<PAGE>
          ------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001       COMMISSION FILE NUMBER 1-9026


                           COMPAQ COMPUTER CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


           DELAWARE                                             76-0011617
 (STATE OR OTHER JURISDICTION OF                             (I.R.S.  EMPLOYER
 INCORPORATION OR ORGANIZATION)                             IDENTIFICATION NO.)

                       20555 SH 249, HOUSTON, TEXAS 77070
                                 (281) 370-0670
               (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
                 INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL
                               EXECUTIVE OFFICES)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                                       NAME OF EACH EXCHANGE ON
               TITLE OF EACH CLASS                         WHICH REGISTERED
          -------------------------------              ------------------------
           Common Stock, $.01 par value                 New York Stock Exchange
          Preferred Share Purchase Rights               New York Stock Exchange


SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:  None

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

         The aggregate market value of the voting stock held by non-affiliates
of the registrant on January 29, 2002 (assuming all officers and directors are
affiliates and based on the last sale price on the New York Stock Exchange as of
such date) was approximately $19 billion.

         The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of January 29, 2002, was approximately 1.7 billion.

          ------------------------------------------------------------


<PAGE>

                           COMPAQ COMPUTER CORPORATION
                             FORM 10-K ANNUAL REPORT
                       FISCAL YEAR ENDED DECEMBER 31, 2001
                                TABLE OF CONTENTS

<Table>
<S>                                                                             <C>
                                     PART I

Item 1.    Business                                                                2
Item 2.    Properties                                                             11
Item 3.    Legal Proceedings                                                      11
Item 4.    Submission of Matters to a Vote of Securities Holders                  11

                                     PART II

Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters  12
Item 6.    Selected Consolidated Financial Data                                   13
Item 7.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations                                                  14
Item 7A.   Quantitative and Qualitative Disclosures about Market Risks            34
Item 8.    Financial Statements and Supplementary Data                            36
Item 9.    Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosures                                              72

                                    PART III

Item 10.   Directors and Executive Officers of the Registrant                     73
Item 11.   Executive Compensation                                                 76
Item 12.   Security Ownership of Certain Beneficial Owners and Management         84
Item 13.   Certain Relationships and Related Transactions                         85

                                     PART IV

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K        86
Signatures                                                                        91
</Table>


TERMS USED IN THIS ANNUAL REPORT ON FORM 10-K. The industry in which Compaq
participates has developed a vocabulary that is used to describe its products
and services. A number of these terms may not be used outside Compaq's industry
and will be defined in this Annual Report on Form 10-K. As used in its industry,
the term enterprise generally applies to equipment, software, services and
solutions designed to meet the information technology needs of the customer's
entire organization and to fulfill their needs for corporate-wide applications
and services. In its broadest definition, storage means the retention of
software program instructions, business records and other data within a computer
system. The term may also be used to refer to equipment that is dedicated to
storage. Enterprise storage means computer equipment on which computer
instructions and business data for a corporation are written and stored.
Fault-tolerant products are computer products that are designed with substantial
component redundancy to eliminate any single point of failure and cope with
internal failures or technical problems within the product without interrupting
the computer system's performance and operation. Fault-tolerant products are
generally designed for business-critical uses such as major stock exchange
systems, airline booking, emergency police systems or certain hospital needs,
where the highest levels of system and application reliability are required.
Communication products broadly encompass information transfer and in
computer-related areas involve data transfer from one computer to another.



                                       1
<PAGE>


PART I

ITEM 1. BUSINESS

GENERAL

         Founded in 1982, Compaq Computer Corporation is a leading global
provider of information technology products, services and solutions for
enterprise customers. Compaq Computer Corporation, together with its
consolidated subsidiaries, (collectively "Compaq") designs, develops,
manufactures and markets information technology equipment, software, services
and solutions, including industry-leading enterprise storage and computing
solutions, fault-tolerant business-critical solutions, communication products,
personal desktop and notebook computers, and personal entertainment and Internet
access devices.

         Compaq products and services are sold in more than 200 countries
directly and through a network of authorized Compaq marketing partners. Compaq
markets its products and services primarily to customers in the business, home,
government and education sectors. Customer support and information about Compaq
and its products and services are available at www.compaq.com.

         The matters discussed in this Annual Report on Form 10-K should be read
in conjunction with the consolidated financial statements provided under Part
II, Item 8 of this Annual Report on Form 10-K. Certain statements contained
herein may constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements involve a
number of risks, uncertainties and other factors that could cause actual results
to differ materially, as discussed more fully herein.

RECENT EVENTS, ACQUISITIONS AND DIVESTITURES

         On September 3, 2001, Compaq and Hewlett-Packard Company ("HP")
announced that a definitive merger agreement was unanimously approved by both
Boards of Directors, subject to, among other conditions, regulatory approval and
affirmative stockholders' vote by both companies. Under the terms of the
agreement dated as of September 4, 2001, Compaq stockholders will receive 0.6325
of a newly issued HP share for each outstanding share of Compaq common stock.
The transaction will be accounted for as a purchase. Subject to regulatory and
stockholder approvals, which Compaq and HP are in the process of seeking, and
other customary closing conditions, the transaction is expected to close in the
first half of 2002. However, during the fourth quarter of 2001, certain HP
stockholders representing approximately 18 percent of the outstanding common
stock of HP, including Walter Hewlett, a current member of the HP Board of
Directors, announced their intention to cast their respective and related
stockholder votes against the planned merger. Compaq believes that the planned
merger will obtain HP stockholder approval and ultimately be consummated;
however, the outcome is presently uncertain. Despite Compaq's intent to complete
the planned merger, as part of its ordinary course strategic planning, Compaq
continues to consider its revenue and cost forecasts, capital resources,
business units' growth and contraction and other forward-looking planning as a
stand-alone entity.

         In February 1999, Compaq acquired Shopping.Com ("SDC") for an aggregate
purchase price of $257 million. In April 1999, Compaq acquired Zip2 Corp.
("Zip2") for an aggregate purchase price of $341 million. These acquisitions
were accounted for as purchases. The acquisitions of Zip2 and SDC furthered
Compaq's announced strategy to be a global leader in Internet access and
infrastructure through superior technology, services and partnerships. With
these acquisitions Compaq attempted to leverage its interest in AltaVista
Company to become a leading Internet destination site for information and
e-commerce.




                                       2
<PAGE>

         In August 1999, Compaq sold an 81.5 percent equity interest in
AltaVista Company, SDC and Zip2 (collectively "AltaVista") to CMGI, Inc.
("CMGI") for CMGI stock and other consideration totaling $1.8 billion in an
effort to accelerate AltaVista's move to a world-leading portal network.

         In February 2000, Compaq acquired certain configuration and
distribution assets of InaCom Corp. ("Inacom"), a provider of information
technology services and products, for approximately $370 million in cash and the
assumption of certain related liabilities. Compaq's acquisition of certain
assets of Inacom furthered Compaq's announced strategy to accelerate its
progress towards reducing inventories and to provide best-in-class complex
configuration capabilities along with end-to-end order management and direct
fulfillment capacity to the worldwide marketplace. Configuration capabilities
refer to the systems and processes that enable Compaq to assemble an assortment
of computer hardware and software components to produce the computer product or
system designed by a particular customer. This acquisition was accounted for as
a purchase. Compaq subsequently established Custom Edge Incorporated ("CEI")
(doing business as Compaq Direct) as a wholly-owned subsidiary to operate the
assets acquired from Inacom. In 2001, CEI was merged with and into Compaq
Computer Corporation.

         For further information see Note 3 of the Notes to Consolidated
Financial Statements.

COMPAQ PRODUCTS AND SERVICES

         Compaq, a leading global provider of information technology, products,
services and solutions, designs, develops, manufactures and markets products and
services that help customers build a competitive advantage and succeed in the
evolving Internet-based economy. Compaq's three reportable business segments are
Enterprise Computing, Access and Compaq Global Services. Segment results reflect
changes made during 2001 in the organization of Compaq's businesses and its
expense allocation methodology. Compaq combined its commercial personal
computing business with its consumer business to form the Access segment. In
addition, the results of Compaq's financing business, which were previously
reflected in the Other segment category, were included in Compaq Global
Services. Further, Compaq allocated certain shared expenses, such as information
management, facilities and marketing costs, to the segments during 2001.
Financial data for prior periods has been restated to conform to the current
presentation. For further information on Compaq's reportable segments, including
revenues for the years ended December 31, 2001, 2000 and 1999, see Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Note 11 of the Notes to Consolidated Financial Statements.

         In 2001, Compaq created Compaq Global Solutions, a marketing
organization that works with each of Compaq's business segments and alliance
partners to develop complete information technology solutions. Such solutions
consist of Compaq products and services from across its business segments and
alliance partners' expertise to solve the complex business issues facing
Compaq's enterprise customers. During 2001, Compaq Global Solutions concentrated
on the development of solutions for four vertical industries -
telecommunications, finance, retail and government - and on the wireless
horizontal market. In 2002, Compaq intends to expand its leadership role with
products, services and solutions that address new technologies, reliability,
high performance, competitive price points and new markets. Compaq continues to
invest in research and development across its product lines.




                                       3
<PAGE>
ENTERPRISE COMPUTING. Enterprise Computing designs, develops, manufactures and
markets advanced computing and telecommunications products and solutions for
enterprise customers worldwide. The Enterprise Computing segment consists of
three global business units: Industry Standard Servers, Business Critical
Solutions and Enterprise Storage. Industry Standard Servers designs and
manufactures industry-standard ProLiant(TM) servers, which are building blocks
for information technology infrastructures, and integrates these with software
and services to provide information technology solutions for companies of all
sizes. Industry-standard products are produced using components such as
microprocessors and software operating systems, designed and manufactured by
third parties that are available across the industry and used by many computer
manufacturers. Business Critical Solutions provides NonStop(TM) Himalaya(TM) and
high performance AlphaServer(TM) systems with Tru64(TM) UNIX, OpenVMS(TM) and
Linux operating systems for solutions that deliver the highest levels of
availability, performance, scale and manageability for the telecommunications,
financial services, high performance technical computing and other
business-critical market segments. Enterprise Storage provides global storage
solutions through the development and delivery of StorageWorks(TM) by Compaq
storage area networks, automated backup solutions, network attached storage and
a complete suite of SANworks(TM) by Compaq storage management solutions. Network
attached storage means storage devices connected to a network of computers that
store and deliver information to computers in the network. Enterprise Computing
accounted for approximately 32 percent, 34 percent and 34 percent of Compaq's
consolidated revenue in 2001, 2000 and 1999, respectively.

ACCESS. The Access segment delivers products and solutions designed to provide
home and business users with anytime, anywhere access to information,
communication and entertainment. For the business customer, the Access segment
offers a broad range of innovative commercial computing devices, services and
solutions. These include desktop, notebook, workstation and thin client products
marketed under the Evo(TM), DeskPro(TM), Armada(TM) and other brands, as well as
a full line of Compaq branded monitor and networking products - all designed to
help customers simplify their business computing environments. For the consumer
customer, the Access segment offers a wide range of innovative products and
technologies that all work together to help the home or home office user
simplify their life, connect their world and have fun. These include
Presario(TM) branded desktop and notebook Internet PCs and a line of monitors
and printers sold under the Compaq brand. In addition, the Access segment offers
an innovative line of personal devices and solutions marketed under the iPAQ(TM)
brand, targeting the convergence of business and home computing. These include
handhelds, such as the award-winning iPAQ Pocket PC, as well as personal
entertainment and communications products, home networking products, desktop
computers, microportable projectors and Internet access appliances. Internet
access appliances are devices used to access the Internet. The Access segment
accounted for approximately 45 percent, 49 percent and 47 percent of Compaq's
consolidated revenue in 2001, 2000 and 1999, respectively.




                                       4
<PAGE>

COMPAQ GLOBAL SERVICES. The Compaq Global Services segment helps customers
manage the complexities and risks of today's multi-vendor, multi-technology
information technology environments in over 200 countries. Compaq Global
Services' proven methodologies and best-in-class processes deliver information
technology solutions for today's most challenging business issues. Compaq Global
Services' solutions are optimized for the highest levels of performance,
availability and security. Compaq Global Services is a pioneer in wireless
computing solutions, "Computing on Demand" or utility-style computing, and an
industry leader in delivering enterprise solutions based on Microsoft
Corporation ("Microsoft") technologies. Enterprise solutions incorporate
industry expertise and consist of combinations of information technology
equipment, software and services that are designed to solve complex business
issues, such as payroll processing or inventory management, for enterprise
customers. The Compaq Global Services segment consists of four global business
units: Customer Support, Systems Integration, Managed Services and Financial
Services. Customer Support offerings include lifecycle support services,
business-critical services and high availability support services for
multi-vendor, multi-technology hardware and software products. Lifecycle support
services consist of installation, user assistance, maintenance, upgrading,
replacement and disposition services available through a product's end of life.
Customer Support also manages and delivers warranty support to its customers
through its own service organization, as well as through full-service resellers
and independent service companies. Systems Integration offerings include
end-to-end information systems consulting, technical and application design
services, systems integration, Internet and network architecture, project
management services and e-business solutions. Systems integration means
designing, configuring and installing a variety of computers and other
information technology devices, often from different vendors and performing
different functions, to provide a unitary system within a user environment.
Managed Services offerings include outsourcing and resource management services,
as well as business continuity and recovery services. Financial Services
offerings include customized enterprise financing solutions that encompass
computers, networks and technology upgrades, as well as asset management
services for large and multi-national business customers. Asset management
services involve the tracking, recovery, reconditioning and disposition of
equipment. Financial Services also offers an array of specialized financial
services to small and medium-sized businesses and the consumer, educational and
government marketplaces. Financial Services operates in 42 countries. Compaq
Global Services accounted for approximately 23 percent, 18 percent and 19
percent of Compaq's consolidated revenue in 2001, 2000 and 1999, respectively.

GEOGRAPHIC REGIONS

         Compaq operates in more than 200 countries worldwide and recognized 62
percent, 55 percent and 55 percent of its revenue from sales outside the United
States during 2001, 2000 and 1999, respectively. Its business is organized in
various geographic regions such as North America; Asia-Pacific; Japan; Latin
America; Greater China; and Europe, the Middle East and Africa ("EMEA"). Each
geographic region performs sales and marketing activities in its implementation
of the respective global business unit's performance plans. Over the last three
years, approximately 36 percent of Compaq's revenue was derived from EMEA.
Compaq anticipates that a majority of its revenue will continue to come from
sales outside the United States during 2002. Compaq believes that its
international diversification provides stability to its worldwide operations and
reduces the impact on Compaq of adverse economic changes in any single country.
For a discussion of risks attendant to Compaq's foreign operations, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors That May Affect Financial Condition and Future Results".





                                       5
<PAGE>

PRODUCT DEVELOPMENT

         Compaq is actively engaged in the design and development of new
products and enhancements to its existing products. During 2001, 2000 and 1999,
Compaq spent $1.3 billion, $1.5 billion and $1.7 billion, respectively, on
research and development. Compaq continues to invest in research and development
across its product lines.

         Since information technology develops rapidly, Compaq's continued
success is dependent on the timely introduction of new products with competitive
prices and features. Compaq's engineering efforts focus on new and emerging
technologies, as well as design features that will increase manufacturing
efficiency and lower production costs. In 2001, Compaq focused significant
attention on technological developments for high performance technical
computing, high availability and failsafe solutions, information technology for
life sciences and telecommunications applications, storage technology,
integration and configuration optimization, wireless development, and Internet
and Intranet technologies. The terms high availability and failsafe solutions
refer to different levels of fault-tolerance. High availability solutions refer
to systems that are designed to provide a maximum amount of uptime availability
for their users, usually measured in terms of less than 0.1 percent of downtime
due to component failures or maintenance servicing. The high availability uptime
is generally accomplished by clustering two or more computers so that they
behave like a single computer. The concept of failsafe solutions is emerging in
the information technology industry and refers to the combining of
fault-tolerant and high availability features into an integrated system or
solution.

         Compaq's product development efforts are centered on aggressively
developing new areas in which Compaq can differentiate its products and add
value, focusing on innovative platform features, the integration of hardware and
software, and new related products and services. As Compaq's business intersects
with a number of areas in which other companies have significantly greater
technological, marketing and service expertise, Compaq has focused on alliances
with third parties that have complementary products and skills as well as
acquisitions that target incremental business opportunities.

MANUFACTURING AND MATERIALS

         Compaq's manufacturing operations consist of manufacturing finished
products and various circuit boards from components and subassemblies that
Compaq acquires from a wide range of vendors. In addition to its own
manufacturing operations, Compaq utilizes a number of Electronic Manufacturing
Services ("EMS") companies around the world to manufacture Compaq designed
products. The use of EMS companies is intended to generate cost efficiencies and
reduce time to market for certain Compaq designed products. Two of Compaq's
largest EMS manufacturers are Hon Hai Precision Industry Company, Ltd. and
Inventec Corp., both headquartered in Taiwan with manufacturing facilities in
several countries. Some Compaq branded products are manufactured by third-party
Original Equipment Manufacturers ("OEMs"). OEMs design, manufacture and often
market their products under their own brand names. Compaq purchases the products
and resells them rebranded with the Compaq brand. Two of Compaq's largest OEMs
are Brocade Communications Systems, Inc. of San Jose, California, a supplier of
fiber channel switches, and Lexmark International, Inc. of Lexington, Kentucky,
a supplier of printers.




                                       6
<PAGE>

         Compaq utilizes two primary methods of fulfilling demand for products:
building products to order ("BTO") and configuring products to order ("CTO").
BTO capabilities are employed to maximize manufacturing efficiencies by
producing high volumes of basic product configurations. CTO permits
configuration of units to the particular hardware and software customization
requirements of certain customers. Both BTO and CTO are designed to generate
cost efficiencies relating to just-in-time manufacturing, inventory management
and distribution practices. Just-in-time manufacturing reduces inventory by
manufacturing or taking delivery of the inventory from third-party suppliers
immediately prior to the sale or distribution of products to Compaq's customers.

         Compaq believes that there are a sufficient number of vendors for most
of its components and subassemblies. A significant number of components,
however, are purchased from single sources such as Intel Corporation ("Intel")
and Microsoft, among others, due to technology, availability, price, quality or
other considerations. Order lead times and cancellation requirements vary by
supplier and component. Key components and processes currently obtained from
single sources include certain types of Compaq's microprocessors, displays,
operating systems, application-specific integrated circuits and other custom
chips, and certain processes relating to construction of the housing for
Compaq's computers. In addition, new products introduced by Compaq may initially
utilize custom components obtained from only one source until Compaq has
evaluated whether there is a need for additional suppliers.

         Compaq has a significant relationship with Intel based on the use of
Intel microprocessors in many of Compaq's products. Compaq purchases Intel
microprocessors through purchase orders at prices that it believes are generally
the same as similarly situated companies. Compaq negotiates discounts from
Intel's standard pricing on specific quantities of specific microprocessors from
time to time based, in part, on availability. In addition, Compaq participates
in marketing programs that Intel offers to manufacturers utilizing its products.
Compaq also has a strategic alliance with Intel designed to consolidate Compaq's
high performance enterprise servers on the Intel Itanium microprocessor
architecture. In connection with this alliance, Compaq granted Intel a
non-exclusive license to its Alpha microprocessor technology.

