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© Copyright 2003 Hewlett-Packard Development Company, L.P
All rights reserved. Do not use without written permission from HP.

Thank you, and good afternoon. It is a pleasure to be with you here in Charlotte.

Now, as you know, I'm from California, and in California, when we see this many people gathered in a room, we assume they're all running for Governor. But I know you only have one mayor who is running for reelection here.

I am honored to be here, not just as a guest, but also as a member. HP is a proud member - hopefully a member in good standing - of the Charlotte Chamber of Commerce, so it's great to be with you. And it's also great for me to be back here in North Carolina for another reason. As was referenced in the introduction, there's been a lot of press - too much from my point of view - but still, they miss a few things. I actually graduated high school from the Charles E. Jordan Senior High School in Durham, North Carolina, so it's great to be back.

When I think of Charlotte, and in fact, reminiscent of the discussion I was having here at lunch with many of your chamber members, I am reminded of a story. It is the story of a little boy who was pulling his wagon one day when the back wheels fell off. And he looked at the wagon and he said, "I'll be damned." So he put the wheels back on the wagon and he walked a little further and the wheels fell off again, and he said, "Well I'll be damned." And this time, there was a minister who was walking by and the minister overheard him, and he went up to the little boy and he said, "Son, when something happens to you, you shouldn't curse, you should praise the Lord for all the good things in your life."

So the boy nodded and put the wheels back on the wagon, and walked a little bit further, and sure enough - the wheels fell off the wagon again. And this time, the little boy - remembering what the Reverend said - remarked, "Praise the Lord!" And sure enough, the two wheels jumped up off the pavement and reattached themselves to the wagon, and the minister said, "Well I'll be damned…"

Now, I mention that story because in some ways, it seems similar to the reaction you get when people realize that good old North Carolina - which for two centuries was known mostly for textiles and tobacco - is now one of the leading edge high technology centers of the United States. As a leader of a high tech company, I know it, and many other people know it, as well. And of course, this transformation from textile and tobacco to technology is no accident. It is a direct result of businesses in this state working hand-in-hand with the government of this state to take public/private partnerships to a whole new level.

And when I think about some of the things that this chamber has been able to accomplish in uptown Charlotte alone - from the new businesses to the new basketball team, to the recent news that Johnson & Wales University will be moving a campus here, to all the growth in your school systems that I've been talking about at lunch, it is really a tribute to the work that all of you have been able to do together, and I think a role model for the rest of America, and all those people running for Governor in California ought to pay some attention.

And, of course, the partnership that I'm talking about has also helped make Charlotte the number two center for financial services in the United States. This is an industry that we know something about, and are very proud to point out that some of our most valuable customers are based right here in Charlotte.

Everybody knows that HP went through a big merger battle, but there are a lot of things about HP that perhaps you may not know. One of the things you may not know, for example, is that HP today powers more than 100 stock and commodity exchanges around the world - including 14 of the world's largest, beginning with the New York Stock Exchange. In other words, we help process 95% of the world's security transactions. We help process two out of every three credit card transactions worldwide. We process three out of every four electronic funds transfers. And of course, we are also proud to count banks at both ends of College Street as our valued customers in the Bank of America and Wachovia, as well as many others in the region.

And we do business with lots of industries here in the region - from energy and manufacturing, to distribution and healthcare, and we are honored to be the standard technology provider for the Charlotte Mecklenburg School District, which is the largest in the state. In fact, just this week we completed an agreement to provide another $5 million worth of technology and equipment to local schools as part of a $10 million technology infusion project. And I want to say a special hello to all the members of the Charlotte Mecklenburg Schools who join us here today.

And, of course, Charlotte also happens to be the home to one of the largest campuses of one of our important partners, Microsoft. And when we get a moment, maybe you can tell what you really thought of Steve's speech a year ago and I'll be sure and pass it on to him.

