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updated 3/18/2004 3:36:43 PM ET 2004-03-18T20:36:43

Hewlett-Packard's shareholders on Wednesday called on the computer maker to start deducting the cost of employee stock options from its reported profits, marking the biggest defeat yet suffered by a technology company in the growing war over options accounting.

The battle is likely to intensify in the coming weeks as a number of other big tech companies face similar challenges, including International Business Machines. Although shareholder votes such as the one at H-P are not binding, U.S. accounting regulators are also expected to issue a proposal rule of their own shortly that would require companies to expense options.

Holders of 1.2 billion shares voted in favor of the accounting change at H-P's annual meeting, or 57 per cent of the votes cast. A similar proposal had been defeated a year before.

H-P, the second-biggest computer maker after IBM, would have reported extra costs of $2.3 billion over the past three years if it had been required to expense options, according to footnotes to its accounts. That would have left it with combined profits over the same period of only $212 million, rather than the $2.5 billion it actually reported.

The company said its board would review the accounting issue in the light of the vote. Although H-P's directors have rejected the idea until now, the company is required by the Securities and Exchange Commission to give the shareholder proposal serious consideration, a spokesman said.

"We feel we give full transparency and visibility into this issue in the footnotes in our accounts," he added.

The H-P vote was prompted by the Massachusetts employees' state pension fund, which has been waging a campaign to force companies to expense options. That campaign led to successful shareholder revolts at 26 companies last year.

While companies in other industries have suffered similar defeats, including US Bancorp and paper company Georgia-Pacific, the issue has become particularly contentious in the tech industry thanks to the widespread use of options there. Some tech leaders have argued that any requirement to expense options would lead to a flight of tech jobs from the U.S.

The expected proposal from the Financial Accounting Standards Board, along with a recent ruling by the International Accounting Standards Board, have brought a flurry of last-ditch lobbying from Silicon Valley to block the idea.

Calling on shareholders before the meeting to reject the proposal, H-P said that it already gave enough information in the footnotes to its accounts to assess the cost of options.

Copyright The Financial Times Ltd. All rights reserved.

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