         Compaq has used Microsoft components in its products since 1983, and
sells a license for a Microsoft operating system with many of its products. The
terms of this licensing arrangement are set forth in Microsoft's OEM license
agreements with Compaq. Compaq ships an operating system with a majority of its
products, but is not required to ship a Microsoft operating system. Compaq also
ships computers with other types of operating systems. In addition, Compaq has
separate license agreements for other types of Microsoft software. Compaq
believes that the terms of the OEM and other license agreements are generally
the same as those for other similarly situated manufacturers.




                                       7
<PAGE>

         Like other participants in the computer industry, Compaq ordinarily
acquires materials and components through a combination of blanket and scheduled
purchase orders released to position the supplier to support Compaq's
requirements for periods averaging 90 to 120 days. From time to time, Compaq has
experienced significant price increases and limited availability of certain
components that are not available from multiple sources. At times, Compaq has
been constrained by parts availability in meeting product orders, and future
constraints could have an adverse effect on Compaq's operating results. In 2001,
Compaq experienced shortages in microprocessors and printed circuit assemblies,
which constrained production. In addition, Compaq experienced material
constraints in all commodities during the latter portion of the third quarter of
2001 as a result of the September 11 tragedy and its impact on transportation
services. Because of the related delays in distribution of Compaq products and
the slowdown in the market, it is difficult to quantify the scale of the impact
of these constraints. If the supply of a key material component is delayed or
halted for a significant period of time, production could be curtailed,
resulting in an adverse effect on Compaq's business. Frequently, Compaq is able
to obtain scarce components for somewhat higher prices on the open market, which
may have an impact on gross margins but does not disrupt production. On
occasion, Compaq acquires component inventory in anticipation of supply
constraints. A restoration of component availability and resulting decline in
component pricing more quickly than anticipated could have an adverse effect on
Compaq's operating results.

MARKETING AND DISTRIBUTION

         In response to changing industry practices and customer preferences,
Compaq continues to tailor its product and service delivery models to the needs
of its customers. Compaq's products and services are sold and delivered
primarily directly to large enterprise, government and education accounts,
supplemented by dealers, value-added resellers, systems integrators and
authorized service providers. Compaq's products and services are sold and
delivered primarily through dealers, consumer retail channels and authorized
service providers to medium-sized business and home customers, and increasingly
through direct sales and delivery, including via the Internet. Value-added
resellers, frequently referred to as VARs, are businesses that buy Compaq
products and resell them to third parties along with other equipment or services
designed to be used with Compaq products. Systems integrators buy Compaq
products and combine them with other products to create a customized computer
system for a particular customer. Compaq's direct model includes sales of its
products and services through its worldwide sales force, Internet-based and
telephone sales and service delivery via Compaq's www.compaq.com website and
toll free number, 1-800-AT-COMPAQ, Enterprise Direct programs for major
business, government and education accounts, and Partner Direct fulfillment to
customers referred by Compaq's marketing partners.

         Compaq has made substantial progress toward evolving its distribution
model to sell more products directly to end-users. In 2001, Compaq continued to
expand its direct product distribution model, principally in North America. At
the end of 2001, Compaq was shipping approximately 59 percent of its North
America product sales via its direct model. In 2002, Compaq will continue
improvements in North America and focus its efforts on improving its direct
model in EMEA. Should Compaq fail to implement the most advantageous delivery
model for its products and services, Compaq could lose market opportunities that
may result in an adverse effect on its operating results. Compaq, however, does
not believe that there is only one distribution model to optimally sell its
products and services.




                                       8
<PAGE>

PATENTS, TRADEMARKS AND LICENSES

         Compaq believes that the intellectual property it owns or licenses is
an important part of its business and complements its technological expertise,
innovative talents and marketing capabilities across all business segments.
Compaq owned over 3,900 patents and had over 1,800 patent applications pending
with the United States Patent and Trademark Office at the close of 2001, as well
as related international patents and patent applications. Those patents are of
various durations. Compaq, however, does not believe that Compaq's or any of its
principal segments' business is materially dependent on any particular patent.
From time to time, Compaq has entered into patent cross-licensing agreements of
various durations with companies holding patents to technology related to
Compaq's products. Such companies have included International Business Machines,
Inc., Microsoft and Intel. Compaq also owns numerous registered trademarks in
the United States and in a number of foreign countries.

SEASONALITY

         General economic conditions have an impact on Compaq's business and
financial results. From time to time, the markets in which Compaq sells its
products experience weak economic conditions that may negatively affect sales.
Although Compaq does not consider its business to be highly seasonal, Compaq
generally experiences higher revenue and earnings in the second half of the
year. European sales and consumer sales are typically more seasonal than other
geographies/markets. Significant growth in Europe or in consumer sales generally
could result in financial results that are more dependent on those selling
cycles.

CUSTOMERS

         Compaq sells its products and services to a broad range of customers in
over 200 countries. Compaq's customer base includes large business enterprises,
governments, educational institutions, small and medium-sized businesses,
consumers and indirect sales distributors and resellers. Though Compaq's direct
model is growing, Compaq continues to distribute a significant portion of its
sales in the Access business segment through indirect distributors and
resellers. As a result, Compaq may maintain individually significant accounts
receivable balances from those companies. If the financial condition and
operations of those companies deteriorate, Compaq's operating results could be
adversely affected. One such distributor, Ingram Micro, Inc. ("Ingram"),
accounted for approximately 11 percent of consolidated revenue in 2001,
predominantly in the Access segment, and 6 percent of accounts receivable as of
December 31, 2001. In 2000, Ingram accounted for approximately 14 percent of
consolidated revenue and 11 percent of accounts receivable at December 31, 2000.
During these periods, no other customer of Compaq accounted for 10 percent or
more of consolidated revenue.

         Ingram has been a distributor of Compaq's products for a number of
years, and prior to that time Ingram was a reseller of Compaq's products.
Compaq's agreement with Ingram contains no minimum sale or purchase commitments
and does not contain pricing for Compaq's products. Instead, it refers to
pricing programs, which are modified from time to time and applicable to all
distributors of a similar type in the same geographical market. Compaq believes
that the contractual terms that govern its relationship with Ingram are not
materially different from contracts that Compaq enters into with its other
United States distributors.

         Compaq generally has experienced longer accounts receivable cycles in
its emerging markets, in particular Asia-Pacific and Latin America, when
compared with its United States and European markets. In the event that accounts
receivable cycles in these developing markets significantly deteriorate or one
or more of Compaq's larger resellers in these regions fails, Compaq's operating
results could be adversely affected.




                                       9
<PAGE>

BACKLOG

         Compaq's resellers typically purchase products on an as-needed basis,
and they frequently change delivery schedules and order rates depending on
market conditions. Unfilled orders can be, and often are, canceled at will and
without penalties. Compaq believes that backlog is not a meaningful indicator of
future business prospects due to the large volume of products delivered from
shelf inventories and the shortening of product lifecycles. Therefore, Compaq
believes that backlog information is not meaningful to an understanding of its
business.

COMPETITION

         The computer industry is intensely competitive with many United States
and international companies vying for market share. The market continues to be
characterized by rapid technological advances in both hardware and software
developments that have substantially increased the capabilities and applications
of information management products and have resulted in the frequent
introduction of new products. Because of the complexity of computer systems and
because of reliance upon the interaction of a variety of hardware and software
products, customers increasingly look for a broad range of product and service
offerings from a single vendor that takes overall responsibility for the
interoperability of the system. The principal elements of competition are
distribution capability, product performance, product quality and reliability,
service and support, price, financing, marketing and corporate reputation.
Compaq believes that its products and services compete favorably based on each
of these elements. Compaq, however, could be adversely affected if its
competitors introduce innovative products, offer a more attractive combination
of products and services, or offer their products at significantly lower prices
than Compaq. Compaq's results could also be adversely affected should it be
unable to effectively implement its technological and marketing alliances with
other companies, such as Microsoft, Intel, AOL Time Warner, Inc., Novell, Inc.,
Oracle Corporation and SAP Corporation, among others, and to manage the
competitive risks associated with these relationships.

ENVIRONMENTAL LAWS AND REGULATIONS

         Compaq is committed to conducting its business in a manner that
delivers leading environmental, health and safety ("EHS") performance and
protects the quality of the communities where it operates. Compaq has
implemented a comprehensive EHS management system to address risks associated
with its business operations. Compaq integrates numerous environmental features
into its product design and manufacturing processes that reduce the products'
potential environmental impact during their lifecycles. Compaq's products are
designed and manufactured to meet or exceed a variety of the world's
environmental standards, regulations and expectations. Compaq undertakes ongoing
environmental programs, including waste reduction, energy conservation,
recycling and design for the environment. Compaq maintains a worldwide
environmental health and safety audit program. The audit program includes
management system audits, compliance evaluations and waste disposal vendor
reviews.




                                       10
<PAGE>

         Compaq's operations are subject to various environmental laws and
regulations in the United States and other countries where Compaq operates.
Compaq is continuing to incur costs in connection with the investigation and
remediation of certain properties that it acquired in previous business
combinations. Pursuant to the Comprehensive Environmental Response, Compensation
and Liability Act of 1980 (also known as "Superfund"), Compaq is sharing in the
cost of cleaning up certain sites listed on the Federal National Priorities List
of Superfund Sites and certain state listed contaminated sites. Compliance with
laws enacted for protection of the environment to date has had no material
effect upon Compaq's capital expenditures, earnings or competitive position.
Compaq does not anticipate any material adverse effect in the future based on
the nature of its operations, current environmental laws and regulations, and
the current estimates of Compaq's site investigation and cleanup costs
associated with the Superfund and state listed sites. However, environmental
laws and regulations are subject to change, cleanup periods are protracted in
length, and environmental remediation standards may become more stringent.
Therefore, there can be no assurance that such laws, regulations or standards
will not have a future material adverse effect on Compaq.

EMPLOYEES

         At December 31, 2001, Compaq had approximately 63,700 full-time regular
employees and approximately 14,500 temporary and contract workers engaged in
manufacturing operations, engineering, research and development, marketing,
sales, service and administrative activities. Compaq believes that its ability
to attract and appropriately retain skilled personnel is critical to its
success. Accordingly, Compaq has developed competitive human resources policies
consistent with its business plan.

ITEM 2.  PROPERTIES

         Compaq's principal administrative facilities and a manufacturing
facility are located on the 1,000-acre Compaq Campus in Houston, Texas. Compaq
owns or leases administrative, sales, service, research and development,
warehouse, and manufacturing facilities in over 500 cities in 58 countries
worldwide. Compaq's principal international manufacturing facilities are in
Scotland and Brazil, and its principal domestic manufacturing facilities are in
California and Texas. Compaq Direct operates assembly and configuration centers
in Nebraska, Indiana, New Jersey and California. Compaq owns and leases customer
service call centers worldwide, the largest of which are in Massachusetts,
Georgia, Texas and Ireland.

         Compaq's real estate portfolio consisted of approximately 26 million
and 27 million square feet of building space worldwide at December 31, 2001 and
2000, respectively. Compaq's facilities are used for current operations of all
segments and suitable additional space is available to accommodate expansion
needs.

ITEM 3.  LEGAL PROCEEDINGS

         Information regarding legal proceedings is set forth in Note 13 of the
Notes to Consolidated Financial Statements under the subheading "Litigation"
which information is hereby incorporated by reference.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

         There were no matters submitted to a vote of security holders during
the fourth quarter of 2001.



                                       11
<PAGE>


PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         MARKET FOR COMMON STOCK. Compaq's common stock is listed on the New
York Stock Exchange and trades under the symbol CPQ. As of January 28, 2002,
Compaq had approximately 84,000 stockholders of record. The high and low closing
stock prices, as reported on the NYSE Composite Transaction Tape, were as
follows:

<Table>
<Caption>
                             2001                                 2000
              -----------------------------------   ----------------------------------
                    High              Low                High              Low
              ----------------- -----------------   ---------------- -----------------

<C>           <C>               <C>                 <C>              <C>
1st Quarter       $ 24.58          $  14.81             $ 33.00         $  24.69
2nd Quarter         21.85             13.30               30.25            24.50
3rd Quarter         15.85              7.85               34.63            25.00
4th Quarter         11.65              7.66               31.42            14.70
</Table>

         DIVIDENDS, DIVIDEND REINVESTMENT AND DIRECT STOCK PURCHASE PLAN. Compaq
paid quarterly dividends of $0.025 per share during 2001 and 2000. Should the
proposed merger with Hewlett-Packard Company not be completed, Compaq
anticipates that the cash dividend will continue to be paid on a quarterly
basis. Compaq has established a dividend reinvestment plan through which
stockholders may reinvest their dividends in Compaq common stock. Compaq also
has a direct stock purchase plan through which Compaq stock may be purchased
directly from the company. Information about both plans is available at
www.compaq.com/corporate/ir/si/irsi.html.

         RECENT ISSUANCES OF UNREGISTERED SECURITIES.  None.



                                       12
<PAGE>
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

         The following income statement and balance sheet data have been derived
from Compaq's consolidated financial statements. The information set forth below
is not necessarily indicative of the results of future operations and should be
read in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this Annual Report on Form 10-K.

<Table>
<Caption>
Year ended December 31
(In millions, except per share amounts)                         2001          2000          1999        1998(1)         1997
---------------------------------------                      ----------    ----------    ----------    ----------    ----------
<S>                                                          <C>           <C>           <C>           <C>           <C>
STATEMENT OF INCOME
Revenue:
    Products(2)                                              $   26,728    $   35,506    $   31,824    $   27,372    $   24,122
    Services                                                      6,826         6,716         6,623         3,797           462
                                                             ----------    ----------    ----------    ----------    ----------
        Total revenue                                            33,554        42,222        38,447        31,169        24,584
                                                             ----------    ----------    ----------    ----------    ----------
Cost of sales:
    Products                                                     21,536        27,624        25,263        21,383        17,500
    Services                                                      4,906         4,793         4,535         2,597           333
                                                             ----------    ----------    ----------    ----------    ----------
        Total cost of sales                                      26,442        32,417        29,798        23,980        17,833
                                                             ----------    ----------    ----------    ----------    ----------
Selling, general and administrative expense                       5,328         6,044         6,341         4,978         2,947
Research and development                                          1,305         1,469         1,660         1,353           817
Restructuring and related activities                                742           (86)          868           393            --
Merger-related costs                                                 44            --            --            --            44
Purchased in-process technology(3)                                   --            --            --         3,196           208
Other (income) expense, net(2)(4)                                   466         1,503        (1,154)          (69)          (23)
                                                             ----------    ----------    ----------    ----------    ----------
                                                                  7,885         8,930         7,715         9,851         3,993
                                                             ----------    ----------    ----------    ----------    ----------
Income (loss) before income taxes                                  (773)          875           934        (2,662)        2,758
Provision (benefit) for income taxes                               (210)          280           365            81           903
                                                             ----------    ----------    ----------    ----------    ----------
Income (loss) before cumulative effect of
  accounting change                                                (563)          595           569        (2,743)        1,855
Cumulative effect of accounting change, net of tax(5)              (222)          (26)           --            --            --
                                                             ----------    ----------    ----------    ----------    ----------
Net income (loss)                                            $     (785)   $      569    $      569    $   (2,743)   $    1,855
                                                             ==========    ==========    ==========    ==========    ==========
Earnings (loss) per common share:
Basic:
   Before cumulative effect of accounting change             $    (0.34)   $     0.35    $     0.35    $    (1.71)   $     1.23
   Cumulative effect of accounting change, net of tax             (0.13)        (0.02)           --            --            --
                                                             ----------    ----------    ----------    ----------    ----------
                                                             $    (0.47)   $     0.33    $     0.35    $    (1.71)   $     1.23
                                                             ==========    ==========    ==========    ==========    ==========
Diluted:
   Before cumulative effect of accounting change             $    (0.34)   $     0.34    $     0.34    $    (1.71)   $     1.19
   Cumulative effect of accounting change, net of tax             (0.13)        (0.01)           --            --            --
                                                             ----------    ----------    ----------    ----------    ----------
                                                             $    (0.47)   $     0.33    $     0.34    $    (1.71)   $     1.19
                                                             ==========    ==========    ==========    ==========    ==========
Shares used in computing earnings (loss) per common share:
    Basic                                                         1,688         1,702         1,693         1,608         1,505
    Diluted                                                       1,688         1,742         1,735         1,608         1,564

Cash dividends per common share                              $     0.10    $     0.10    $    0.085    $    0.065    $    0.015

FINANCIAL POSITION
Current assets                                               $   13,278    $   15,111    $   13,849    $   15,167    $   12,017
Total assets                                                     23,689        24,856        27,277        23,051        14,631
Current liabilities                                              11,133        11,549        11,838        10,733         5,202
Long-term obligations                                               600           575            --           422            --
Stockholders' equity                                             11,117        12,080        14,834        11,351         9,429
</Table>

----------

(1)      1998 results reflect the acquisition of Digital in June 1998.

(2)      2000 and 1999 reflect reclassifications between product revenue and
         other income and expense to reflect the adoption of Emerging Issues
         Task Force Issue 01-9, Accounting for Consideration Given by a Vendor
         to a Customer or a Reseller of the Vendor's Products ("EITF 01-9").

(3)      Represents non-recurring, non-tax-deductible charges associated with
         purchased in-process technology of $3.2 billion in connection with the
         Digital acquisition in 1998, and $208 million in connection with
         acquisitions in 1997.

(4)      Includes a $613 million charge for impairment of investments and
         related assets in 2001; a $1.8 billion charge for impairment of
         investments in 2000; and a $1.2 billion gain on the sale of an 81.5
         percent interest in AltaVista in 1999.

(5)      Effective January 1, 2001, Compaq adopted EITF 01-9. Effective January
         1, 2000, Compaq adopted Staff Accounting Bulletin No. 101, Revenue
         Recognition in Financial Statements, as amended. Pro forma results for
         prior years are not disclosed due to immateriality.



                                       13
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         Founded in 1982, Compaq Computer Corporation is a leading global
provider of information technology products, services and solutions for
enterprise customers. Compaq Computer Corporation, together with its
consolidated subsidiaries, (collectively "Compaq") designs, develops,
manufactures and markets information technology equipment, software, services
and solutions, including industry-leading enterprise storage and computing
solutions, fault-tolerant business-critical solutions, communication products,
personal desktop and notebook computers, and personal entertainment and Internet
access devices that are sold in more than 200 countries.

         On September 3, 2001, Compaq and Hewlett-Packard Company ("HP")
announced that a definitive merger agreement was unanimously approved by both
Boards of Directors, subject to, among other conditions, regulatory approval and
affirmative stockholders' vote by both companies. Under the terms of the
agreement dated as of September 4, 2001, Compaq stockholders will receive 0.6325
of a newly issued HP share for each outstanding share of Compaq common stock.
The transaction will be accounted for as a purchase. Subject to regulatory and
stockholder approvals, which Compaq and HP are in the process of seeking, and
other customary closing conditions, the transaction is expected to close in the
first half of 2002. However, during the fourth quarter of 2001, certain HP
stockholders representing approximately 18 percent of the outstanding common
stock of HP, including Walter Hewlett, a current member of the HP Board of
Directors, announced their intention to cast their respective and related
stockholder votes against the planned merger. Compaq believes that the planned
merger will obtain HP stockholder approval and ultimately be consummated;
however, the outcome is presently uncertain. Despite Compaq's intent to complete
the planned merger, as part of its ordinary course strategic planning, Compaq
continues to consider its revenue and cost forecasts, capital resources,
business units' growth and contraction and other forward-looking planning as a
stand-alone entity.

         The following discussion should be read in conjunction with the
consolidated financial statements provided under Part II, Item 8 of this Annual
Report on Form 10-K. Certain statements contained herein may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements involve a number of risks,
uncertainties and other factors that could cause actual results to differ
materially, as discussed more fully herein.