Being a banking town first and foremost, I know that all of you know a thing or two about mergers and acquisitions. And between just Wachovia and Bank of America alone, this town has seen nearly 250 acquisitions in recent years, so I think you'll know a lot about what I'm going to say because I have been asked to talk a little bit about our merger with Compaq, and where we see technology going, and where we see HP going. And then I'd like to open it up and take your questions.

Of course, everybody knows the last few years have been tough - not just for the economy in general, but for IT in particular. And in this industry, it's actually quite rare for the business and consumer IT markets to slow down simultaneously, but that is in fact exactly what happened, and in 2002, it happened for the second year in a row.

I think there has been a tendency for people to look at the recent trends and to make one of two predictions about information technology. Either IT is dead, it's not important any more, there is no innovation that matters any more; it's just all about commoditization. That was the view of the Harvard Business Review in a story they put out several months ago. Or, another theory is that this is all part of cyclical economics and everything is going to go back to normal when the economy picks up. Everything back to normal means for some, the go-go growth years of the technology industry in the last 90s.

And frankly, I think they are both wrong. I think IT is far from dead; in fact, it is more important than ever, but it is changing. What we see happening in IT and what we saw, which drove us to undertake a bold and quite controversial move, is a fundamental shift in the way companies and customers buy and perceive technology as well as in the way consumers use it.

The facts are that technology is becoming more deeply integrated into every facet of work and life, home and business. The facts are that technology is at the core of solving some of our most vexing social problems - whether it is healthcare or inequity of opportunity. Technology has become not something on the fringe, not a science experiment that only engineers and geeks need to understand; technology is at the core of business and life and progress in both.

And when something goes to the core of problem solution or competitive advantage, there is a renewed focus on value, and value is defined in lots of ways. But frankly, customers are much less interested in individual products, and much more interested in how the investments they make in information technology can support change, can respond to change, and can even drive change.

And as a result, the downturn has been marked by a movement away from the era of pure products. The 90s frankly, was an era when many people perceived of technology almost as a silver bullet. If I throw enough money at the technology, everything is going to get fixed. Nothing is a silver bullet - including technology, and people are much more focused on a more complete value proposition. I need quality…I need reliability… I need lower total cost of ownership… and yes, I need speed…I need flexibility…and I need responsiveness. In other words, I need all this stuff I have to work better together, and I need a better return out of what I've already bought, and a better return out of what I intend to invest in.

And by the way, consumers are much the same. Consumers still love gadgets, but frankly, they want the value of a rewarding experience and products that work better together. Businesses and consumers are seeking less complexity, greater manageability and a better return or greater value from their technology investment.

And so for all of us who work in the technology industry, those changes in customer requirements have forced tough questions: what does the future hold for technology companies that specialize in point products, when customers want integrated solutions? What happens to companies whose growth depends on proprietary architectures in an era where open standards-based architectures give customers the flexibility and the price points that they want? What does the future hold for tech companies whose business models are tuned to the explosive growth rates of the 90s, when growth in our industry going forward is most likely going to be two times GDP, not five times GDP?

And the business model shift that's required to deal with all of those questions is accelerating the trend towards consolidation in our industry. Today, there are fewer and fewer companies in the market with the ability to offer end-to-end solutions that customers require and the resources to sustainably invest in inventing the technologies of the future. HP believes that we are one of those companies and we intend to lead.

And so, two years ago last week, we announced the merger with Compaq, and as you may recall, all hell broke loose immediately thereafter. But we launched our merger with Compaq to respond to these trends. On that day, we talked about a company that would provide two important benefits to our customers and our partners: one was a fundamental improvement in our cost structure. When you have customers who have a relentless focus on improving price performance and total cost of ownership - cost structure matters. And in our opinion, a cost structure is one of two things: it is a competitive vulnerability or it is a competitive weapon; there is no in-between. We needed our cost structure to be a competitive weapon.

