Michael T. Frank DLA Piper Rudnick Gray Cary US LLP 2000 University Avenue East Palo Alto, CA 94303 (650) 833-2000 micha

1. Converting Stock Awards in a Merger or Acquisition July 12, 2006 Ellen N. Sueda Hewlett-Packard Company 3000 Hanover Street, MS 1050 Palo Alto, CA 43304 (650) 857-3984 ellen.sueda@hp.com Michael T. Frank DLA Piper Rudnick Gray Cary US LLP 2000 University Avenue East Palo Alto, CA 94303 (650) 833-2000 michael.frank@dlapiper.com

2. What Do the Plans Provide? Target’s Plan • Does the Plan permit conversion of awards? • Does the Plan permit early termination of awards that will not be continued? • Are there notice or consent provisions? Buyer’s Plan • Does the Plan provide for substitution of awards? 2

3. Should Buyer Convert Awards? • Determine the retention impact • Part or full acceleration of vesting upon the change may impact retention planning • Buyer may not want to convert options if there is no retention value 3

4. Should Buyer Convert Awards? • Consider tax impact • The loss of qualification of ISOs with acceleration of options due to the ISO $100K limit • Section 280G: non-deductibility of certain accelerated awards and compensation • Consider the number of former employees of Target who hold awards • Securities held by a former employee may require additional securities filings 4

5. Should Buyer Convert Awards? • Non-U.S. jurisdictions • Determine labor/employment laws, regulatory requirements, e.g., governmental filings, and foreign exchange requirements • Determine if awardees subject to immediate taxation upon the change of control • Consider Buyer’s policies concerning awards in various jurisdictions 5

6. Retention • Buyer may not want to convert awards that have no retention value, e.g., awards that have full acceleration of vesting upon a change of control • Do not forget to review individual employment agreements or arrangements in addition to the plan and individual award agreements • Consider the following: • Consent from key employees to amend awards to remove or modify acceleration of vesting • If a cash deal, arrange for a holdback of award proceeds for key employees (do not forget about 409A) 6

7. Due Diligence A good due diligence list is important. It will remind you of the pitfalls and challenges of mergers and acquisitions! 7

8. Assume or Substitute? • Assumption Pros: • Preserves your share reserve • Can grant assumed reserve shares, but not for employees of Buyer 8

9. Assume or Substitute? • Assumption Cons: • Multiple share buckets in multiple deals • Awards treated as non-shareholder approved for “201(d)” table in proxy/10-K • Additional overhang • Form S-8 filing, including a prospectus • Administration of another plan’s terms and conditions in addition to already existing plans • Who will administer the plan and update prospectus? • Different plan terms and conditions complicate any future communications • Reserves and registration need to be tracked separately 9

10. Assume or Substitute? • Substitution Pros: • One share reserve • May be able to harmonize rules (beware ISO modification and 409A) • Report awards as shareholder approved in the proxy • No separate Form S-8 filing • No need to administer another plan’s terms and conditions; however, if material terms are preserved and are different from regular option grant terms, then should be described in the prospectus and other communications (also, watch modification)

11. Assume or Substitute? • Substitution Cons: • Impacts existing share reserve • Changing terms may require optionee consent and cause confusion to optionees

12. Conversion Mechanics • Preserve Aggregate “Spread” • Typically, when applying the conversion ratio, round price up and round share number down • Preserve Ratio of Fair market Value to Strike Prices • Example Target holds an option to buy 100 shares @ $5 per share. Target shares worth $10 at closing. Buyer shares worth $20 at closing. Target option becomes buyer option to buy 50 buyer shares @$10 • Used to retain ISO status and avoid 409A problems 12

13. Restricted Stock – Specific Issues • Does Plan require explicit assumption/assignment of forfeiture or repurchase right? • Cash deal = right to get cash? • Securities law issue of treating shareholders of the same class of stock differently

14. Employee Stock Purchase Plans • Generally are terminated upon an acquisition • Target should expect that its ESPP will be terminated and ensure that the plan document provides for mid-period termination 14

15. Additional Issues to Consider • ISO rules • 409A compliance • Earn outs • Cash transactions • Grant documentation (accounting or 409A issues?) 15

16. ISO Issues • Is there a $100K limitation issue? • Will acceleration of options disqualify all or part of the option? • Will there be any modification causing a disqualification? • Conversion mechanics nearest whole cause a disqualification? E.g., rounding shares up or rounding strike price down • If substituting, does Buyer’s plan provide for applicable ISO rules? 16

17. Section 409A Issues • Discounted stock options • Option pricing history and methodology • Reasonable valuation or safe harbor for stock valuation for private companies • Modification of plans or stock awards after 12/31/04 • Extension of exercise period? • Faulty conversion? • Repricing? • RSUs with retirement features and/or deferral of equity awards 17

18. Earn Out Issues • Exchange of “share right” for earnout right? • Including earn out right in option 18

19. Negotiation Items • Have Target revise non-compliant plans and arrangements, e.g., reprice or limit exercise on discounted options. • Special Indemnity Escrow? • Cover future compliance and other “HR” costs? • Consider in light of Section 409A and recent option backdating issues • Adjust purchase price by amount necessary to gross-up taxes, e.g., 409A or 280G, and cost of withholding/reporting, or include adjustments as part of the escrow arrangement. 19

20. For Questions Please Contact: Michael T. Frank DLA Piper Rudnick Gray Cary US LLP 2000 University Avenue East Palo Alto, CA 94303 (650) 833-2000 michael.frank@dlapiper.com