         The forward-looking information set forth in this Annual Report on Form
10-K is as of January 30, 2002, and Compaq undertakes no duty to update this
information. Should events occur subsequent to January 30, 2002 that make it
necessary to update the forward-looking information contained in this Form 10-K,
the updated forward-looking information will be filed with the SEC in a
Quarterly Report on Form 10-Q or as an earnings release included as an exhibit
to a Form 8-K, each of which will be available at the SEC's website at
www.sec.gov. More information about potential factors that could affect Compaq's
business and financial results is included in the section entitled "Factors That
May Affect Financial Condition And Future Results" beginning on page 28 of this
Form 10-K.



                                       14
<PAGE>


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         Compaq's discussion and analysis of its financial condition and results
of operations are based upon Compaq's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
Compaq to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, Compaq evaluates its estimates,
including those related to customer programs and incentives, product returns,
bad debts, inventories, investments, intangible assets, income taxes, financing
operations, warranty obligations, excess component order cancellation costs,
restructuring, long-term service contracts, pensions and other post-retirement
benefits, and contingencies and litigation. Compaq bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

         Compaq believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements. Compaq records estimated reductions to
revenue for customer programs and incentive offerings including special pricing
agreements, price protection, promotions and other volume-based incentives. If
market conditions were to decline, Compaq may take actions to increase customer
incentive offerings possibly resulting in an incremental reduction of revenue at
the time the incentive is offered. Compaq recognizes revenue and profit as work
progresses on long-term, fixed price contracts using the percentage-of-
completion method, which relies on estimates of total expected contract revenue
and costs. Compaq follows this method since reasonably dependable estimates of
the revenue and costs applicable to various stages of a contract can be made.
Recognized revenues and profit are subject to revisions as the contract
progresses to completion. Revisions in profit estimates are charged to income in
the period in which the facts that give rise to the revision become known.
Compaq maintains allowances for doubtful accounts for estimated losses resulting
from the inability of its customers to make required payments. If the financial
condition of Compaq's customers were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required. Compaq
provides for the estimated cost of product warranties at the time revenue is
recognized. While Compaq engages in extensive product quality programs and
processes, including actively monitoring and evaluating the quality of its
component suppliers, Compaq's warranty obligation is affected by product failure
rates, material usage and service delivery costs incurred in correcting a
product failure. Should actual product failure rates, material usage or service
delivery costs differ from Compaq's estimates, revisions to the estimated
warranty liability would be required. Compaq writes down its inventory for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required. Compaq holds minority interests in companies having operations
or technology in areas within its strategic focus, some of which are publicly
traded and have highly volatile share prices. Compaq records an investment
impairment charge when it believes an investment has experienced a decline in
value that is other than temporary. Future adverse changes in market conditions
or poor operating results of underlying investments could result in losses or an
inability to recover the carrying value of the investments that may not be
reflected in an investment's current carrying value, thereby possibly requiring
an impairment charge in the future. Compaq records a valuation allowance to
reduce its deferred tax assets to the amount that is more likely than not to be
realized. While Compaq has considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for the valuation
allowance, in the event Compaq were to determine that it would be able to
realize its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made. Likewise, should Compaq determine that it
would not be able to realize all or part of its net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made.



                                       15
<PAGE>


RESULTS OF OPERATIONS

         Compaq completed the acquisitions of Shopping.Com ("SDC") and Zip2
Corp. ("Zip2") and purchased certain assets and liabilities of InaCom Corp.
("Inacom") in February 1999, April 1999 and February 2000, respectively. These
transactions were accounted for as purchases. In August 1999, Compaq sold an
81.5 percent equity interest in AltaVista Company, SDC and Zip2 (collectively
"AltaVista") to CMGI, Inc. ("CMGI"). Accordingly, Compaq's consolidated
financial statements include the results of operations from the respective dates
of acquisition through divestiture or December 31, 2001, as applicable.

         Segment results reflect changes made during 2001 in the organization of
Compaq's businesses and its expense allocation methodology. Compaq has combined
its commercial personal computing business with its consumer business to form
the Access segment. In addition, the results of Compaq's financing business,
which were previously reflected in the Other segment category, were included in
the Compaq Global Services segment in 2001. Further, Compaq allocated certain
shared expenses that were previously reported in unallocated corporate expenses,
such as information management, facilities and marketing costs, to the segments
during 2001. The effect of this change in expense allocation was to lower
segment operating profit by the amount of the allocated costs. Financial data
for prior periods has been restated to conform to the current presentation.
Compaq has three reportable segments: Enterprise Computing, Access and Compaq
Global Services.

         Summary financial data by business segment follows:

<Table>
<Caption>
(In millions)                         2001            2000            1999
-------------                     ------------    ------------    ------------
<S>                               <C>             <C>             <C>
ENTERPRISE COMPUTING
        Revenue                   $     10,699    $     14,253    $     12,947
        Operating income                   163           1,656             674
ACCESS
        Revenue                         15,193          20,624          18,128
        Operating income (loss)           (587)            145            (437)
COMPAQ GLOBAL SERVICES
        Revenue                          7,789           7,483           7,413
        Operating income                 1,062             884             998
SEGMENT ELIMINATIONS AND OTHER
        Revenue                           (127)           (138)            (41)
        Operating income (loss)              1             (43)           (289)
CONSOLIDATED SEGMENT TOTALS
        Revenue                   $     33,554    $     42,222    $     38,447
        Operating income          $        639    $      2,642    $        946
</Table>

         A reconciliation of Compaq's consolidated segment operating income to
consolidated income (loss) before income taxes follows:

<Table>
<Caption>
Year ended December 31 (In millions)            2001            2000            1999
------------------------------------        ------------    ------------    ------------
<S>                                         <C>             <C>             <C>
Consolidated segment operating income       $        639    $      2,642    $        946
Unallocated corporate expenses                      (160)           (350)           (298)
Restructuring and related activities                (742)             86            (868)
Merger-related costs                                 (44)             --              --
Other income (expense), net                         (466)         (1,503)          1,154
                                            ------------    ------------    ------------
Income (loss) before income taxes           $       (773)   $        875    $        934
                                            ============    ============    ============
</Table>



                                       16
<PAGE>


OVERVIEW

         Compaq reported 2001 consolidated revenue of $33.6 billion, a decrease
of $8.7 billion, or 21 percent, compared with 2000. Revenue in 2001 was affected
by economic weakness as generally seen throughout the technology industry, a
competitive pricing environment, and Compaq's commitment to lower channel
inventory, which declined by an estimated $1.7 billion throughout the year.
Revenue increased $3.8 billion, or 10 percent, in 2000 compared with 1999 due to
strong growth in Enterprise Computing and Access. The term channel refers to
Compaq's resellers and distributors.

         Consolidated gross margin of $7.1 billion (approximately 21 percent of
revenue) in 2001 decreased 2 percentage points compared with 2000. The decline
in gross margin resulted from continued pricing pressures, particularly in
Compaq's Enterprise Computing and Access segments. Consolidated gross margin of
$9.8 billion (23 percent of revenue) in 2000 improved 1 percentage point
compared with 1999. Stronger margins in Enterprise Computing and Access led to
the overall improvement in gross margin in 2000.

         Consolidated operating expense was $6.7 billion in 2001, a decline of
$836 million, or 11 percent. Operating expense included merger-related charges
of $44 million in 2001, while 2000 operating expense included litigation related
charges of $81 million. Compaq continued to drive down operating expenses as
further benefits were realized from ongoing cost control initiatives and
restructuring plans, including the actions to combine its personal computer
businesses into a single business unit and increase the efficiency in its
corporate and administrative functions. Consolidated operating expense was $7.5
billion in 2000, a decline of $488 million, or 6 percent, compared with 1999.
Operating expense declined during 2000 due to solid execution of disciplined
spending.

         Compaq had a tax benefit of 27 percent in 2001 compared with effective
tax rates of 32 percent and 39 percent in 2000 and 1999, respectively. The
change in the tax rate from 2000 to 2001 was primarily caused by impairment
charges resulting from the write-down of certain of Compaq's investments during
2001, partially offset by a reduction in foreign tax expense and the benefit of
certain foreign losses. Compaq increased its valuation allowance by $130 million
in 2001 for these investment impairments charges that could result in future
capital losses that are not expected to result in a corresponding tax benefit,
as Compaq does not expect to generate future capital gains sufficient to offset
all potential future capital losses. The higher tax rate in 1999 compared with
2000 was principally due to a gain on the sale of an 81.5 percent equity
interest in AltaVista.

         Compaq expects the markets in which it participates to expand by 3
percent in revenue in 2002 and forecasts its 2002 revenue at $34 billion, a 1
percent increase compared with 2001, with earnings per share of $0.32. Compaq
estimates that its 2002 gross margin will be 21 percent and its operating
expense 18.2 percent of revenue. Compaq believes that it has the opportunity to
exceed its estimated revenue, which would have a favorable impact on gross
margin and operating expense. Therefore, Compaq believes that an increase in
revenue will increase its earnings per share significantly, with a year-to-year
increase in revenue of 3 percent, for example, leading to earnings per share of
$0.40.

         Compaq anticipates an effective tax rate of 30 percent for 2002. At
December 31, 2001, Compaq had a deferred tax asset of $774 million related to
net operating loss carryforwards which, if not utilized, will generally expire
between 2002 and 2021 and credit carryforwards of approximately $773 million
which, if not utilized, will generally expire between 2002 and 2016. Compaq had
a valuation allowance of $380 million as of December 31, 2001 against the net
operating loss and credit carryforwards. Compaq has considered future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance. In the event Compaq were to determine that it
would not be able to realize all or part of its net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made.




                                       17
<PAGE>

         Compaq reported a consolidated net loss of $785 million, or $(0.47) per
diluted common share, in 2001 compared with consolidated net income of $569
million, or $0.33 per diluted common share, in 2000. The consolidated net loss
in 2001 included restructuring charges of $742 million, net investment losses of
$438 million, merger-related costs of $44 million, related tax effects for the
preceding items, and a cumulative effect arising from the adoption of a new
accounting method of $222 million, net of tax. Consolidated net income in 2000
included net investment losses of $1.6 billion ($1.1 billion, net of tax).
Consolidated net income was $569 million, or $0.34 per diluted common share, in
1999 and included a gain on sale of businesses of $1.2 billion, a charge for
restructuring and related activities of $868 million and related tax effects.

         Effective January 1, 2001, Compaq adopted Emerging Issues Task Force
Issue 01-9, Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products, ("EITF 01-9"), which was issued in November
2001. Compaq's adoption of EITF 01-9 resulted in a change in method of
accounting for certain sales incentive offerings. Historically, Compaq
recognized certain incentives at the time an obligation was incurred, which
generally occurred upon completion of qualifying sales transactions by Compaq's
direct or indirect customers. EITF 01-9 requires such discounts to be recognized
at the later of the date the sales incentive is offered or the date at which the
related revenue is recognized. Compaq recognized a cumulative effect of an
accounting change of $222 million, net of tax. Also in accordance with EITF
01-9, Compaq reclassified certain customer financing costs from interest expense
to net revenue. Compaq has adjusted its results for the first three quarters of
2001 as reflected in the Selected Quarterly Financial Data on page 68 and
reclassified charges related to certain customer financing costs to conform to
the new method for all periods presented.

         Effective January 1, 2000, Compaq adopted Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements, as amended ("SAB 101"), issued
by the SEC in December 1999. Compaq's adoption of SAB 101 resulted in a change
in the method of accounting for certain product shipments. The cumulative effect
of this change was $26 million, net of tax.

ENTERPRISE COMPUTING

         Enterprise Computing designs, develops, manufactures and markets
advanced computing and telecommunications products and solutions for enterprise
customers worldwide. The Enterprise Computing segment consists of three global
business units: Industry Standard Servers, Business Critical Solutions and
Enterprise Storage. Industry Standard Servers designs and manufactures
industry-standard ProLiant servers, which are building blocks for information
technology infrastructures, and integrates these with software and services to
provide information technology solutions for companies of all sizes.
Industry-standard products are produced using components such as microprocessors
and software operating systems, designed and manufactured by third parties, that
are available across the industry and used by many computer manufacturers.
Business Critical Solutions provides NonStop Himalaya and high performance
AlphaServer systems with Tru64 UNIX, OpenVMS and Linux operating systems for
solutions that deliver the highest levels of availability, performance, scale
and manageability for the telecommunications, financial services, high
performance technical computing and other business-critical market segments.
Enterprise Storage provides global storage solutions through the development and
delivery of StorageWorks by Compaq storage area networks, automated backup
solutions, network attached storage and a complete suite of SANworks by Compaq
storage management solutions. Network attached storage means storage devices
connected to a network of computers that store and deliver information to
computers in the network.




                                       18
<PAGE>

         Enterprise Computing revenue decreased $3.6 billion, or 25 percent, in
2001 compared with 2000. Weak economic conditions, particularly in North
America, and continued pricing pressures led to lower revenue. While Compaq
expects an industry-wide competitive pricing environment to continue, signs of
returning corporate customer purchases were apparent late in the fourth quarter
of 2001. Enterprise Computing revenue increased $1.3 billion, or 10 percent, in
2000 compared with 1999 and represented 34 percent of consolidated revenue.
Revenue was higher in 2000 compared with 1999 primarily due to strong demand for
industry-standard servers. Enterprise Computing revenue represented 32 percent,
34 percent and 34 percent of consolidated revenue in 2001, 2000 and 1999,
respectively.

         Revenue was significantly lower in Industry Standard Servers during
2001 as intense price competition and a shift in sales mix to lower-end servers
resulted in average selling price declines of 27 percent. In 2002, Compaq
expects the market to expand by 7 percent in revenue. In 2001, unit sales
decreased as well due to approximately $700 million in channel inventory
reductions and lower server demand from Internet service providers and other
market segments such as telecommunications customers. Despite declining revenue,
Compaq maintained its worldwide market share lead in industry-standard servers
and regained its number one position in North America, according to third
quarter 2001 share data from International Data Corporation ("IDC"). Industry
Standard Servers revenue increased dramatically during 2000 compared with 1999,
benefiting from an increase in average unit sales of 11 percent related to the
market shift to rack optimized and richer configured higher-end servers. Rack
optimized servers are servers housed within a rack-mounting frame or cabinet to
optimize accessibility. Component shortages encountered during 2000, resulting
from high demand, contributed to slightly higher average selling prices. Demand
was strong across all regions in 2000 as both corporate and Internet service
provider customers built out data centers.

         Business Critical Solutions revenue declined 15 percent during 2001 due
to continued weak global economic conditions, weakness in the finance and
telecommunication industries and competitive pricing. The full year decline was
partially offset by sales increases late in the year following the events of
September 11 as customers resumed implementing infrastructure projects and
increased their security and disaster recovery capabilities, and with the
implementation of several large-scale supercomputer installations. Sales to new
customers of NonStop Himalaya servers also increased late in 2001. In 2002,
Compaq expects market revenue in this area to expand 5 percent. Compaq
maintained its market leading position in the fault-tolerant server market in
2001 according to IDC. Fault-tolerant servers have the capability to cope with
internal hardware problems without interrupting the system's performance and are
designed for business-critical uses, such as major stock exchange systems,
airline booking, emergency police systems or certain hospital needs, where the
highest levels of system and application reliability are required. Compaq
believes its offerings in high-end servers and storage are well positioned as
customers add capacity and upgrade their business-critical infrastructures
should increasing customer buying patterns continue. In June 2001, Compaq
announced a strategic alliance with Intel Corporation ("Intel") that, over a
multi-year period, will lead to consolidation of its NonStop Himalaya and
AlphaServer systems onto a single microprocessor architecture. While the
transition to Intel architecture could lead to the loss of some customers,
resulting in lower future revenue earned by Business Critical Solutions, Compaq
is attempting to mitigate this effect through the use of customer assurance and
other programs designed to lessen the impact of product transition on its
customers. Business Critical Solutions revenue was relatively unchanged in 2000
compared with 1999 due to component shortages that delayed product shipment of
Compaq's AlphaServer GS Series, resulting in lower unit sales of this product,
offset by higher selling prices. Compaq's reliance on third-party suppliers of
key material components exposes it to potential delays or curtailments of the
supply of material components or product quality issues arising from faulty
components manufactured by third-party suppliers that could inhibit its ability
to ship its products in desired quantities and in a timely manner. While, in
2000, Compaq attempted to mitigate the risk of reliance on third-party suppliers
by working closely on product plans and coordinating the product introductions,
delays in receiving appropriate quantities of components delayed manufacturing
and subsequent product shipments resulting in a reduction of revenue in this
business unit.




                                       19
<PAGE>

         Enterprise Storage revenue declined 11 percent during 2001 due to weak
economic conditions and resulting pricing pressures. Despite these factors,
Compaq shipped over 100 petabytes of storage during 2001 and increased this
business unit's percentage of direct sales. Storing the equivalent of one
character, a byte is the basic unit of measurement for computer storage. A
petabyte is one thousand trillion bytes. Performance by Enterprise Storage began
to improve during the fourth quarter of 2001 due to new product introductions,
such as the StorageWorks Enterprise Virtual Array and Modular SAN Array 1000,
with Compaq regaining its number one world market position in overall storage,
including revenue, units and capacity shipped according to IDC. In 2002, Compaq
expects market revenue in this area to increase by 12 percent. Compaq expects
future revenue from this business unit to benefit from the introduction of these
new products, however, there can be no guarantee that such benefits will be
realized. Revenue from this business unit increased in 2000 compared with 1999
due to higher sales volumes in external storage products driven by strong
acceptance of Compaq's Enterprise Network Storage Architecture solutions.
Revenue benefited from an increase in overall storage capacity shipped of 67
percent to 70 petabytes during 2000, partially offset by industry-wide price
declines per unit of capacity.

         Enterprise Computing operating income decreased $1.5 billion, or 90
percent, in 2001 compared with 2000. Aggressive pricing and weak economic
conditions contributed to an overall decline in gross margin of 4 percentage
points compared with 2000. Enterprise Computing operating income increased $982
million, or 146 percent, in 2000 compared with 1999 due to strong revenue growth
and higher gross margins, as well as lower operating expenses as a percentage of
revenue.

         Operating income in Industry Standard Servers was lower in 2001 as
average selling price declines outpaced 19 percent reductions in average unit
costs. Average unit costs declined principally due to lower priced memory.
Compaq made significant improvements in this business unit's go-to-market model
during 2001 including channel inventory reductions, increasing inventory turns
from 24 to 33 and raising the percentage of direct sales 8 percentage points.
While the results from this business unit are dependent upon market conditions
and other factors, Compaq expects these and further improvements to drive higher
gross margins in the future. Operating income improved in 2000 compared with
1999 as gross margins were 3 percentage points higher. Strong market demand for
industry-standard servers drove a richer mix of higher margin servers in the
dense optimized and high-end markets, supporting higher average selling prices
relative to average unit costs. Dense optimized servers are physically designed
to occupy a limited space in light of space constraints in corporate data
centers.