Like many of you in your businesses, we intend for our cost structure, our efficiency, and our effectiveness to be a weapon that we can use on behalf of our customers. Two year ago, we had projected that we would capture two and a half billion dollars worth of synergies out of this combination by the end of 2004. We have captured three and a half billion of synergies in one year and we are not finished. And we think we are translating that into improved price performance and total cost of ownership for our customers.

But we also said that we wanted to improve our competitive position on behalf of our customer and improve our ability to sustain investments on their behalf in technology and innovation. And we think we're delivering on that promise, as well.

We are now the leader in imaging and printing, as we have been. We continue to gain market share. We are the leader in Linux servers, and Windows servers, and UNIX servers. We are the number one supercomputing company in the world. We are the leading network management software management company in the world. We are the leader in storage and workstations, in laptops, notebooks, running neck-and-neck with Dell, separated by about 500,000 units in PCs and growing our managed services or outsourcing business very aggressively at 20-plus percent every quarter, and are now close behind IBM.

And of course, improving our competitive position and improving our cost structure also require us to continue to innovate. We spend about $4 billion a year on R&D - over the past two and a half years, our rate of innovation has accelerated by 350%. We measure our rate of innovation in terms of new products introduced into the marketplace and new patents produced, and we now are producing an average of five patents every day. We actually have achieved the highest rate of innovation in our company's history in the last 12 months, and we think that's important because, in fact, innovation does still matter. And as a technology company, we think innovation will continue to be our life's blood.

One of the things you may not know - in addition to being a very large business-to-business technology company - we are also the largest consumer technology company in the world. We count among our customers, one billion consumers around the world. We process over $30 billion in e-commerce every year. We are actually one of the leading enterprise companies in the world, we are the leading technology supplier to small-and-medium sized business, and as I mentioned, the leading consumer technology company.

And our goal is to go to market with a value proposition that we think sets us apart. The shorthand for it, if you think about what I just talked about, is high tech, - we do think that innovation will continue to be important and that we have to set the pace for innovation in our industry - low cost, and what we call best total customer experience. We don't think customers are willing to trade off innovation and price. They actually want those; they need those. Nor are they willing to trade off, any longer, a great total customer experience. Total customer experience is actually something pretty scientific. We measure it, we pay on it. One of the aspects of my pay and all of our senior managers' pay is whether or not we are achieving our improvement objectives for total customer experience, which we measure relentlessly every quarter. And total customer experience is all about the total life cycle of an engagement of us with our customers. We think in addition to providing constantly improving price performance, and innovation that matters on behalf of our customers, that our customers should value the collaboration they have with us and that how we collaborate with customers, how we collaborate with our customers' other partners - in other words, how we do things - is as important as what we deliver. And that's why we focus very much on measuring that total customer experience.

Now, let me just talk a moment about what that value proposition - high tech, low cost, best total customer experience - means in each of the spaces in which we do business. Let me talk a little bit about the enterprise space. We are seeing structural changes in how companies and customers buy and perceive technology. Customers now want to lower their IT acquisition costs. They want to lower their costs of operating and maintaining IT. They want to rely on partners with the scope and scale to have sustainability and longevity in a relationship. And, they want their technology investments, as well as their technology partners, to be adaptable as well as sustainable.

And as I mentioned earlier, these changes we think are being driven by the fact that technology is more important to customers, not less important. Customers cannot tolerate technology any more as a science experiment or a mystery. Gone are the days when a CEO says "I don't need to understand it." And in fact in my experience, while businesses are spending less money today on technology than perhaps they did in 99, businesses understand it better. They understand what they need it to do; they understand what they need from it; and they also understand the discipline they need to apply in making a technology investment pay off.

I think the opportunity to apply technology, not only to business challenges, but to social challenges is enormous. I mentioned healthcare, but the problems we face in healthcare today will not be solved without the application of technology. The problems we face in education will not be solved without the application of technology. So, we think there is a lot of opportunity to turn innovation into competitive advantage.

