HP's effective tax rate was 19.7% and 19.0% for the three months ended July 31, 2011 and July 31, 2010, respectively, and 20.4% and 19.8% for the nine months ended July 31, 2011 and July 31, 2010, respectively. HP's effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from HP's operations in lower-tax jurisdictions throughout the world. The jurisdictions with favorable tax rates that have the most significant effective tax rate impact in the periods presented include Singapore, the Netherlands, China, Ireland and Puerto Rico. HP has not provided U.S. taxes for all of such earnings because HP plans to reinvest some of those earnings indefinitely outside the United States.

In the three and nine months ended July 31, 2011, HP recorded discrete items with a net tax benefit of $145 million and $302 million, respectively. These amounts included net tax benefits of $62 million and $174 million, respectively, from restructuring and acquisition charges, and net tax benefits of $83 million and $85 million, respectively, for settlement of tax audit matters and other miscellaneous discrete items. In addition, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law. HP recorded a tax benefit of $43 million arising from the retroactive research and development credit provided by that legislation in the first quarter of fiscal 2011.

In the three and nine months ended July 31, 2010, HP recorded discrete items with a net tax benefit of $236 million and $375 million, respectively. These amounts included net tax benefits of $206 million and $340 million, respectively, from restructuring and acquisition charges; and net tax benefits of $30 million and $35 million, respectively, associated with adjustments to prior year foreign income tax accruals and credits, settlement of tax audit matters, valuation allowance releases, and other miscellaneous discrete items.

As of July 31, 2011, the amount of gross unrecognized tax benefits was $1.9 billion, of which up to $1.3 billion would affect HP's effective tax rate if realized. HP recognizes interest income and interest expense and penalties on tax overpayments and underpayments within income tax expense. As of July 31, 2011, HP had accrued a net $164 million payable for interest and penalties. In the three and nine months ended July 31, 2011, HP recognized $18 million and $17 million, respectively, of net interest income on net tax overpayments, net of tax.

HP engages in continuous discussion and negotiation with taxing authorities regarding tax matters in various jurisdictions. HP does not expect complete resolution of any Internal Revenue Service ("IRS") audit cycle within the next 12 months. However, it is reasonably possible that certain federal, foreign and state tax issues may be concluded in the next 12 months, including issues involving transfer pricing and other matters. Accordingly, HP believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $198 million within the next 12 months.

HP is subject to income tax in the United States and approximately 80 foreign countries and is subject to routine corporate income tax audits in many of these jurisdictions. In addition, HP is subject to numerous ongoing audits by state and foreign tax authorities. HP has received from the IRS Notices of Deficiency for its fiscal 1999, 2000, 2003, 2004 and 2005 tax years, and Revenue Agent's Reports ("RAR") for its fiscal 2001, 2002 and 2006 tax years. The IRS began an audit of HP's 2007 income tax returns in 2009, and began its audit of HP's 2008 and 2009 income tax returns during 2010 and 2011, respectively. With respect to major foreign and state tax jurisdictions, HP is no longer subject to tax authority examinations for years prior to 1999. HP believes that adequate reserves have been provided for all open tax years.

On January 30, 2008, HP received a Notice of Deficiency from the IRS for its fiscal 2003 tax year. At the same time, HP received an RAR from the IRS for its fiscal 2002 tax year that proposed no change in HP's tax liability for that year. The IRS's adjustments for both years, if sustained, would reduce tax refund claims HP has filed for net operating loss carrybacks to earlier fiscal years and reduce the tax benefits of tax credit carryforwards to subsequent years, by approximately $215 million. HP is contesting the remaining adjustments proposed in the Notice of Deficiency and the RAR. Towards this end, HP filed a petition with the United States Tax Court on April 29, 2008. HP believes that it has provided adequate reserves for any tax deficiencies or reductions in refund claims that could result from the IRS actions.

On July 30, 2009, HP received a Notice of Deficiency from the IRS for its fiscal 2004 and 2005 tax years. On July 8, 2011, HP finalized a closing agreement with the IRS covering specific matters for these tax years. The remaining unresolved IRS adjustments for both years, if sustained, would reduce the tax benefits of tax credit carryforwards to subsequent years by approximately $35 million. HP is contesting these adjustments through IRS Appeals. HP believes that it has provided adequate reserves for any tax deficiencies or reductions in tax benefits that could result from the IRS actions.

The IRS has completed its examination of EDS tax years through 2002 and no unresolved issues remain outstanding. EDS has received RARs for its 2003 through 2006 tax years, proposing tax deficiencies of $110 million. These deficiencies include a $29 million effect on carrybacks to 2000 through 2002. The IRS is currently auditing EDS's tax years 2007 and the short period ended August 26, 2008. HP is appealing certain issues and believes adequate reserves have been provided for all years.

The breakdown between current and long-term deferred tax assets and deferred tax liabilities was as follows:

	July 31, 2011			October 31, 2010

	In millions
Current deferred tax assets	$	5,376		$	5,833
Current deferred tax liabilities		(38	)		(53	)
Long-term deferred tax assets		2,200			2,070
Long-term deferred tax liabilities		(5,812	)		(5,239	)

Total deferred tax assets net of deferred tax liabilities	$	1,726		$	2,611