         Operating income declined in Business Critical Solutions in 2001
compared with 2000 due to lower revenue, driven by weak economic conditions and
competitive pricing. Gross margin in 2001 was relatively unchanged as a
percentage of revenue. Gross margin in 2000 included charges related to a
customer benefit program that Compaq put in place to mitigate the impact of its
decision to cease development of AlphaServer units that run Windows NT for
certain customers who previously deployed Windows NT on Compaq's AlphaServer
systems. Excluding these program charges, 2001 gross margin declined 4
percentage points compared with 2000. Operating expenses in 2001 were 9 percent
lower compared with 2000 partially offsetting the lower gross margin. Operating
income was higher in this business unit in 2000 compared with 1999, despite
relatively unchanged revenue and the impact to gross margin of the customer
benefit program, due to a reduction in operating expense of 12 percent that was
driven by headcount reductions related to the third quarter 1999 restructuring
plan.



                                       20
<PAGE>

         Operating income declined in Enterprise Storage in 2001 compared with
2000 due to lower revenue and higher operating expenses. Revenue decreased due
to weak economic conditions and resulting pricing pressures, as previously
noted, while operating expense increased 15 percent due to significant
investments in new products and technology. Gross margin as a percentage of
revenue was relatively stable and was aided by a favorable shift in product mix
including higher sales of Storage Area Network products. Operating results
strengthened in this business unit during 2000 compared with 1999 due to higher
revenue that was driven by strong product acceptance and a reduction in
operating expense that resulted from an increased focus on reducing
administrative costs.

ACCESS

         The Access segment delivers products and solutions designed to provide
home and business users with anytime, anywhere access to information,
communication and entertainment. For the business customer, the Access segment
offers a broad range of innovative commercial computing devices, services and
solutions. These include desktop, notebook, workstation and thin client products
marketed under the Evo, DeskPro, Armanda and other brands, as well as a full
line of Compaq branded monitor and networking products - all designed to help
customers simplify their business computing environments. For the consumer
customer, the Access segment offers a wide range of innovative products and
technologies that all work together to help the home or home office user
simplify their life, connect their world and have fun. These include Presario
branded desktop and notebook Internet PCs and a line of monitors and printers
sold under the Compaq brand. In addition, the Access segment offers an
innovative line of personal devices and solutions marketed under the iPAQ brand,
targeting the convergence of business and home computing. These include
handhelds, such as the award-winning iPAQ Pocket PC, as well as personal
entertainment and communications products, home networking products, desktop
computers, microportable projectors and Internet access appliances. Internet
access appliances are devices used to access the Internet.

         Access revenue was $15.2 billion in 2001, a decrease of $5.4 billion,
or 26 percent, compared with 2000. An overall PC unit market decline of 10
percent, weak global economic conditions, reductions in channel inventory and
aggressive price competition led to lower revenues, particularly in North
America and Europe. In 2002, Compaq expects PC market revenue to decline 3
percent. In 2001, average selling prices for desktops and notebooks fell 15
percent and 20 percent, respectively, compared with 2000. Additionally, channel
inventory reductions of approximately $800 million during the year and weak
market conditions drove overall unit sales for desktops and notebooks lower by
15 percent compared with unit sales in 2000. Unit sales of Compaq's iPAQ
handheld grew 63 percent compared with 2000 propelling it to the world's number
one Pocket PC handheld product in terms of market share according to IDC. During
2000, Access revenue increased $2.5 billion, or 14 percent, compared with 1999.
Revenue from products targeted at corporate customers increased 16 percent in
2000 compared with 1999, benefiting from 66 percent higher unit sales of
notebooks and Compaq iPAQ products, offset in part by a 12 percent decrease in
unit sales of desktops. Compaq completed the purchase of key assets from Inacom
during the first quarter of 2000 and subsequently established direct fulfillment
operations marketed under the name "Compaq Direct". This purchase added custom
configuration capabilities and direct fulfillment logistics that enable Compaq
to better meet customer needs in North America. Higher unit sales of 27 percent
in home and office desktops and notebooks also contributed to revenue growth in
2000 compared with 1999 although consumer sales late in 2000 were hampered by
the lack of a seasonal uplift in sales. Revenues benefited from strong
international sales growth, particularly in Asia-Pacific and Latin America.
Access revenue represented 45 percent, 49 percent and 47 percent of consolidated
revenue in 2001, 2000 and 1999, respectively.




                                       21
<PAGE>

         The Access segment incurred an operating loss of $587 million during
2001 compared with operating income of $145 million in 2000 as lower gross
margins more than offset improvements in operating expense and cost structure.
Segment gross margins declined 3 percentage points compared with 2000 due to
aggressive pricing and weak economic conditions. Compaq was able to partially
mitigate the downward pressure on margins by increasing its direct sales mix 12
percentage points in North America and introducing a simplified new product line
centered around the Evo family of personal computing products targeted at
corporate customers. The new Evo product family uses simplified form factors and
common components to lower overall unit cost. Operating expense in 2001
decreased $298 million, or 14 percent, primarily due to cost reductions
following the consolidation of Compaq's previous two personal computing
businesses and increased efficiencies in the non-direct portion of business
through significant channel inventory reductions. As current competitive pricing
conditions are expected to continue to pressure margins, Compaq plans to
continue to focus on business model improvements in this segment. Compaq expects
profitability in its Access segment in the second half of 2002 as it increases
the proportion of its Access sales that use a direct or auto-replenishment
distribution model. However, revenues may be adversely affected in the
short-term as direct sales made by Compaq may compete with the sales made by
distributors. Operating income was $145 million in 2000 compared with an
operating loss of $437 million in 1999. Operating results from sales to
corporate customers strengthened dramatically due to continued improvement in
the business model, including integration of Compaq Direct's fulfillment
capacity, and successful reduction of operating costs. Profitability also
benefited from a favorable shift in product mix to higher margin notebooks and
supply chain efficiencies. Operating expense declined 8 percent due to
persistent focus on streamlining processes and increasing efficiencies.
Operating income on sales to home and office customers declined primarily due to
a downturn in the United States consumer PC market that occurred late in the
fourth quarter of 2000, a period where an uplift in sales to consumers is
customarily experienced. Higher component costs also contributed to lower
operating income. Operating expenses were relatively unchanged as a percentage
of revenue.

COMPAQ GLOBAL SERVICES

         The Compaq Global Services segment consists of four global business
units: Customer Support, Systems Integration, Managed Services and Financial
Services. Customer Support offerings include lifecycle support services,
business-critical services and high availability support services for
multi-vendor, multi-technology hardware and software products. Lifecycle support
services consist of installation, user assistance, maintenance, upgrading,
replacement and disposition services available through a product's end of life.
Customer Support also manages and delivers warranty support to its customers
through its own service organization, as well as through full-service resellers
and independent service companies. Systems Integration offerings include
end-to-end information systems consulting, technical and application design
services, systems integration, Internet and network architecture, project
management services and e-business solutions. Systems integration means
designing, configuring and installing a variety of computers and other
information technology devices, often from different vendors and performing
different functions, to provide a unitary system within a user environment.
Managed Services offerings include outsourcing and resource management services,
as well as business continuity and recovery services. Financial Services
offerings include customized enterprise financing solutions that encompass
computers, networks and technology upgrades, as well as asset management
services for large and multi-national business customers. Asset management
services involve the tracking, recovery, reconditioning and disposition of
equipment. Financial Services also offers an array of specialized financial
services to small and medium-sized businesses and the consumer, educational and
government marketplaces.



                                       22
<PAGE>

         Compaq Global Services revenue increased $306 million, or 4 percent, in
2001 compared with 2000. Combined revenue in Customer Support, Managed Services
and Financial Services grew 6 percent compared with 2000, partially offset by
lower revenue in Systems Integration. Compaq Global Services revenue increased
$70 million, or 1 percent, in 2000 compared with 1999. Lower revenue in Managed
Services was offset by strong performance in Financial Services. Compaq Global
Services accounted for approximately 23 percent, 18 percent and 19 percent of
Compaq's consolidated revenue in 2001, 2000 and 1999, respectively.

         Customer Support revenue increased 3 percent in 2001 compared with
2000. Revenue from this business unit was higher across all regions in 2001,
fueled by demand for Microsoft-related services and global enterprise technology
solutions as well as expansion into multi-technologies to more fully support the
Internet environment. In 2002, Compaq expects the market for customer services
to expand by 6 percent. During 2000, Customer Support revenue declined 1 percent
compared with 1999 but was higher in terms of constant currency by 5 percent.
Revenue from Systems Integration was lower in 2001, down 3 percent from the
prior year, due to a second half slowdown in the consulting and systems
integration market segment in several regions. Compaq also believes that it did
not perform as well as the general market for systems integration in 2001. The
market softening was most predominant in North America with Systems Integration
revenue down 21 percent compared with 2000. Partially offsetting the North
America revenue decline was strong growth in Japan, up 21 percent compared with
2000, driven by strong penetration of consulting services in the
telecommunications sector. In 2002, Compaq expects the market for systems
integration to expand by 6 percent. During 2000, Systems Integration revenue
declined 4 percent compared with 1999. Revenue in 2000 was adversely affected by
the Y2K spending slowdown. Managed Services revenue in 2001 was 3 percent higher
compared with 2000, with the strongest growth in Europe, up 8 percent. The
market for Managed Services remained strong despite economic weakness, with
customer demand focused on cost reduction and asset management. In 2002, Compaq
expects the market for managed services to increase by 12 percent. In 2001,
revenue from Managed Services also benefited from workforce rebalancing and
retraining efforts started in 2000. Compaq narrowed its focus to target areas of
opportunity that are consistent with its Internet-related service strategy and
realigned its workforce to support growth plans. Managed Services also
introduced the Computing on Demand initiative during 2001, which allows
customers to manage their information technology spending as a variable expense,
similar to utilities such as electricity or gas. Within a Computing on Demand
engagement, Compaq agrees to provide a business with personal computers and
other equipment, which may include prepackaged as well as custom solutions for
products and services, priced on a per unit basis. During 2000, Managed Services
revenue decreased 6 percent compared with 1999. The general industry decline of
Y2K-related services demand contributed to lower revenue in 2000. Financial
Services, with a revenue increase of 39 percent in 2001 compared with 2000,
continued to see positive growth in traditional leasing programs as well as new
opportunities through Computing on Demand. Financial Services' total asset
portfolio was $3.3 billion at the end of 2001, representing growth of 23 percent
compared with 2000. Financial Services revenue increased 96 percent in 2000
compared with 1999, as a result of increasing hardware volumes and related
financing penetration, as well as a higher earning asset base.




                                       23
<PAGE>

         Overall, Compaq Global Services continues to benefit from a large
geographically diverse base, helping to counterbalance market weakness in the
United States. Compaq's strategy of offering bundled hardware and solutions
through asset management, leasing and support services has led to steady
sequential growth in the number of units under contract for these services
during the last three years. During 2001, Compaq's unit sales of hardware
declined due to the general economic weakness and technology market contraction
experienced by the industry as a whole. Should Compaq not be successful in
maintaining the number of hardware units under contract for services or should
it not be able to grow its market share through other service offerings and
penetration with new customers to offset declines in its contract base, then
Compaq's asset management, leasing and support services revenue could suffer in
future periods. In addition, if the trend for design and implementation of
systems continues to move from proprietary environments to industry-standard
products, Compaq will need to continue to accelerate rebalancing and retraining
its services workforce to compete in the new environment.

         Compaq Global Services operating income increased $178 million, or 20
percent, in 2001 compared with 2000. Improvements in the service delivery cost
structure, coupled with higher revenue, contributed to increased operating
income in Customer Support, Managed Services and Financial Services. Lower
operating income in Systems Integration was driven by decreased revenue
attributable to each engineer, a mix shift to lower margin projects and
investments in building professional consulting sales capability. Compaq
continues to refine the service delivery fulfillment model in order to mitigate
the downward margin pressures of business mix changes and shifting revenue
profile. However, there can be no guarantee that such cost reductions can keep
pace should demand weaken. Compaq Global Services operating income decreased
$114 million, or 11 percent, in 2000 compared with 1999. While profitability
increased in Financial Services and remained strong in Customer Support and
Managed Services, operating income in Systems Integration was significantly
lower in 2000 compared with 1999, requiring workforce rebalancing and training.
In addition, a shift in the sales mix to lower margin services placed downward
pressure on operating income.

UNALLOCATED CORPORATE EXPENSES

         The results of the business segments exclude separately managed
unallocated corporate expenses, which are comprised primarily of general and
administrative costs as well as other items not controlled by the business
segments.

         Unallocated corporate expenses decreased $146 million, or 42 percent,
from $350 million to $204 million as actions to reduce the cost of corporate and
administrative functions under Compaq's second quarter 2001 restructuring plan
have been fully achieved. Unallocated corporate expenses included merger-related
charges of $44 million in 2001 and litigation related charges of $81 million in
2000. Unallocated corporate expenses increased $52 million, or 17 percent, in
2000 compared with 1999.

RESTRUCTURING AND RELATED ACTIVITIES

         In the first and second quarters of 2001, Compaq's management approved
restructuring plans to realign its organization and reduce operating costs.
Compaq combined its commercial and consumer personal computer operations into a
single Access segment. Compaq also implemented significant changes in its
business model and supply chain operations. These actions were designed to
simplify product offerings, derive greater internal operating efficiencies,
lower order cycle time, reduce channel inventory and improve account and order
management. In addition, Compaq consolidated certain functions within its global
business units and reduced administrative functions. Accordingly, Compaq planned
to reduce associated employee positions by approximately 4,500 and 4,000
worldwide in connection with the first and second quarter plans, respectively.




                                       24
<PAGE>
 Restructuring and related charges of $249 million and $493 million were
expensed during the first and second quarters of 2001, respectively. The first
quarter charge was comprised of $173 million related to employee separations,
$64 million of related asset impairment charges and $12 million for other exit
costs. The second quarter charge was comprised of $303 million related to
employee separations, $138 million of related asset impairment charges, $40
million for facility closure costs and $12 million for other exit costs. During
the fourth quarter of 2001, Compaq reversed excess reserves of $68 million for
employee separation costs accrued in conjunction with the first and second
quarter plans and expensed an additional charge of approximately the same amount
for additional reductions of 1,400 employee positions as approved by management
to further achieve its objectives of realigning its organization and reducing
operating costs. Employee separation benefits under each plan were similar and
included severance, medical and other benefits. As of December 31, 2001, Compaq
completed 9,200 of the planned 9,900 employee separations under the 2001 plans.
Compaq expects to substantially complete the initiatives contemplated under the
restructuring plans by March 31, 2002. During 2001, Compaq realized cost savings
of approximately $325 million as a result of these actions. Upon conclusion of
its restructuring initiatives, Compaq expects to achieve annualized savings of
approximately $950 million in cost of sales and operating expenses. These
estimated cost savings were calculated based upon expected cost reductions
related to employee separations and lower depreciation expense related to
impaired assets. However, Compaq cannot give any assurance that the estimated
cost savings will materialize.

         Components of accrued restructuring costs and amounts charged against
the 2001 plans as of December 31, 2001 were as follows:

 <Table>
 <Caption>
                                        ADJUSTMENTS
                           BEGINNING        AND        DECEMBER 31,
(In millions)               ACCRUAL     EXPENDITURES       2001
-------------            ------------   ------------   ------------

<S>                      <C>            <C>            <C>
Employee separations     $        476   $        245   $        231
Facility closure costs             40             15             25
Other exit costs                   24             16              8
                         ------------   ------------   ------------
                         $        540   $        276   $        264
                         ============   ============   ============
</Table>

         The accrual at December 31, 2001 includes $164 million related to
future cash payments to employees separated prior to December 31, 2001.

OTHER INCOME AND EXPENSE

         Other income and expense for 2001 included investment losses of $438
million, resulting from an other than temporary decline in the value of Compaq's
investment portfolio, including a write-down in Compaq's investment in CMGI and
related assets, net of investment gains. Investment gains and interest income of
$61 million in 2001 resulted primarily from the sale of an investment in a
limited liability corporation. Net investment losses in 2000 included impairment
charges of $1.8 billion due primarily to Compaq's investment in CMGI, a $252
million realized gain on the sale of available-for-sale securities and a $77
million loss from investments accounted for under the equity method.




                                       25
<PAGE>

RECENT PRONOUNCEMENTS

         In June 2001, the Financial Accounting Standards Board issued FAS 142,
Goodwill and Other Intangible Assets. Under FAS 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed at least
annually for impairment. The amortization provisions of FAS 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, Compaq is
required to adopt FAS 142 effective January 1, 2002. Application of the
non-amortization provisions of FAS 142 for goodwill is expected to result in an
increase in operating income of approximately $30 million in 2002. Changes in
the estimated useful lives of intangible assets are not expected to result in a
material effect on net income in 2002. At December 31, 2001, Compaq had goodwill
of approximately $240 million. Pursuant to FAS 142, Compaq will test its
goodwill for impairment upon adoption and, if impairment is indicated, record
such impairment as a cumulative effect of accounting change. Compaq is currently
evaluating the effect that the adoption may have on its consolidated results of
operation and financial position.

LIQUIDITY AND CAPITAL RESOURCES

         Compaq's cash and cash equivalents increased to $3.9 billion at
December 31, 2001, from $2.6 billion at December 31, 2000. The increase resulted
primarily from $1.5 billion and $964 million provided by operating activities
and financing activities, respectively, offset in part by $955 million used in
investing activities.

         Net cash of $1.5 billion provided by operating activities consisted
primarily of $1.7 billion from a net loss adjusted for non-cash items, offset by
$250 million used in working capital and other activities. Net cash used in
working capital and other activities resulted from an increase in lease
receivables and decreases in accounts payable and other current liabilities,
partially offset by a decrease in trade receivables and inventories. Days sales
outstanding were 54 days and 53 days for 2001 and 2000, respectively. From time
to time, Compaq may sell accounts receivable when it is economically beneficial.
Accounts receivable sold were $43 million and $328 million at December 31, 2001
and 2000, respectively. Inventory turns were 15.6 and 14.4 in 2001 and 2000,
respectively.

         Net cash of $955 million used in investing activities resulted
primarily from the following items. Compaq used cash of $927 million for capital
expenditures, net of disposals, $122 million for the purchases of investments
and $276 million in other investing activities. These items were partially
offset by $370 million in proceeds from the sale of investments.

         Cash provided by financing activities of $964 million consisted
primarily of increases in short-term borrowings of $706 million, proceeds under
Compaq's medium-term note program of $300 million, and common stock transactions
of $127 million, partially offset by dividends paid to stockholders of $169
million.

         Estimated future uses of cash in 2002 include capital expenditures for
land, buildings and equipment of approximately $750 million and purchases of
equipment to be leased to third parties of approximately $440 million.

         Compaq also plans to use available liquidity to develop the purchased
in-process technology related to the Digital acquisition into commercially
viable products. At December 31, 2001, the estimated costs to be incurred to
develop the purchased in-process technology into commercially viable products
totaled approximately $520 million in the aggregate through the year 2004 ($320
million in 2002, $140 million in 2003 and $60 million in 2004).




                                       26
<PAGE>

         Compaq currently expects to fund expenditures for capital requirements
as well as liquidity needs from a combination of available cash balances,
internally generated funds and financing arrangements. Compaq has a $1.75
billion revolving credit facility that expires in September 2002 and a $2.0
billion facility that expires in October 2002. The facilities bear interest at
LIBOR plus 0.625 percent and LIBOR plus 0.325 percent, respectively. There were
no borrowings outstanding under these facilities at December 31, 2001 and 2000.
Compaq operates two short-term commercial paper programs authorized for a total
of $4.7 billion. These programs are supported by the $1.75 billion and $2.0
billion credit facilities. Outstanding commercial paper reduces available
borrowings under these credit facilities. At December 31, 2001 and 2000, Compaq
had $1.2 billion and $636 million, respectively, in commercial paper outstanding
under the programs, with a weighted average interest rate of 3.0 percent and 7.5
percent, respectively. The carrying amount of the borrowings under the
commercial paper programs approximates their fair value. Additionally, Compaq
maintains various lines of credit, totaling $537 million, of which $75 million
was outstanding at December 31, 2001. There were no outstanding borrowings
against these lines at December 31, 2000.