When you think about it in the 80s, technology was all about building up islands of automation. The focus was on cost, and quality, and stability. And then in 90s, it was all about killer apps, the hot box - I've got to move fast. Those were the wonderful days when CIOs got used to walking into the CEOs office and saying: "I need more money," and the CEO saying: "Okay, I don't really understand it, I can't really measure it, but I guess we've got to do it." The game has changed, and now customers want it all. They want stability and reliability and cost and speed and flexibility. We think customers need it all and we think we have to be able to deliver it all.

We think change has to be predictable and controllable as it ripples across the system. And I could go on and on, but I guess the thing I would say perhaps that is most relevant, is that we know this because we've had to rely on it in our own merger with Compaq. We are using our own experience, our own products, our own people, our own services, our own tools, our own methodologies, and our own partners to manage the integration of these two companies. And yes, it has been the largest, most complex integration in the history of the IT industry, and also the largest and most complex IT systems integration challenge in a long while.

And so, we think we understand a lot about what it takes to use technology as a competitive weapon to accelerate change within an organization instead of to retard change in an organization. We believe the new kind of enterprise IT architecture requires people to think about their enterprise, their processes, their governance, and yes, their technology as well - horizontally, not vertically. And we think there are some basic things that all customers have to think about as they consider their technology investment: Simplification, for reduced complexity and reduced risk; standardization, for increased flexibility and lower cost; modularity, for improved asset utilization and improved manageability and change; the opportunity to get the maximum utility out of every IT asset - most customers use 30 percent of their IT assets that they've invested in; they need to use 80-plus percent - and fourth, integration…integration of processes, integration of applications, and integration of infrastructure. And this is what we did to complete our integrations a year and a-half ahead of schedule, and a billion and a half ahead of plan. In other words, we think we have to practice what we preach; we have to use what we sell; we have to be our own best reference account. And to just give you some numbers, when we brought these two companies together, we had 7,000 applications, we had 160,000 employees, we had 260,000 e-mail addresses - I never understood how you could have so many e-mail addresses, but we did.

And the challenge we set for ourselves is that we would have an integrated e-mail system, an integrated Web site, integrated supply chains on day-one, and we did. On day-one, our e-mail systems were integrated so that every employee could find every other. We had integrated supply chains, and we had integrated Web sites, and we reduced our IT budget by 25%. This is all a shameless advertisement, but frankly speaking, we'd like to do for you what we did for ourselves.

For small and medium businesses, we think the challenges are somewhat different. Entrepreneurs and small business owners are the cornerstone of this country's economy, and actually, they are the cornerstone of the world's economy. I just came back from Europe, and it's interesting to note that in a country like Italy, for example, 94% of that economy is small- and medium-sized businesses. So, they are the cornerstone of growth in this world's economy. And of course, we know that two-thirds of all new jobs are driven by small businesses, and we also know that entrepreneurs - the people who have the courage to take the risk and step into the unknown - have huge benefits for our economy.

But it's also true that one risk that most small business owners are not willing to take is with their technology. When technology fails and you're a small business, too often your business fails with it, and so when technology fails for a small business, that's a 100% revenue loss, and what our customers are telling us is that they want a worry-free office.

By the way, they're not willing to be a generation or two behind, they want to be right current with technology - but it has to be 100% reliable, because they don't have the time, frequently they don't have the expertise, and they certainly don't have the opportunity to let customers walk by. And so every technology issue has to be fixed; it's got to be fixed right away. The technology just has to work. In other words, easy isn't enough; it's got to be more than easy. They need more than just a fast supply chain - they need low costs and a full portfolio of quality products and the right support and service and proven innovation that they can count on generation after generation after generation.

And finally, for the consumer market, customers routinely tell us that they are very excited about the digital revolution, and they also tell us - and we know - that the real inflection point in the consumer market will be when we digitize everything, and that time is coming. We are already digitizing photography and entertainment. If you think just about the digital photography experience, digital cameras are now outselling traditional cameras. And if you think about a digital photography process versus a traditional photography process, traditional photography is a physical process. You take a picture; there is a physical thing that occurs inside a camera. You then walk your film down somewhere to your favorite store, you had your film over, and there is a chemical physical process that occurs. You walk back; you pick up your pictures, you take them home, you mail them out - that is a physical process. And it is also time consuming, inflexible, labor intensive.