         In May 2000, Compaq registered $2.0 billion of debt securities. Compaq
had the following debt securities outstanding under its effective registration
statement as of December 31, 2001:

<Table>
<Caption>
          DATE              AMOUNT          INTEREST RATE           INTEREST PAYABLE              MATURITY DATE
     ----------------    --------------     --------------    -----------------------------    ---------------------
<S>                      <C>                <C>               <C>                              <C>
       August 2000       $300 million           7.65%           February 1 and August 1           August 1, 2005
       August 2000       $275 million           7.45%           February 1 and August 1           August 1, 2002
</Table>

         In February 2001, Compaq established under its effective registration
statement a $1.4 billion medium-term notes program for issuance of debt
securities due nine months or more from date of issue. Compaq had the following
debt securities outstanding under its medium-term notes program as of December
31, 2001:

<Table>
<Caption>
          DATE              AMOUNT          INTEREST RATE           INTEREST PAYABLE              MATURITY DATE
     ----------------    --------------     --------------    -----------------------------    ---------------------
<S>                      <C>                <C>               <C>                              <C>
        May 2001         $300 million           6.2%             May 15 and November 15            May 15, 2003
</Table>

         The net proceeds from the sale of these senior unsecured debt
securities were used for general corporate purposes including investments in
Compaq's leasing operations, capital expenditures and repayment of outstanding
indebtedness (including commercial paper issued for working capital purposes).
At December 31, 2001, Compaq had the capacity to issue an additional $1.1
billion under its medium-term notes program.

         During the year ended December 31, 2001, Compaq entered into capital
lease securitizations to minimize credit risk. Amounts securitized under the
program were less than $10 million at December 31, 2001. At December 31, 2001
and 2000, Compaq did not have any other relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes. As such, Compaq is not
materially exposed to any financing, liquidity, market or credit risk that could
arise if Compaq had engaged in such relationships.




                                       27
<PAGE>

         The following summarizes Compaq's contractual obligations at December
31, 2001, and the effect such obligations are expected to have on its liquidity
and cash flow in future periods.

<Table>
<Caption>
                                                          LESS THAN                   AFTER
December 31 (In millions)                      TOTAL        1 YEAR    1 - 3 YEARS    3 YEARS
-------------------------                    ----------   ----------  -----------   ----------
<S>                                          <C>          <C>          <C>          <C>
CONTRACTUAL OBLIGATIONS:
Commercial paper borrowings                  $    1,237   $    1,237   $       --   $       --
Other borrowings                                    180          180           --           --
Long-term debt                                      875          275          300          300
Non-cancelable operating lease obligations        1,089          233          310          546
                                             ----------   ----------   ----------   ----------
Total contractual cash obligations           $    3,381   $    1,925   $      610   $      846
                                             ==========   ==========   ==========   ==========
</Table>

         Certain of Compaq's resellers finance a portion of their inventories
through third-party finance companies. Under the terms of the financing
arrangements, Compaq may be required to repurchase certain products from the
finance companies. These arrangements have not had a material adverse effect on
Compaq's operating results in the past. Further, Compaq does not expect to incur
material charges related to these arrangements in future periods, as Compaq
would likely resell any repurchased product.

         Compaq is in compliance with all covenants or other requirements set
forth in its credit agreements or indentures. Further, Compaq does not have any
rating downgrade triggers that would accelerate the maturity dates of its debt.
However, a downgrade in Compaq's credit rating could adversely affect Compaq's
ability to renew existing, or obtain access to new, credit facilities in the
future and could increase the cost of such facilities. For example, a downgrade
in credit rating could preclude Compaq's ability to issue commercial paper under
its current programs. Should this occur, Compaq would seek alternative sources
of funding, including issuance of bonds under its existing medium-term notes
program and other potential bond offerings, and secured lending. In addition,
Compaq has the ability at its option to draw upon its $1.75 billion revolving
credit facility prior to its commitment termination in September 2002 with
repayment due in September 2003.

FACTORS THAT MAY AFFECT FINANCIAL CONDITION AND FUTURE RESULTS

         Compaq participates in a highly volatile industry that is characterized
by intense industry-wide competition. Industry participants confront aggressive
pricing practices by competitors, continually changing customer demand patterns
and rapid technological developments. The following cautionary statements
discuss important factors that could cause actual results to differ materially
from the projected results contained in the forward-looking statements in this
report.



                                       28
<PAGE>
         Compaq's business and stock price may be adversely affected if the
merger with Hewlett-Packard Company ("HP") is not completed. On September 4,
2001, Compaq entered into an agreement to combine its business with HP. If the
merger is not completed, Compaq could be subject to a number of risks that may
adversely affect its business and stock price, including: Compaq would not
realize the benefits it expects by being part of a combined company with HP, as
well as the potentially enhanced financial and competitive position as a result
of being part of the combined company; the diversion of management attention
from Compaq's day-to-day business and the unavoidable disruption to its
employees and its relationships with customers and joint venture partners as a
result of efforts and uncertainties relating to Compaq's anticipated merger with
HP may detract from its ability to grow revenues and minimize costs, which, in
turn may lead to a loss of market position that Compaq could be unable to regain
if the merger does not occur; Compaq's ability to borrow in certain capital
markets, such as the commercial paper market, may be hindered, resulting in
increased borrowing costs, more restrictive covenants and the extension of less
open credit; the market price of shares of Compaq's common stock may decline to
the extent that the current market price of those shares reflects a market
assumption that the merger will be completed; under certain circumstances Compaq
could be required to pay HP a $675 million termination fee; Compaq must pay the
costs related to the merger, such as legal and accounting fees and a portion of
the investment banking fees; and Compaq may not be able to continue its present
level of operations, may need to scale back its business, may have to consider
additional reductions in force, may have to consider alternative sources of
funding and may not be able to take advantage of future opportunities or
effectively respond to competitive pressures, any of which could have a material
adverse effect on its business and results of operations. In connection with the
proposed merger, Compaq and HP have filed a preliminary joint proxy
statement/prospectus with the SEC. Once the joint proxy statement/prospectus has
been declared effective by the SEC, such definitive joint proxy
statement/prospectus will be mailed to all holders of Compaq stock and will
contain important information about Compaq, HP and the proposed merger, risks
relating to the merger and the combined company, and related matters. Compaq
urges all of its stockholders to read the definitive joint proxy
statement/prospectus when it becomes available.

         The announcement of the planned merger could have an adverse effect on
Compaq's revenues in the near-term if customers delay, defer, or cancel
purchases pending resolution of the planned merger with HP. To the extent
Compaq's announcement of the merger creates uncertainty among persons and
organizations contemplating purchases of products or services such that several
large customers, or a significant group of small customers, delays purchase
decisions pending resolution of the planned merger, this could have an adverse
effect on Compaq's results of operations and quarterly revenues could be
substantially below the expectations of market analysts and could cause a
reduction in stock price. Compaq does not believe its results have been
materially affected to-date as new sales orders with major customers for
products and services have totaled approximately $5 billion since the date of
the planned merger announcement. However, Compaq continues to believe that there
is a risk of customer loss due to uncertainties relating to the direction of
Compaq's product and related support offerings following completion of the
merger. Compaq has implemented customer assurance programs to address the risk
of customer loss due to their uncertainty relating to the planned merger, which
may result in additional obligations of Compaq that could result in higher
long-term costs to Compaq.



                                       29
<PAGE>
         Continued weak global economic conditions could adversely impact
Compaq's revenues and growth rate. During the year ended December 31, 2001, the
information technology market weakened, first in the United States, then in
Europe and Asia. Continued softness in these markets, particularly in the
telecommunications and consumer sectors, and purchasers' uncertainty about the
extent of the global economic downturn could result in lower demand for products
and services. Compaq has observed effects of the global economic downturn in
many areas of its business. For example, the downturn has contributed to
reported net revenue declines during the 2001 fiscal year. In addition, Compaq
also experienced gross margin declines, reflecting the effect of competitive
pressures. The economic downturn also has led, in part, to restructuring actions
and contributed to write-downs to reflect the impairment of certain investments
in Compaq's investment portfolio. While worsening economic conditions have had a
negative impact on revenues to date, revenues, gross margins and earnings could
further deteriorate or Compaq's growth rate could be adversely impacted in the
future as a result of economic conditions.

        The competitive environment in the information technology industry
places pressure on revenue, gross margins and market share. Competition remains
intense in the information technology industry with a large number of
competitors vying for customers and market share domestically and
internationally. These competitive factors have spurred more aggressive pricing
tactics due to the softness in the information technology industry, which
continues to put pressure on revenue, gross margins and market share. In the
first quarter of 2002, Compaq intends to continue aggressive pricing and
programs to drive demand generation in core markets and to reduce reseller
inventories. Compaq cannot guarantee that programs and lower prices will
generate growth in demand, or that the growth in demand will offset the relative
reduction in its gross margins. Further, if its pricing and programs are not
sufficiently competitive with the pricing and programs offered by its current
and future competitors, Compaq may lose market share, which could adversely
affect its revenues and prospects. Failure to successfully manage operating
expenses, in connection with pricing programs, could adversely affect results of
operations.

         Expansion of Compaq's solutions model could be delayed by cost
constraints and organizational transition, which may have an adverse impact on
its revenues. Compaq is focusing its business development on offering total
information technology solutions to its customers. To succeed in this effort,
Compaq must continue to expand its vertical industry presence, increase its
service and software offerings, and offer programs that enable its customers to
purchase information technology as a utility. Compaq must also invest
significant resources in developing new solutions offerings and retain or
develop significant new employee skills. Compaq's failure to successfully expand
its information technology solutions model or delay in its internal development
or its acquisition of significant external resources in this area could result
in its offerings not being competitive and lead to a reduction in consumer
demand for its products and services, which could adversely affect its revenues.

         The consolidation of Compaq's high performance servers on a single
microprocessor architecture could adversely affect its revenues. In June 2001,
Compaq announced a strategic alliance with Intel that, over a multi-year period,
will lead to consolidation of its NonStop Himalya and AlphaServer systems onto a
single microprocessor architecture. The transition to the Intel architecture
could lead to the loss of potential new business for Compaq's high-end
enterprise products with different microprocessor architecture and service
business associated with such products and, more significantly, the loss of
current customers to high-end enterprise hardware competitors in this sector.
Compaq believes it has successfully communicated its product transition strategy
to its customers and while Compaq has not observed a significant loss of
existing customers or new business in the period since the announced strategic
alliance with Intel, such a loss of business or current customers in the
high-end performance enterprise server market could adversely affect Compaq's
revenues.



                                       30
<PAGE>
         Compaq's failure to timely and successfully implement changes in its
delivery models could negatively affect its revenues. Compaq uses a variety of
delivery models to sell its broad array of products and services. Compaq sells
directly to end-users in all market sectors, but the largest proportion of its
direct hardware sales is in large United States enterprise accounts. Some of
Compaq's computing hardware products are sold to the commercial market through
third-party resellers while some consumer personal computing products are sold
through retail outlets. Compaq has established a variety of programs designed to
achieve improved operational capabilities for all of its delivery models by
simplifying its product-set and pricing model, re-engineering its channel
delivery model and more rapidly expanding its e-commerce capabilities for large,
medium and small businesses. Should Compaq fail to implement the most
advantageous delivery model for each of its products and services, Compaq could
lose market opportunities that result in an adverse impact on its revenues.

         As Compaq continues to increase its commitment to direct sales, Compaq
could risk alienating channel partners and adversely affecting its distribution
model which, in turn, could adversely affect Compaq's revenues. Compaq's
business model is slowly evolving from a distribution model to a direct and
auto-replenishment model. Since direct sales made by Compaq may compete with the
sales made by third-party resellers and distributors, these third-party
resellers and distributors may elect to use other suppliers that do not directly
sell their own products. Therefore, any increase by Compaq of its commitment to
direct sales could alienate some of its channel partners, particularly in the
European Union where the direct sales model is not widely embraced. As a result,
Compaq may lose some of its customers that purchase from third-party resellers
or distributors, which in turn could adversely affect Compaq's revenues.

         The terrorist attacks that took place in the United States on September
11, 2001 were unprecedented events that have created many economic and political
uncertainties, some of which may materially harm Compaq's business and revenues.
The disruption of Compaq's business as a result of the terrorist attacks of
September 11, 2001 on the United States, including transportation and supply
chain disruptions and deferrals of customer purchasing decisions, had an
immediate adverse impact on its business. The long-term effects of the September
11, 2001 attacks on Compaq's business and revenues are unknown. The potential
for future terrorist attacks, the national and international responses to
terrorist attacks, and other acts of war or hostility have created many economic
and political uncertainties, which could adversely affect Compaq's business and
revenues in the short or long-term in ways that cannot presently be predicted.

         Erosion of the financial condition of customers could adversely affect
Compaq's business. Compaq continually monitors and manages the credit it extends
to its customers and attempts to limit credit risks by utilizing risk transfer
arrangements and obtaining security interests. Compaq's business could be
adversely affected in the event that the financial condition of its customers
erodes. As the global information technology market weakens, the likelihood of
the erosion of the financial condition of these customers increases. Upon the
financial failure of a customer, Compaq could experience disruptions in
distribution as well as a loss associated with the unsecured portion of any of
its outstanding accounts receivable. Additionally, Compaq provides information
technology leasing and financing solutions to customers. As a consequence,
Compaq is exposed to the risk that lessees will be unable to make required lease
payments and to the risk that leased equipment will be worth less upon its
return to Compaq than was estimated at lease inception. While Compaq believes
that its allowances for credit losses are adequate and that its estimates of the
residual values of leased equipment are reasonable, these allowances may not
cover actual losses and Compaq may not realize estimated residual values, both
of which could adversely affect its business.



                                       31
<PAGE>

         Compaq's failure to successfully align its service practices with the
trend toward industry-standard products could adversely affect its business.
Compaq's Global Services business has traditionally provided services that
included the design and implementation of both high-end proprietary systems and
industry-standard products. If the trend for design and implementation of
systems continues to move from proprietary environments to industry-standard
products, Compaq will need to continue to accelerate retraining and rebalancing
its services workforce to compete in the new environment. Compaq's failure to
successfully continue rebalancing, training, and attracting the necessary
personnel to achieve this transition as Compaq adapts its service practices to
changing conditions could adversely affect its business.

         Unanticipated delays in Compaq's product schedules could negatively
affect product demand and adversely affect its business. The process of
developing new high-technology products and services is complex and often
uncertain due to the frequent introduction of new products that offer improved
performance and pricing. Compaq's ability to successfully transition products
and deploy new products requires that Compaq make accurate predictions of the
product development schedule as well as volumes, product mix, customer demand
and configuration. Compaq may anticipate demand and perceived market acceptance
that differs from the product's realizable customer demand and revenue stream.
Further, in the face of intense industry competition, any delay in the
development, production or marketing of a new product could decrease any
advantage Compaq may have to be the first or among the first to market. Compaq's
failure to carry out a product rollout in the time frame anticipated and in the
quantities appropriate to customer demand could adversely affect the future
demand for its products and the related services and have an adverse effect on
its business.

         Compaq's quarterly sales cycle makes planning and operational
efficiencies difficult and future financial results less predictable. Like other
technology companies, Compaq generally sells more hardware products in the third
month of each quarter than in the first and second months. Despite recent
improvements in linearity, this sales pattern places pressure on manufacturing
and logistics systems based on internal forecasts and may adversely affect
Compaq's ability to predict its financial results accurately. In addition, to
rationalize manufacturing utilization, Compaq may build products early in the
quarter in anticipation of demand late in the quarter. Developments late in a
quarter, such as lower-than-anticipated product demand, a systems failure,
component pricing movements, or global logistics disruptions could adversely
impact inventory levels, cash and related profitability in a manner that is
disproportionate to the number of days in the quarter affected.

         The risks of doing business in developing countries and economically
volatile areas could adversely affect Compaq's operations and earnings. Compaq's
manufacturing operations in developing countries, such as Brazil and China, and
the expansion of sales into economically volatile areas, such as Asia-Pacific,
Latin America and other emerging markets, subject Compaq to a number of economic
and other risks. Such risks include financial instability among customers in
these regions, the volatility of economic conditions in countries dependent on
exports from the United States and European markets, and political instability
and potential conflicts among developing nations. Compaq generally has
experienced longer accounts receivable cycles in emerging markets, in particular
Latin American markets, when compared with the United States and European
markets. Compaq is also subject to any political and financial instability in
the countries in which it operates, including inflation, recession, trade
protection measures, local labor conditions, and unexpected changes in
regulatory requirements, currency devaluation and interest rate fluctuations. In
early 2002, the United States dollar was eliminated as Argentina's monetary
benchmark, resulting in significant currency devaluation. Compaq engages in
hedging programs aimed at limiting in part the impact of currency fluctuations
and does not expect that the devaluation event in Argentina will result in a
future material charge. However, there can be no guarantee that economic
circumstances in Argentina or elsewhere will not worsen, which could result in
future effects on earnings should such events occur. Compaq's failure to
successfully manage economic, political and other risks relating to doing
business in developing countries and economically and politically volatile areas
could adversely affect its business.




                                       32
<PAGE>

         Compaq's reliance on third-party suppliers of material components for
its products could curtail production. Compaq depends on many third-party
suppliers for key components contained in its product offerings and certain
other supply chain functions. For some of these components, Compaq may only use
a single source supplier. From time to time, the supply for key components in
its products lags behind worldwide demand. If the supply of a key material
component is delayed or curtailed, Compaq's ability to ship the related product
in desired quantities and in a timely manner could be adversely affected. For
example, in the second quarter of the fiscal year ended December 31, 2000,
Compaq was unable to ship desired quantities of its new AlphaServer GS Series
servers in a timely manner. Likewise, in 2001 Compaq experienced shortages in
microprocessors and printed circuit assemblies, which constrained production. In
the event that the financial condition of Compaq's third-party suppliers for key
components were to erode, the delay or curtailment of deliveries of key material
components could occur. Further, Compaq's reliance on third-party suppliers of
key material components exposes it to potential product quality issues that
could affect the reliability and performance of its product set. Compaq's
inability to ship its products in desired quantities and in a timely manner due
to a delay or curtailment of the supply of material components, or product
quality issues arising from faulty components manufactured by third-party
suppliers, could adversely affect the market for its products and lead to a
reduction in its revenues. Compaq's attempts to mitigate the risk of reliance on
third-party suppliers by working closely on product plans, coordinated product
introductions, purchases on the spot market and selected strategic purchases
could also fail.

         Delays in implementing Compaq's business and information management and
system improvements could adversely affect its business. Compaq continues to
focus on increasing the effectiveness and efficiency of its business and
information management processes to increase customer satisfaction, improve
productivity and lower costs. In 2002, Compaq continues to focus on improvements
required to support more direct sales and changes in its manufacturing supply
chain operations to improve inventory levels. Capital investments to improve its
systems infrastructure and increase system security could be hampered by its
need to balance increased operational efficiency against budgetary constraints.
Delays in implementing the improvements necessary to support more direct sales
and changes to Compaq's manufacturing supply chain operations could adversely
affect its business.

        Compaq's stock price, like that of other technology companies, can be
volatile. Some of the factors that could affect Compaq's stock price are
Compaq's, or a competitor's, announcement of new products, services or
technological innovations, quarterly increases or decreases in revenue or
earnings, changes in revenue or earnings estimates by the investment community,
and speculation in the press or investment community about Compaq's financial
condition or results of operations. General market conditions and domestic or
international economic factors unrelated to Compaq's performance may also affect
its stock price. For these reasons, investors should not rely on recent trends
to predict future stock prices or financial results. In addition, following
periods of volatility in a company's securities, securities class action
litigation against a company is sometimes instituted. This type of litigation
could result in substantial costs and the diversion of management time and
resources.



                                       33
<PAGE>
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

         Compaq is exposed to market risks, which include changes in United
States and international interest rates as well as changes in currency exchange
rates as measured against the U.S. dollar and each other. Compaq attempts to
reduce these risks by utilizing derivatives and other financial instruments.

         Compaq uses market valuations and value-at-risk valuation methods to
assess the market risk of its financial instruments and derivative portfolios.
It uses software by RiskMetrics to estimate the value-at-risk of its financial
instruments and derivative portfolios based on estimates of volatility and
correlation of market factors drawn from RiskMetrics data sets for the dates
calculated. RiskMetrics defines loss as a reduction in the value of a portfolio
in the event of adverse market conditions, using a predetermined confidence
interval, over a specified period of time. Compaq's model uses a
variance/covariance method for a holding period of one day with a 95 percent
confidence level.

         The value of the U.S. dollar affects Compaq's financial results.
Changes in exchange rates may positively or negatively affect Compaq's revenues,
gross margins, operating expenses and retained earnings as expressed in U.S.
dollars. Compaq engages in hedging programs aimed at limiting in part the impact
of currency fluctuations. Principal currencies hedged include the Euro, Japanese
yen and British pound sterling. Compaq primarily uses forward exchange contracts
to hedge those assets and liabilities that affect the income statement when
remeasured according to accounting principles generally accepted in the United
States. For some markets, Compaq has determined that ongoing hedging of non-U.S.
dollar net monetary assets is not cost effective and instead attempts to
minimize currency exposure risk through working capital management. There can be
no assurance that such an approach will be successful, especially if a
significant and sudden decline occurs in the value of local currencies. Compaq
purchases foreign currency forward exchange contracts to protect against
currency exchange risks associated with the forecasted revenues and costs of
Compaq's international marketing subsidiaries, with the exception of certain
subsidiaries that reside in countries in which such activity would not be cost
effective or local regulations preclude this type of activity. These hedging
activities provide only limited protection against currency exchange risks.
Factors that could affect the effectiveness of Compaq's hedging programs include
accuracy of sales forecasts, volatility of the currency markets and availability
of hedging instruments. All currency contracts that are entered into by Compaq
are components of hedging programs and are entered into for the sole purpose of
hedging an existing or anticipated currency exposure, not for speculation.
Although Compaq maintains these programs to reduce the impact of changes in
currency exchange rates, Compaq's revenues or costs are adversely affected when
the U.S. dollar sustains a strengthening position against currencies in which
Compaq sells products and services or a weakening exchange rate against
currencies in which Compaq incurs costs.

         Based on Compaq's foreign currency exchange instruments outstanding at
December 31, 2001, Compaq estimates a maximum potential one-day loss in fair
value of approximately $36 million. Compaq included all foreign exchange
contracts in the value-at-risk calculation. The holding period for these
instruments varies from one day to nine months, with the exception of
instruments held in connection with leasing operations, which have holding
periods up to four years.

         Changes in interest rates affect interest income earned on Compaq's
cash equivalents and short-term investments, interest expense on short-term
borrowings, and the fair value of Compaq's debt portfolios. Compaq does not
enter into derivative transactions related to its cash and cash equivalents.
Compaq does periodically enter into interest rate swap transactions for the
purpose of hedging existing or anticipated liabilities. All interest rate swaps
entered into by Compaq are for the sole purpose of hedging existing or
anticipated interest rate sensitive positions, not for speculation.



                                       34
<PAGE>
         Based on Compaq's debt and investment portfolios outstanding at
December 31, 2001, Compaq estimates a maximum potential one-day loss in fair
value of $2 million. Compaq included all fixed income investments, interest rate
swaps, commercial paper and long-term debt obligations in the value-at-risk
calculation. The holding period for these instruments varies from one day to
five years.

         Compaq is exposed to equity price risks on the marketable portion of
investments in publicly traded equity securities. These investments are
generally in companies having operations or technology in areas within Compaq's
strategic focus. Compaq does not attempt to reduce or eliminate its market
exposure on these securities. As of December 31, 2001, the fair value of
Compaq's available-for-sale securities was $99 million. A 20 percent adverse
change in equity prices would result in an approximate $20 million decrease in
the fair value of Compaq's available-for-sale securities as of December 31,
2001.

         Because of the foregoing factors (Factors That May Affect Financial
Condition and Future Results and Quantitative and Qualitative Disclosures About
Market Risks), as well as other variables affecting Compaq's operating results,
past financial performance should not be considered a reliable indicator of
future performance and investors should not use historical trends to anticipate
results or trends in future periods.




                                       35
<PAGE>

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

<Table>
<Caption>

                                                                                                           Page
                                                                                                           ----

<S>                                                                                                       <C>
Consolidated Financial Statements:
         Audit Reports                                                                                      37
         Consolidated Balance Sheet at December 31, 2001 and 2000                                           39
         Consolidated Statement of Income for each of the three years in the
                  period ended December 31, 2001                                                            40
         Consolidated Statement of Cash Flows for each of the three years in
                  the period ended December 31, 2001                                                        41
         Consolidated Statement of Stockholders' Equity for each of the three
                  years in the period ended December 31, 2001                                               43
         Notes to Consolidated Financial Statements                                                         44


Financial Statement Schedule:
         Audit Reports                                                                                      69
         Schedule II: Valuation and Qualifying Accounts for each of the
                  three years in the period ended December 31, 2001                                         71
</Table>


                                       36
<PAGE>


REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Stockholders of Compaq Computer Corporation

We have audited the accompanying consolidated balance sheets of Compaq Computer
Corporation as of December 31, 2001 and 2000, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the two
years in the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Compaq Computer
Corporation at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2001, the Company changed its method of accounting for certain sales
incentive offerings and effective January 1, 2000, the Company changed its
method of accounting for certain product shipments.


                                                             Ernst and Young LLP

Houston, Texas
January 16, 2002




                                       37
<PAGE>


REPORT OF INDEPENDENT ACCOUNTANTS


To the Stockholders and Board of Directors
of Compaq Computer Corporation

In our opinion, the consolidated statements of income, of cash flows and of
stockholders' equity for the year ended December 31, 1999 present fairly, in all
material respects, the results of operations and cash flows of Compaq Computer
Corporation and its subsidiaries for the year ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. We have not audited the
consolidated financial statements of Compaq Computer Corporation for any period
subsequent to December 31, 1999.


PricewaterhouseCoopers LLP
Houston, Texas
January 25, 2000








                                       38
<PAGE>
                           COMPAQ COMPUTER CORPORATION
                           CONSOLIDATED BALANCE SHEET

<Table>
<Caption>


December 31 (In millions, except par value)                   2001        2000
-------------------------------------------                 --------    --------
<S>                                                         <C>         <C>
ASSETS
Current assets:
   Cash and cash equivalents                                $  3,874    $  2,569
   Trade accounts receivable, net                              4,623       6,715
   Leases and other accounts receivable                        1,881       1,677
   Inventories                                                 1,402       2,161
   Other assets                                                1,498       1,989
                                                            --------    --------
       Total current assets                                   13,278      15,111

Property, plant and equipment, net                             3,199       3,431
Other assets, net                                              7,212       6,314
                                                            --------    --------
           Total assets                                     $ 23,689    $ 24,856
                                                            ========    ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Borrowings                                               $  1,692    $    711
   Accounts payable                                            3,881       4,233
   Deferred income                                             1,181       1,089
   Other liabilities                                           4,379       5,516
                                                            --------    --------
       Total current liabilities                              11,133      11,549
                                                            --------    --------

Long-term debt                                                   600         575
                                                            --------    --------
Postretirement and other postemployment benefits                 839         652
                                                            --------    --------
Commitments and contingencies
                                                            --------    --------
Stockholders' equity:
   Preferred stock, $.01 par value
       Shares authorized: 10 million; shares issued: none         --          --
   Common stock and capital in excess of $.01 par value
       Shares authorized: 3 billion
       Shares issued:  December 31, 2001 - 1,766 million
            December 31, 2000 - 1,742 million                  8,307       8,039
   Retained earnings                                           4,393       5,347
   Accumulated other comprehensive income (loss)                (132)         27
   Treasury stock (shares: December 31, 2001 - 62 million
            December 31, 2000 - 53 million)                   (1,451)     (1,333)
                                                            --------    --------
       Total stockholders' equity                             11,117      12,080
                                                            --------    --------
           Total liabilities and stockholders' equity       $ 23,689    $ 24,856
                                                            ========    ========
</Table>






       The accompanying notes are an integral part of these consolidated
                             financial statements.




                                       39
<PAGE>


                           COMPAQ COMPUTER CORPORATION
                        CONSOLIDATED STATEMENT OF INCOME

<Table>
<Caption>
Year ended December 31 (In millions, except per share amounts)       2001          2000           1999
--------------------------------------------------------------    ----------    ----------    ----------
<S>                                                               <C>           <C>           <C>
Revenue:
    Products                                                      $   26,728    $   35,506    $   31,824
    Services                                                           6,826         6,716         6,623
                                                                  ----------    ----------    ----------
       Total revenue                                                  33,554        42,222        38,447
                                                                  ----------    ----------    ----------

Cost of sales:
    Products                                                          21,536        27,624        25,263
    Services                                                           4,906         4,793         4,535
                                                                  ----------    ----------    ----------
       Total cost of sales                                            26,442        32,417        29,798
                                                                  ----------    ----------    ----------

Selling, general and administrative                                    5,328         6,044         6,341
Research and development                                               1,305         1,469         1,660
Restructuring and related activities                                     742           (86)          868
Merger-related costs                                                      44            --            --
Other (income) expense, net                                              466         1,503        (1,154)
                                                                  ----------    ----------    ----------
                                                                       7,885         8,930         7,715
                                                                  ----------    ----------    ----------
Income (loss) before income taxes                                       (773)          875           934
Provision (benefit) for income taxes                                    (210)          280           365
                                                                  ----------    ----------    ----------
Income (loss) before cumulative effect of accounting change             (563)          595           569

Cumulative effect of accounting change, net of tax                      (222)          (26)           --
                                                                  ----------    ----------    ----------


Net income (loss)                                                 $     (785)   $      569    $      569
                                                                  ==========    ==========    ==========

Earnings (loss) per common share:
Basic:
    Before cumulative effect of accounting change                 $    (0.34)   $     0.35    $     0.35
    Cumulative effect of accounting change, net of tax                 (0.13)        (0.02)           --
                                                                  ----------    ----------    ----------
                                                                  $    (0.47)   $     0.33    $     0.35
                                                                  ==========    ==========    ==========

Diluted:
    Before cumulative effect of accounting change                 $    (0.34)   $     0.34    $     0.34
    Cumulative effect of accounting change, net of tax                 (0.13)        (0.01)           --
                                                                  ----------    ----------    ----------
                                                                  $    (0.47)   $     0.33    $     0.34
                                                                  ==========    ==========    ==========

Shares used in computing earnings (loss) per common share:
    Basic                                                              1,688         1,702         1,693
                                                                  ==========    ==========    ==========
    Diluted                                                            1,688         1,742         1,735
                                                                  ==========    ==========    ==========
</Table>








       The accompanying notes are an integral part of these consolidated
                             financial statements.


                                       40
<PAGE>



                          COMPAQ COMPUTER CORPORATION
                      CONSOLIDATED STATEMENT OF CASH FLOWS

<Table>
<Caption>
Year ended December 31 (In millions)                                             2001          2000          1999
------------------------------------                                          ----------    ----------    ----------

<S>                                                                           <C>           <C>           <C>
Cash flows from operating activities:
     Net income (loss)                                                        $     (785)   $      569    $      569
     Adjustments to reconcile net income (loss) to net cash
        provided by operating activities:
           Cumulative effect of accounting change, net of tax                        222            26            --
           Depreciation and amortization                                           1,377         1,407         1,402
           Gain on sale of investments                                              (194)         (278)         (126)
           Impairment charge for investments and related assets                      613         1,756            --
           Gain on sale of businesses                                                 --            --        (1,182)
           Restructuring and related activities                                      742           (86)          868
           Deferred income taxes and other                                          (243)          252           147
           Changes in operating assets and liabilities, net of
              effects of acquired businesses:
                Receivables                                                        1,297        (1,946)          185
                Inventories                                                          645           (72)          (97)
                Accounts payable                                                    (319)         (228)          135
                Other assets and liabilities                                      (1,873)         (835)         (598)
                                                                              ----------    ----------    ----------
                  Net cash provided by operating activities                        1,482           565         1,303
                                                                              ----------    ----------    ----------

Cash flows from investing activities:

     Capital expenditures, net                                                      (927)       (1,133)       (1,185)
     Proceeds from sale of investments                                               370           292           149
     Purchases of investments                                                       (122)         (539)          (89)
     (Increase) decrease in short-term investments                                    --           636          (636)
     Acquisitions of businesses, net of cash acquired                                 --          (370)         (517)
     Other, net                                                                     (276)         (117)         (191)
                                                                              ----------    ----------    ----------
                  Net cash used in investing activities                             (955)       (1,231)       (2,469)
                                                                              ----------    ----------    ----------

Cash flows from financing activities:

     Increase in short-term borrowings, net                                          706           258           453
     Increase in long-term borrowings                                                300           575            --
     Issuance of common stock for stock options                                      245           308           183
     Treasury stock purchases                                                       (118)         (673)         (276)
     Dividends to stockholders                                                      (169)         (170)         (136)
     Payment to retire Digital preferred stock                                        --            --          (400)
                                                                              ----------    ----------    ----------
                  Net cash provided by (used in) financing activities               964           298          (176)
                                                                              ----------    ----------    ----------


Effect of exchange rate changes on cash and cash equivalents                        (186)          271           (83)
                                                                              ----------    ----------    ----------

                  Net increase (decrease) in cash and cash equivalents             1,305           (97)       (1,425)
Cash and cash equivalents at beginning of period                                   2,569         2,666         4,091
                                                                              ----------    ----------    ----------


Cash and cash equivalents at end of period                                    $    3,874    $    2,569    $    2,666
                                                                              ==========    ==========    ==========
</Table>



        The accompanying notes are an integral part of these consolidated
                             financial statements.



                                       41
<PAGE>

                           COMPAQ COMPUTER CORPORATION
                CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)

<Table>
<Caption>

SUPPLEMENTAL CASH FLOW INFORMATION
Year ended December 31 (In millions)          2001         2000          1999
------------------------------------       ----------   ----------    ----------

<S>                                        <C>          <C>           <C>
Interest paid                              $      141   $      127    $       74
Income taxes paid                          $      447   $      488    $      415

ACQUISITION OF BUSINESSES
Fair value of:
     Assets acquired                       $       --   $      499    $      811
     Liabilities assumed                           --         (129)         (201)
     Options issued                                --           --           (60)
                                           ----------   ----------    ----------
Cash paid                                          --          370           550
Less: Cash acquired                                --           --           (33)
                                           ----------   ----------    ----------
Net cash paid for acquisitions             $       --   $      370    $      517
                                           ==========   ==========    ==========

SALE OF BUSINESSES
Fair value of:
     Equity proceeds                       $       --   $       --    $    1,597
     Note receivable                               --           --           204
     Cash received                                 --           --            70
                                           ----------   ----------    ----------
                                                   --           --         1,871
Less: Basis in net assets sold                     --           --          (689)
                                           ----------   ----------    ----------
Gain on sale of businesses                 $       --   $       --    $    1,182
                                           ==========   ==========    ==========

</Table>


       The accompanying notes are an integral part of these consolidated
                             financial statements.



                                       42
<PAGE>



                           COMPAQ COMPUTER CORPORATION
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY


<Table>
<Caption>

                                                      COMMON STOCK
                                              ------------------------------                ACCUMULATED
                                                               PAR VALUE                       OTHER                      TOTAL
                                               NUMBER OF      AND CAPITAL      RETAINED    COMPREHENSIVE   TREASURY    STOCKHOLDERS'
(In millions)                                   SHARES      IN EXCESS OF PAR   EARNINGS    INCOME (LOSS)    STOCK         EQUITY
-------------                                 ---------    -----------------   --------    -------------   --------    ------------

<S>                                           <C>           <C>                <C>         <C>             <C>         <C>
Beginning balance, December 31, 1998               1,698       $    7,270      $  4,501       $      (36)  $   (384)   $     11,351
Comprehensive income:
   Net income                                                                       569                                         569
   Changes in unrealized gains and losses on
      investments, net of reclassifications                                                        2,978                      2,978
   Foreign currency translation adjustment                                                           (26)                       (26)
   Minimum pension liability adjustment                                                                3                          3
                                                                                                                       ------------
Total comprehensive income                                                                                                    3,524
                                                                                                                       ------------
   Issuance pursuant to stock option plans            17              183                                                       183
   Issuance pursuant to acquisitions                                   32                                                        32
   Stock option tax benefits                                          142                                                       142
   Gain on redemption of Digital preferred stock                                     22                                          22
   Cash dividends                                                                  (144)                                       (144)
   Repurchase of treasury stock, at cost                                                                       (276)           (276)
                                               ---------       ----------      --------       ----------   --------    ------------
Ending balance, December 31, 1999                  1,715            7,627         4,948            2,919       (660)         14,834

Comprehensive income:
   Net income                                                                       569                                         569
   Changes in unrealized gains and losses on
      investments, net of reclassifications                                                       (2,904)                    (2,904)
   Foreign currency translation adjustment                                                           (12)                       (12)
   Minimum pension liability adjustment                                                               24                         24
                                                                                                                       ------------
Total comprehensive loss                                                                                                     (2,323)
                                                                                                                       ------------

   Issuance pursuant to stock plans                   27              308                                                       308
   Stock option tax benefits                                          104                                                       104
   Cash dividends                                                                  (170)                                       (170)
   Repurchase of treasury stock, at cost                                                                       (673)           (673)
                                               ---------       ----------      --------       ----------   --------    ------------
Ending balance, December 31, 2000                  1,742            8,039         5,347               27     (1,333)         12,080
Comprehensive income:
   Net loss                                                                        (785)                                       (785)
   Changes in unrealized gains and losses on
      investments, net of reclassifications                                                          (50)                       (50)
   Foreign currency translation adjustment                                                            (5)                        (5)
   Minimum pension liability adjustment                                                             (113)                      (113)
   Changes in gains and losses on derivative
      instruments, net of reclassifications                                                            9                          9
                                                                                                                       ------------
Total comprehensive loss                                                                                                       (944)
                                                                                                                       ------------
   Issuance pursuant to stock plans                   24              245                                                       245
   Stock option tax benefits                                           23                                                        23
   Cash dividends                                                                  (169)                                       (169)
   Repurchase of treasury stock, at cost                                                                       (118)           (118)
                                               ---------       ----------      --------       ----------   --------    ------------
Ending Balance, December 31, 2001                  1,766       $    8,307      $  4,393       $     (132)  $ (1,451)   $     11,117
                                               =========       ==========      ========       ==========   ========    ============

</Table>




        The accompanying notes are an integral part of these consolidated
                             financial statements.