When you digitize that process, what are you doing? You are creating digital content and then you are then networking, manipulating, editing, storing that content, sending it, sharing it, and when you want, you are transforming digital content into physical content. That same digitization of a process is going to happen for every process, in every home, in every business. It is only a matter of time.

But consumers are also telling us that this technology is way too complicated today. Consumers believe in the essential power and promise of technology, but they also think it is too complicated; they have to work too hard to get to the rewarding experience that they buy the technology for in the first place. Forty-five percent of the people who own a PC today are intimidated by the technology - and the real digital revolution won't happen in the home or in the school until technology is simple, indeed intuitive - it just works; and where we are providing experiences that are enabled by technology, as opposed to a frustrating long manual that you have to go through before you can get what you bought. Customers shouldn't have to care frankly, about all the complex technology.

And in fact, this is illustrative of perhaps the most fundamental change that I think the technology industry has to go through. Technologists love technology, and so for a long time, the technology industry focused on making sure that everybody understood how complicated their technology was. The truth is that customers shouldn't have to worry about the technology. And more and more, I think what the technology industry has to do is hide the technology, hide the complexity, and deliver the power the value, the possibility, the experience.

We have done a lot of work in the last couple of years. Our goal, our ambition - which is a big one - is to be the leading technology company in the world. And we think leadership is defined not just by products and portfolios and patents and market presence. Leadership is first and foremost defined by people, and that's all about how we interact, how we collaborate everyday on a local level. For us, in the end, leadership is also about our values, our personality. And those things are as important to defining the leading technology company in the world as anything else.

I will close by just saying something about our values, our personality, what we aspire to when we collaborate with customers…There was a lot of discussion when this merger was first announced about the clash of cultures; a lot of discussion about how we could never make this work, because in the end when it's all said and done, mergers, yes are big complicated things, but it actually comes down to one person at a time. We underwent a process that we called cultural due diligence. You know, you do financial due diligence, you do technology due diligence, we did cultural due diligence. And what cultural due diligence was all about was, we conducted focus groups with employees and leaders from both companies all around the world, and we asked some basic questions. We said, what are the values that you think this company ought to stand for? And we were also trying to explore some of the differences between companies. We found out something kind of interesting. We found out that our employees all over the world, no matter where they came from, aspired to the same values…values like passion for customers, and trust and respect for individuals, and highest levels of achievement in contribution, and teamwork and collaboration, and making sure that we were a good global citizen and contributed to community. We aspired to the same values, and so we had a foundation to work on. We also found that there were some differences between our companies and our people, and we decided to leverage the diversity that our company now represented.

I think diversity in all its forms is a huge competitive advantage. When everybody starts to think the same, act the same, look the same, and talk the same, you have a company in trouble. And so, we took the best of both, and we were very explicit about where we wanted to leverage diversity. HP happened to be, just as one example, a company that was very thorough and process-intensive. That's great, but sometimes we processed forever and never decided.

Compaq tended to be a company that was fast and decisive, but sometimes they had to decide over and over again, because they hadn't thought it all the way through. Our goal was to marry fast and thorough. We think we've done that in the integration of these companies so far, but it's an example, a very real, live example of the power of diversity.

I am going to close by saying just a couple of things. We feel privileged, truly privileged to be an important part of this community. We feel privileged as well, to be a company that is able to lead in what I think is one of the most exciting and mission critical sectors in the world. We think we have the privilege to help over a billion customers with technology that truly has the potential to change the world, to change the way we work, to change the way we live; technology that can empower people in a way that has never been possible before. And, we are very privileged to be a part of your community as you think about shaping the future.

Thanks very much.

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