                                       43
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS. Founded in 1982, Compaq Computer Corporation is a
leading global provider of information technology products, services and
solutions for enterprise customers. Compaq Computer Corporation, together with
its consolidated subsidiaries, (collectively "Compaq") designs, develops,
manufactures and markets information technology equipment, software, services
and solutions, including industry-leading enterprise storage and computing
solutions, fault-tolerant business-critical solutions, communication products,
personal desktop and notebook computers, and personal entertainment and Internet
access devices that are sold in more than 200 countries.

         Compaq completed the acquisition of Shopping.Com ("SDC") and Zip2 Corp.
("Zip2") and purchased certain assets and liabilities of InaCom Corp. ("Inacom")
in February 1999, April 1999 and February 2000, respectively. These acquisitions
were accounted for as purchases. In August 1999, Compaq sold an 81.5 percent
equity interest in AltaVista Company to CMGI, Inc. ("CMGI"). Accordingly,
Compaq's consolidated financial statements include the results of operations
from the respective dates of acquisition through divestiture or December 31,
2001, as applicable.

PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of Compaq and its controlled subsidiaries. All significant intercompany
transactions and balances have been eliminated.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES. The preparation of consolidated
financial statements requires Compaq to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, Compaq
evaluates its estimates, including those related to customer programs and
incentives, product returns, bad debts, inventories, investments, intangible
assets, income taxes, financing operations, warranty obligations, excess
component order cancellation costs, restructuring, long-term service contracts,
pensions and other post-retirement benefits, and contingencies and litigation.
Compaq bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.



                                       44
<PAGE>

         Compaq believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements. Compaq records estimated reductions to
revenue for customer programs and incentive offerings including special pricing
agreements, price protection, promotions and other volume-based incentives. If
market conditions were to decline, Compaq may take actions to increase customer
incentive offerings possibly resulting in an incremental reduction of revenue at
the time the incentive is offered. Compaq recognizes revenue and profit as work
progresses on long-term, fixed price contracts using the percentage-of-
completion method, which relies on estimates of total expected contract revenue
and costs. Compaq follows this method since reasonably dependable estimates of
the revenue and costs applicable to various stages of a contract can be made.
Recognized revenues and profit are subject to revisions as the contract
progresses to completion. Revisions in profit estimates are charged to income in
the period in which the facts that give rise to the revision become known.
Compaq maintains allowances for doubtful accounts for estimated losses resulting
from the inability of its customers to make required payments. If the financial
condition of Compaq's customers were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required. Compaq
provides for the estimated cost of product warranties at the time revenue is
recognized. While Compaq engages in extensive product quality programs and
processes, including actively monitoring and evaluating the quality of its
component suppliers, Compaq's warranty obligation is affected by product failure
rates and material usage and service delivery costs incurred in correcting a
product failure. Should actual product failure rates, material usage or service
delivery costs differ from Compaq's estimates, revisions to the estimated
warranty liability would be required. Compaq writes down its inventory for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required. Compaq holds minority interests in companies having operations
or technology in areas within its strategic focus, some of which are publicly
traded and have highly volatile share prices. Compaq records an investment
impairment charge when it believes an investment has experienced a decline in
value that is other than temporary. Future adverse changes in market conditions
or poor operating results of underlying investments could result in losses or an
inability to recover the carrying value of the investments that may not be
reflected in an investment's current carrying value, thereby possibly requiring
an impairment charge in the future. Compaq records a valuation allowance to
reduce its deferred tax assets to the amount that is more likely than not to be
realized. While Compaq has considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for the valuation
allowance, in the event Compaq were to determine that it would be able to
realize its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made. Likewise, should Compaq determine that it
would not be able to realize all or part of its net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made.

CASH EQUIVALENTS. Cash equivalents include highly liquid, temporary cash
investments having original maturity dates of three months or less. For
reporting purposes, cash equivalents are stated at cost plus accrued interest,
which approximates fair value.

INVENTORIES. Inventories are stated at the lower of cost or market value, cost
being determined on a first-in, first-out basis.



                                       45
<PAGE>

LONG-LIVED ASSETS. Property, plant and equipment are stated at cost less
accumulated depreciation. Major renewals and improvements are capitalized; minor
replacements, maintenance and repairs are charged to current operations.
Depreciation is computed by applying the straight-line method over the estimated
useful lives of the buildings (ten to thirty years) and by applying the
straight-line or accelerated methods over the estimated useful lives of
machinery and equipment (two to ten years). Leasehold improvements are amortized
over the shorter of the useful life of the improvement or the life of the
related lease. Compaq performs reviews for the impairment of long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.

LONG-TERM INVESTMENTS. Compaq holds minority equity investments in companies
having operations or technology in areas within Compaq's strategic focus. Compaq
applies the equity method of accounting for minority investments when Compaq has
the ability to exert significant influence over the operating and financial
policies of an investee. In the absence of such ability, Compaq accounts for
these minority investments under the cost method. Certain investments carry
restrictions on immediate disposition. Investments in public companies
(excluding those accounted for under the equity method) with restrictions of
less than one year are classified as available-for-sale and are adjusted to
their fair market value with unrealized gains and losses, net of tax, recorded
as a component of accumulated other comprehensive income. Upon disposition of
these investments, the specific identification method is used to determine the
cost basis in computing realized gains or losses, which are reported in other
income and expense. Declines in value that are judged to be other than temporary
are reported in other income and expense.

INTANGIBLE ASSETS. Intangible assets primarily relate to the value of the
installed customer base, proven research and development, trademarks of
companies acquired, capitalized software and goodwill. The cost of the installed
customer base, proven research and development, trademarks, capitalized software
and goodwill is amortized on a straight-line basis over the estimated lives of
fifteen years, five years, five years, up to three years and up to ten years,
respectively. Intangible assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.

REVENUE RECOGNITION. Compaq recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the sales price is fixed or
determinable and collectibility is probable.

         For product sales recognized by Compaq's Access and Enterprise
Computing segments, these criteria are generally met at the time product is
shipped. At the time revenue is recognized, Compaq provides for the estimated
cost of product warranties and reduces revenue for estimated product returns.
Sales incentives are generally classified as a reduction of revenue and are
recognized at the later of when revenue is recognized or the incentive is
offered. When other significant obligations remain after products are delivered,
revenue is recognized only after such obligations are fulfilled. Shipping and
handling costs are included in cost of goods sold.

         In the Compaq Global Services segment, revenue from fixed price,
long-term contracts is generally recognized over the contract term using the
percentage-of-completion method. Such revenue may be earned from information
system consulting, technical and application design services, systems
integration, Internet and network architecture and project management services.
Losses on fixed price contracts are recognized during the period in which the
loss first becomes apparent. Revenue in excess of billings on service contracts
is recorded as unbilled receivables and is included in trade accounts
receivable. Billings in excess of revenue recognized on service contracts are
recorded as deferred income until revenue recognition criteria are met. Revenue
earned from customer support, which primarily includes maintenance contracts
with terms ranging from one to three years, is recognized ratably over the
contractual period or as the services are performed.




                                       46
<PAGE>

         In certain instances, Compaq sells hardware together with maintenance
contracts. Revenue is recognized for the hardware in accordance with the terms
of the sales contract, which is generally when the product is shipped. Revenue
related to maintenance contracts is deferred and recognized ratably over the
life of the contract. The revenue recognized per element is determined by
allocating the total sales price to each element, based on their relative fair
values.

FINANCING TRANSACTIONS. Compaq offers customer financing to assist customers in
their acquisition of Compaq's products. At the time a financing transaction is
consummated, which qualifies as either a sales-type or direct financing lease,
Compaq records the total lease receivable net of unearned income and the
estimated residual value of the equipment. The non-current portion of lease
receivables and the residual value, net of unearned income, are included in
long-term other assets. Unearned income is recognized as finance income using
the interest method over the term of the lease. Leases not qualifying as either
sales-type or direct financing leases are accounted for as operating leases. The
underlying equipment is depreciated on a straight-line basis over the initial
term of the operating lease to its estimated residual value.

ADVERTISING COSTS. Advertising costs are charged to operations when incurred.
Advertising expenses for 2001, 2000 and 1999 were $357 million, $370 million and
$385 million, respectively.

FOREIGN CURRENCY. Compaq's foreign subsidiaries predominately have the U.S.
dollar designated as their functional currency. Financial statements of these
foreign subsidiaries are remeasured to U.S. dollars for consolidation purposes
using current rates of exchange for monetary assets and liabilities and
historical rates of exchange for nonmonetary assets and related elements of
expense. Revenue and other expense elements are remeasured at rates that
approximate the rates in effect on the transaction dates. Remeasurement gains
and losses are included in other income and expense. Certain foreign
subsidiaries designate the local currency as their functional currency and
related cumulative translation adjustments are included as a component of
accumulated other comprehensive income.

INCOME TAXES. The asset and liability approach is used to account for income
taxes by recognizing deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the carrying amounts and the
tax bases of assets and liabilities. Compaq records a valuation allowance to
reduce the deferred tax assets to the amount that is more likely than not to be
realized.

EARNINGS PER COMMON SHARE. Basic earnings (loss) per common share is computed
using the weighted average number of common shares outstanding during the
period. Diluted earnings per common share is computed using the combination of
dilutive common share equivalents and the weighted average number of common
shares outstanding during the period. Diluted loss per common share for 2001 is
based only on the weighted average number of common shares outstanding during
the period as the inclusion of 16 million common share equivalents would have
been antidilutive. Incremental shares of 40 million in 2000 were used in the
calculation of diluted earnings per common share. Stock options to purchase 231
million, 107 million and 66 million shares of common stock in 2001, 2000 and
1999, respectively, were outstanding but not included in the computation of
diluted earnings (loss) per common share because the option exercise price was
greater than the average market price of the common shares. For the year ended
December 31, 1999, net income used in the calculation of earnings per common
share was adjusted to include a $22 million gain on redemption of Digital
Equipment Corporation ("Digital") preferred stock.

STOCK-BASED COMPENSATION. Compaq measures compensation expense for its
stock-based employee compensation plans using the intrinsic value method, and
has provided in Note 9 the pro forma disclosure of the effect on net income
(loss) and earnings (loss) per common share as if the fair value based method
had been applied in measuring compensation expense.



                                       47
<PAGE>
DERIVATIVE FINANCIAL INSTRUMENTS. Compaq recognizes all derivative financial
instruments as assets and liabilities and measures them at fair value. For
derivative financial instruments that are designated and qualify as a cash flow
hedge, the effective portions of changes in fair value of the derivative are
recorded in other comprehensive income, net of tax, and are recognized in the
income statement when the hedged item affects earnings. Ineffective portions of
changes in the fair value of cash flow hedges are recognized currently in
earnings. Changes in the fair value of derivatives that do not qualify for hedge
treatment are recognized currently in earnings.

COMPREHENSIVE INCOME (LOSS). Other comprehensive income (loss) refers to
revenues, expenses, gains and losses that under accounting principles generally
accepted in the United States are included in comprehensive income (loss) but
are excluded from net income (loss) as these amounts are recorded directly as an
adjustment to stockholders' equity, net of tax. Compaq's other comprehensive
income (loss) is composed of unrealized gains and losses on available-for-sale
securities, cash flow hedge adjustments, foreign currency translation
adjustments and adjustments made to recognize additional minimum liabilities
associated with Compaq's defined benefit pension plans. Amounts relating to
realized investment gains and losses and investment impairment charges are
reclassified from other comprehensive income as they are included in net
income.

SEGMENT DATA. Compaq reports segment data based on the management approach which
designates the internal reporting that is used by Compaq for making operating
decisions and assessing performance as the source of Compaq's reportable
operating segments. Compaq also discloses information about products and
services, geographic areas and major customers.

RECENT PRONOUNCEMENTS. In June 2001, the Financial Accounting Standards Board
issued FAS 142, Goodwill and Other Intangible Assets. Under FAS 142, goodwill
and intangible assets with indefinite lives are no longer amortized but are
reviewed at least annually for impairment. The amortization provisions of FAS
142 apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001, Compaq
is required to adopt FAS 142 effective January 1, 2002. Application of the
non-amortization provisions of FAS 142 for goodwill is expected to result in an
increase in operating income of approximately $30 million in 2002. Changes in
the estimated useful lives of intangible assets are not expected to result in a
material effect on net income in 2002. At December 31, 2001, Compaq had goodwill
of approximately $240 million. Pursuant to FAS 142, Compaq will test its
goodwill for impairment upon adoption and, if impairment is indicated, record
such impairment as a cumulative effect of an accounting change. Compaq is
currently evaluating the effect that the adoption may have on its consolidated
results of operation and financial position.

RECLASSIFICATIONS. Certain prior year amounts have been reclassified to conform
to the current year presentation.




                                       48
<PAGE>

NOTE 2.  ACCOUNTING CHANGES

         Effective January 1, 2001, Compaq adopted Emerging Issues Task Force
Issue 01-9, Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products, ("EITF 01-9"), which was issued by the EITF
in November 2001. Compaq's adoption of EITF 01-9 resulted in a change in method
of accounting for certain sales incentive offerings. Historically, Compaq
recognized certain incentives at the time an obligation was incurred, which
generally occurred upon completion of qualifying sales transactions by Compaq's
direct or indirect customers. EITF 01-9 requires such discounts to be recognized
at the later of the date the sales incentive is offered or the date at which the
related revenue is recognized. Compaq recognized a cumulative effect of an
accounting change of $341 million ($222 million, net of tax). Also in accordance
with EITF 01-9, Compaq reclassified certain customer financing costs from
interest expense to net revenue. Compaq has adjusted its results for the first
three quarters of the year ended December 31, 2001 as reflected in the Selected
Quarterly Financial Data on page 68 and reclassified charges related to certain
customer financing costs to conform to the new method for all periods presented.
Pro forma results for prior years are not disclosed due to immateriality.

         Effective January 1, 2001, Compaq adopted FAS 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. This statement
establishes a new standard for accounting for derivatives and hedging
activities. Under FAS 133, all derivatives must be recognized as assets and
liabilities and measured at fair value. The effect of the adoption did not have
a material impact on Compaq's results of operations or consolidated financial
position in 2001.

         Effective January 1, 2000, Compaq adopted Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements, as amended ("SAB 101"), issued
by the SEC in December 1999. Compaq's adoption of SAB 101 resulted in a change
in method of accounting for certain revenue product shipments. The cumulative
effect of this accounting change was $38 million ($26 million, net of tax). The
accounting change did not have a material effect on revenue or quarterly
earnings during 2000. Pro forma results for prior years are not disclosed due to
immateriality.

NOTE 3.  RECENT DEVELOPMENTS, ACQUISITIONS AND DIVESTITURES

         On September 3, 2001, Compaq and Hewlett-Packard Company ("HP")
announced that a definitive merger agreement was unanimously approved by both
Boards of Directors, subject to, among other conditions, regulatory approval and
affirmative stockholders' vote by both companies. Under the terms of the
agreement dated as of September 4, 2001, Compaq stockholders will receive 0.6325
of a newly issued HP share for each outstanding share of Compaq common stock.
The transaction will be accounted for as a purchase. Subject to regulatory and
stockholder approvals, which Compaq and HP are in the process of seeking, and
other customary closing conditions, the transaction is expected to close in the
first half of 2002. Compaq believes that the planned merger will obtain HP
stockholder approval and ultimately be consummated; however, the outcome is
presently uncertain.

         In February 2000, Compaq acquired certain configuration and
distribution assets of Inacom, a provider of information technology services and
products, for approximately $370 million in cash and the assumption of certain
related liabilities. This acquisition was accounted for as a purchase. The
estimated purchase price was allocated to the assets acquired and liabilities
assumed, including goodwill of $230 million which is being amortized on a
straight-line basis over a period of ten years. Pro forma statements of
operations reflecting this acquisition are not shown as such disclosure is not
material.



                                       49
<PAGE>

         In August 1999, Compaq sold an 81.5 percent equity interest in
AltaVista for approximately 38 million CMGI common shares, CMGI preferred shares
convertible into 3.6 million CMGI common shares and a $220 million three-year
note receivable convertible into CMGI common stock. In October 1999, CMGI
converted the CMGI preferred shares held by Compaq into 3.6 million CMGI common
shares. All CMGI common shares acquired by Compaq in this transaction carried
certain restrictions whereby Compaq could not sell more than 50 percent (20.8
million) of such shares prior to August 2001. Total consideration received from
CMGI was valued at $1.8 billion. After adjusting for the net assets sold and for
the expenses associated with the divestiture, Compaq realized a gain of
approximately $1.2 billion ($670 million, net of tax). During 2001, Compaq
received $75 million cash and other consideration in exchange for the note
receivable. All CMGI share information reflects CMGI's two-for-one stock split,
effective January 2000.

         In April 1999, Compaq acquired Zip2 for an aggregate purchase price of
$341 million consisting of $307 million in cash, the issuance of employee stock
options to purchase AltaVista stock with a fair value of $28 million and other
acquisition costs. In February 1999, Compaq acquired SDC for an aggregate
purchase price of $257 million consisting of $219 million in cash, the issuance
of employee stock options to purchase Compaq stock with a fair value of $32
million and other acquisition costs. These transactions were accounted for as
purchases.

NOTE 4.  CERTAIN BALANCE SHEET COMPONENTS

         Compaq's trade accounts receivable are shown net of allowance for
doubtful accounts of $230 million and $211 million at December 31, 2001 and
2000, respectively. Other current assets include deferred tax assets of $1.3
billion and $1.7 billion at December 31, 2001 and 2000, respectively. The net
investment in lease receivables consisted of the following:

<Table>
<Caption>
December 31 (In millions)                          2001          2000
-------------------------                       ----------    ----------

<S>                                             <C>           <C>
Minimum lease payment receivable                $    2,501    $    1,868
Unguaranteed residual values                           196           122
Initial direct costs                                    31            21
Allowance                                              (53)          (27)
Unearned income                                       (274)         (217)
                                                ----------    ----------
                                                $    2,401    $    1,767
                                                ==========    ==========

</Table>

         Contractual maturities of Compaq's lease receivables at December 31,
2001 were $1.1 billion in 2002, $821 million in 2003, $454 million in 2004, $89
million in 2005 and $37 million in 2006. Compaq also leases its products to
customers under operating leases. Minimum future rentals to be received under
operating leases at December 31, 2001 were $360 million in 2002, $150 million in
2003 and $17 million in 2004.

Inventories consisted of the following:

<Table>
<Caption>
December 31 (In millions)                          2001          2000
-------------------------                       ----------   ----------

<S>                                             <C>          <C>
Raw material                                    $      298   $      540
Work-in-progress                                       172          298
Finished goods                                         932        1,323
                                                ----------   ----------
                                                $    1,402   $    2,161
                                                ==========   ==========
</Table>



                                       50
<PAGE>


         Property, plant and equipment consisted of the following:

<Table>
<Caption>
December 31 (In millions)                     2001           2000
-------------------------                  ----------    ----------

<S>                                        <C>           <C>
Land                                       $      356    $      342
Buildings and leasehold improvements            1,594         1,493
Machinery and equipment                         3,667         3,786
Equipment leased to third parties               1,215         1,166
Construction-in-process                           266           261
                                           ----------    ----------
                                                7,098         7,048
Less: Accumulated depreciation                 (3,899)       (3,617)
                                           ----------    ----------
                                           $    3,199    $    3,431
                                           ==========    ==========
</Table>


         Depreciation expense totaled $1.0 billion, $1.1 billion and $839
million in 2001, 2000 and 1999, respectively. Accumulated depreciation related
to equipment leased to third parties was $590 million and $422 million at
December 31, 2001 and 2000, respectively.

         Other non-current assets consisted of the following:

<Table>
<Caption>
December 31 (In millions)                     2001           2000
-------------------------                  ----------    ----------
<S>                                        <C>           <C>
Intangible assets                          $    2,632    $    2,637
Deferred income taxes                           2,714         1,604
Lease receivable                                1,645         1,067
Other assets                                    1,202         1,829
                                           ----------    ----------
                                                8,193         7,137
Less: Accumulated amortization                   (981)         (823)
                                           ----------    ----------
                                           $    7,212    $    6,314
                                           ==========    ==========
</Table>

         Amortization expense related to intangible assets totaled $341 million,
$313 million and $563 million in 2001, 2000 and 1999, respectively. The cost
basis and fair value of Compaq's available-for-sale securities at December 31,
2001 was $61 million and $99 million, respectively. Gross unrealized gains
related to these investments at December 31, 2001 were $39 million ($25 million,
net of tax). At December 31, 2000, the cost basis and fair value of
available-for-sale securities was $350 million and $461 million, respectively,
and the gross unrealized gains and gross unrealized losses related to these
investments at December 31, 2000 were $132 million ($86 million, net of tax) and
$21 million ($14 million, net of tax), respectively.

         Other current liabilities consisted of the following:

<Table>
<Caption>

December 31 (In millions)                     2001          2000
-------------------------                  ----------   ----------

<S>                                        <C>          <C>
Salaries, wages and related items          $      591   $      922
Income taxes payable                              473          769
Accrued warranties                                861          938
Other accrued liabilities                       2,454        2,887
                                           ----------   ----------
                                           $    4,379   $    5,516
                                           ==========    ==========
</Table>




                                       51
<PAGE>

NOTE 5.  BORROWINGS

         Compaq has a $1.75 billion revolving credit facility that expires in
September 2002 and a $2.0 billion facility that expires in October 2002. The
facilities bear interest at LIBOR plus 0.625 percent and LIBOR plus 0.325
percent, respectively. There were no borrowings outstanding under these
facilities at December 31, 2001 and 2000. Compaq operates two short-term
commercial paper programs authorized for a total of $4.7 billion. These programs
are supported by the $1.75 billion and $2.0 billion credit facilities.
Outstanding commercial paper reduces available borrowings under these credit
facilities. At December 31, 2001 and 2000, Compaq had $1.2 billion and $636
million, respectively, in commercial paper outstanding under the programs, with
a weighted average interest rate of 3.0 percent and 7.5 percent, respectively.
The carrying amount of the borrowings under the commercial paper programs
approximates their fair value. Additionally, Compaq maintains various lines of
credit, totaling $537 million, of which $75 million was outstanding at December
31, 2001. There were no outstanding borrowings against these lines at December
31, 2000.

         In May 2000, Compaq registered $2.0 billion of debt securities. Compaq
had the following debt securities outstanding under its effective registration
statement as of December 31, 2001:

<Table>
<Caption>
          DATE              AMOUNT          INTEREST RATE           INTEREST PAYABLE              MATURITY DATE
     ----------------    --------------     --------------    -----------------------------    ---------------------

<S>                      <C>                <C>               <C>                              <C>
       August 2000       $300 million           7.65%           February 1 and August 1           August 1, 2005
       August 2000       $275 million           7.45%           February 1 and August 1           August 1, 2002
</Table>

         In February 2001, Compaq established under its effective registration
statement a $1.4 billion medium-term notes program for issuance of debt
securities due nine months or more from date of issue. Compaq had the following
debt securities outstanding under its medium-term notes program as of December
31, 2001:

<Table>
<Caption>
          DATE              AMOUNT          INTEREST RATE           INTEREST PAYABLE              MATURITY DATE
     ----------------   ---------------     --------------    -----------------------------    ---------------------

<S>                      <C>                <C>               <C>                              <C>
        May 2001         $300 million           6.2%             May 15 and November 15            May 15, 2003
</Table>

         The fair value of these securities approximates carrying value at
December 31, 2001. The net proceeds from the sale of these senior unsecured debt
securities were used for general corporate purposes including investments in
Compaq's financing services, capital expenditures and repayment of outstanding
indebtedness (including commercial paper issued for working capital purposes).
At December 31, 2001, Compaq had the capacity to issue an additional $1.1
billion under its medium-term notes program.

         At December 31, 2001, borrowings included $1.2 billion in commercial
paper and $275 million in debt securities maturing August 1, 2002. At December
31, 2000, borrowings principally included commercial paper.



                                       52
<PAGE>

NOTE 6.  OTHER INCOME AND EXPENSE

         Other (income) expense consisted of the following:

<Table>
<Caption>
Year ended December 31 (In millions)          2001          2000          1999
------------------------------------       ----------    ----------    ----------

<S>                                        <C>           <C>           <C>
Investment (income) loss, net              $      438    $    1,568    $      (67)
Interest and dividend income                     (232)         (276)         (196)
Interest expense                                  113           112           133
Other expense, net                                147            99           158
Gain on sale of businesses                         --            --        (1,182)
                                           ----------    ----------    ----------
                                           $      466    $    1,503    $   (1,154)
                                           ==========    ==========    ==========
</Table>


         Other income and expense for 2001 included investment losses of $438
million resulting from an other than temporary decline in the value of Compaq's
investment portfolio, including a write-down in Compaq's investment in CMGI and
related assets, net of investment gains. Investment gains and interest income of
$61 million in 2001 resulted primarily from the sale of an investment in a
limited liability corporation. Net investment losses in 2000 included impairment
charges of $1.8 billion due primarily to Compaq's investment in CMGI, a $252
million realized gain on the sale of available-for-sale securities and a $77
million loss from investments accounted for under the equity method. Proceeds
associated with the sale of available-for-sale securities were $121 million and
$264 million in 2001 and 2000, respectively.

NOTE 7.  PROVISION FOR INCOME TAXES

         The components of income (loss) before provision for income taxes were
as follows:

<Table>
<Caption>
Year ended December 31 (In millions)                    2001          2000         1999
------------------------------------                 ----------    ----------   ----------

<S>                                                  <C>           <C>          <C>
United States                                        $     (887)   $      200   $       94
Foreign                                                     114           675          840
                                                     ----------    ----------   ----------
     Income (loss) before income taxes               $     (773)   $      875   $      934
                                                     ==========    ==========   ==========
</Table>


         The provisions for income taxes charged to operations were as follows:

<Table>
<Caption>

Year ended December 31 (In millions)                    2001          2000          1999
------------------------------------                 ----------    ----------    ----------

<S>                                                  <C>           <C>           <C>
Current tax expense (benefit)
   United States Federal                             $     (148)   $      (91)   $        1
   State and local                                           20             5            11
   Foreign                                                  323           353           460
                                                     ----------    ----------    ----------
      Total current                                         195           267           472
                                                     ----------    ----------    ----------

Deferred tax expense (benefit)
   United States Federal                                   (418)          (91)           47
   State and local                                          (25)           (2)           43
   Foreign                                                   38           106          (197)
                                                     ----------    ----------    ----------
      Total deferred                                       (405)           13          (107)
                                                     ----------    ----------    ----------
      Total provision                                $     (210)   $      280    $      365
                                                     ==========    ==========   ===========
</Table>




                                       53
<PAGE>


         The reasons for the differences between income tax expense and amounts
calculated using the United States statutory rate of 35 percent were as follows:

<Table>
<Caption>
Year ended December 31 (In millions)                              2001          2000          1999
------------------------------------                           ----------    ----------    ----------

<S>                                                            <C>           <C>           <C>
Tax expense (benefit) at United States statutory rate          $     (270)   $      306    $      327
Foreign tax effect, net                                               (76)           --           (31)
Valuation allowance on investment write-down                          130            --            --
Disposition of businesses                                              --            --            77
Recovery of operating subsidiary stock basis                           --           (61)           --
Other, net                                                              6            35            (8)
                                                               ----------    ----------    ----------
       Total provision                                         $     (210)   $      280    $      365
                                                               ==========    ==========    ==========
</Table>

         Compaq's 2001 effective tax rate was a 27 percent benefit, due
primarily to the tax effect of the write-down of its investment portfolio during
2001, partially offset by a reduction in foreign tax expense and the benefit of
certain foreign losses. This write-down could result in future capital losses
that are not expected to result in a corresponding tax benefit as Compaq does
not expect to generate future capital gains sufficient to offset all potential
future capital losses. Compaq has recognized benefits in prior years from a
Singapore tax holiday for manufacturing operations. The Singapore tax holiday
for manufacturing operations expired in August 2001; the ongoing Singapore
manufacturing operations are, therefore, not expected to affect Compaq's
effective tax rate in the future.

         Compaq's 2000 effective tax rate was primarily affected by the recovery
of tax basis in the stock of Microcom, Inc., a former operating subsidiary which
was acquired in 1997. In addition, Compaq decreased the level of activity of its
Singaporean manufacturing subsidiary which, when considered with other foreign
effects, reduced the beneficial foreign tax effect as had occurred in previous
years.

         Compaq's 1999 effective tax rate was primarily affected by benefits
from its Singaporean manufacturing subsidiary's tax holiday and by incremental
taxes resulting from the disposition of AltaVista.

         Compaq's valuation allowance increased by $130 million during 2001 by a
direct charge to tax expense as a result of the investment write-downs that are
not expected to result in a corresponding tax benefit. The valuation allowance
was reduced by $54 million during 2001, $95 million during 2000 and $152 million
during 1999 as a result of tax loss and credit carryforward expirations.

         At December 31, 2001, Compaq had a deferred tax asset of $774 million
related to net operating loss carryforwards which, if not utilized, will
generally expire between 2002 and 2021 and credit carryforwards of approximately
$773 million which, if not utilized, will generally expire between 2002 and
2016. United States tax laws limit the annual utilization of tax loss and credit
carryforwards of acquired entities. These limitations should not materially
affect the utilization of the tax carryforwards. Compaq had a valuation
allowance of $380 million as of December 31, 2001 against the net operating loss
and credit carryforwards as well as a valuation allowance of $130 million
against certain investment write-downs. Compaq has considered future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance. In the event Compaq were to determine that it
would not be able to realize all or part of its net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made.



                                       54
<PAGE>

         Compaq has determined that the undistributed earnings of certain
foreign subsidiaries will be permanently reinvested. As a result of these
determinations, no incremental tax is reflected for the earnings of Compaq's
Singaporean manufacturing subsidiary or for the earnings of certain other
foreign subsidiaries. These earnings could become subject to incremental foreign
withholding, Federal and state income tax if they were actually or deemed to be
remitted to the United States. Compaq estimates an additional tax provision of
approximately $2.1 billion would be required if the full amount of approximately
$6.0 billion in accumulated earnings were actually or deemed distributed to the
United States.

         Deferred tax assets (liabilities) were as follows:

<Table>
<Caption>
  December 31 (In millions)                             2001          2000
  -------------------------                          ----------    ----------

<S>                                                  <C>           <C>
  Loss carryforwards                                 $      774    $      379
  Credit carryforwards                                      773         1,109
  Accrued liabilities                                       767           748
  Tax versus financial reporting year-end                    --           446
  Capitalized research and development costs                684           349
  Receivable allowances                                     134           278
  Inventory adjustments                                     459           347
  Equity investments                                        575            --
  Other                                                     712           514
                                                     ----------    ----------
      Gross deferred tax assets                           4,878         4,170
                                                     ----------    ----------
  Equity investments                                         --           (46)
  Intangible assets                                        (241)         (333)
  Other                                                    (234)          (87)
                                                     ----------    ----------
      Gross deferred tax liabilities                       (475)         (466)
                                                     ----------    ----------
  Deferred tax asset valuation allowance                   (510)         (434)
                                                     ----------    ----------
     Total deferred tax asset                        $    3,893    $    3,270
                                                     ==========    ==========
</Table>

NOTE  8.  EMPLOYEE STOCK PLANS

         Compaq maintains various stock plans for its employees. Options to
employees are generally granted at the fair market value of the common stock at
the date of grant and generally vest over two to five years. Options granted to
employees under Compaq's stock option plans must be exercised no later than ten
years from the date of grant. The vesting period and option life for grants to
employees are at the discretion of the Board of Directors ("Board").

         Compaq also maintains plans under which it offers stock options to
non-employee directors. Pursuant to the terms of the plans under which directors
are eligible to receive options, each non-employee director is entitled to
receive options to purchase common stock upon initial appointment to the Board
(initial grants) and upon subsequent reelection to the Board (annual grants).
Initial grants are exercisable during the period beginning one year after
initial appointment to the Board and ending ten years after the date of grant.
Annual grants vest over one year and are exercisable thereafter until the tenth
anniversary of the date of grant. Both initial grants and annual grants have an
exercise price equal to the fair market value of Compaq's common stock on the
date of grant. Additionally, directors may elect to receive stock options in
lieu of all or a portion of the annual retainer to be earned. Such options are
granted at 50 percent of the price of Compaq's common stock at the date of grant
and are exercisable during the period beginning one year after the grant date
and ending ten years after the grant date. The expense resulting from options
granted at 50 percent of the price of Compaq's common stock at the grant date is
charged to operations over the vesting period.



                                       55
<PAGE>

         Compaq had approximately 2 million shares of restricted stock
outstanding at December 31, 2001. Compaq records unearned compensation equal to
the market value of the restricted shares on the date of grant and charges the
unearned compensation to expense over the vesting period.

         At December 31, 2001, there were 400 million shares of common stock
reserved for issuance under all of Compaq's stock option plans. For all plans,
options of 129 million, 107 million and 101 million shares were exercisable at
December 31, 2001, 2000 and 1999 with a weighted average exercise price of
$22.24, $20.16 and $16.13, respectively. There were 74 million, 31 million and
123 million shares available for grant under the plans at December 31, 2001,
2000 and 1999, respectively.

         The following table summarizes stock option activity for each of the
three years ended December 31:

<Table>
<Caption>
                                                             Shares                               Weighted Average
                                                           In Millions        Price Per Share     Price Per Share
                                                           -----------        ---------------    -----------------


<S>                                                        <C>              <C>                   <C>
  OPTIONS OUTSTANDING, DECEMBER 31, 1998                          157                               $    16.37
     Options granted                                              118       $  3.36   -  $ 47.63         31.42
     Options lapsed or canceled                                   (24)                                   28.18
     Options exercised                                            (17)      $  1.30   -  $ 39.23          9.66
                                                            ---------                               ----------
  OPTIONS OUTSTANDING, DECEMBER 31, 1999                          234                                    23.37
     Options granted                                              119       $ 15.04   -  $ 34.08         22.74
     Options lapsed or canceled                                   (30)                                   29.99
     Options exercised                                            (23)      $  1.58   -  $ 31.25         10.40
                                                            ---------                               ----------
  OPTIONS OUTSTANDING, DECEMBER 31, 2000                          300                                    23.45
     Options granted                                               68       $  8.31   -  $ 23.71         10.33
     Options lapsed or canceled                                   (31)                                   26.47
     Options exercised                                            (11)      $  1.58   -  $ 23.81          6.49
                                                            ---------                               ----------
  OPTIONS OUTSTANDING, DECEMBER 31, 2001                          326                               $    21.02
                                                            =========                               ==========
</Table>


         The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 2001:

<Table>
<Caption>
                                        Options Outstanding                          Options Exercisable
                              ------------------------------------------        ------------------------------
                                                Weighted      Weighted                               Weighted
                                                Average        Average                               Average
        Ranges of                Shares        Remaining       Exercise            Shares            Exercise
      Exercise Prices         In Millions    Life in Years      Price            In Millions          Price
      ---------------         -----------    -------------    ----------         -----------         ---------

<S>                           <C>            <C>             <C>                 <C>                <C>
          under $5.00                9             1.3         $   3.92                 9            $   3.52
        5.01 to 10.00               80             8.4             9.57                17                8.81
       10.01 to 15.00                7             4.9            12.32                 6               12.53
       15.01 to 20.00               71             8.0            17.66                28               17.11
       20.01 to 25.00               19             6.7            23.21                12               23.24
       25.01 to 30.00              107             7.6            26.53                34               26.36
          over $30.00               33             6.6            42.96                23               42.30
                             ---------         -------         --------           -------            --------
                                   326             7.5         $  21.02               129            $  22.24
                             =========         =======         ========           =======            ========
</Table>




                                       56
<PAGE>


         In April 1999, Compaq's stockholders approved the Compaq Employee Stock
Purchase Plan ("ESPP"), which became effective in April 2000. Most employees are
eligible to participate. Employees who choose to participate are granted an
option to purchase common stock at 85 percent of market value on the first or
last day of the six-month purchase period, whichever is lower. The ESPP
authorizes the issuance, and the purchase by employees, of up to 25 million
shares of common stock through payroll deductions. No employee is allowed to buy
more than $25,000 of common stock in any year, based on the market value of the
common stock at the beginning of the purchase period. During 2001, employees
purchased approximately 14 million shares for approximately $144 million under
the ESPP. During 2000, employees purchased approximately 2 million shares for
approximately $61 million. At December 31, 2001, there were approximately 8
million shares available for future purchases under the ESPP.

         The weighted average fair value per share of options granted during
2001, 2000 and 1999 was $5.55, $11.80 and $13.22, respectively. The weighted
average fair value per share of options granted under the ESPP during 2001 and
2000 was $3.19 and $8.62, respectively. The fair value for these options was
estimated using the Black-Scholes model with the following weighted average
assumptions:

<Table>
<Caption>
                                                      STOCK OPTIONS                                  ESPP
                                           -------------------------------------           ---------------------------
  Year ended December 31                      2001           2000        1999                  2001          2000
  ----------------------                   ----------    -----------  ----------           ------------   ------------

<S>                                        <C>            <C>          <C>                  <C>            <C>
  Expected life (in years)                    7            6             5                     0.5            0.5
  Risk-free interest rate                     5.3%         5.0%          5.5%                  1.8%           6.3%
  Volatility                                 55.2%        49.7%         39.8%                 65.0%          55.9%
  Dividend yield                              1.0%         0.4%          0.3%                  1.0%           0.4%
</Table>

         The table that follows summarizes the pro forma effect on net income
(loss) in the year presented if the fair values of stock-based compensation had
been recognized as compensation expense on a straight-line basis over the
vesting period of the grant. The following pro forma effect on net income (loss)
for the years presented is not representative of the pro forma effect on net
income (loss) in future years because it does not take into consideration pro
forma compensation expense related to grants made prior to 1995.

<Table>
<Caption>
  Year ended December 31 (In millions, except per share amounts)            2001          2000        1999
  --------------------------------------------------------------         ----------    ----------   ----------
<S>                                                                      <C>           <C>          <C>
  Income (loss) before income taxes:
     As reported                                                         $     (773)   $      875   $      934
     Pro forma                                                               (1,529)          293          623
  Net income (loss):
     As reported                                                         $     (785)   $      569   $      569
     Pro forma                                                               (1,336)          191          367
  Diluted earnings (loss) per share before cumulative effect:
     As reported                                                         $    (0.34)   $     0.34   $     0.34
     Pro forma                                                                (0.87)         0.11         0.23
</Table>

NOTE 9.  STOCKHOLDERS' EQUITY

         Total dividends declared in 2001, 2000 and 1999 were $169 million
($0.10 per share), $170 million ($0.10 per share) and $144 million ($0.085 per
share), respectively.


                                       57
<PAGE>

         During 1998, a systematic common stock repurchase program was
authorized by the Board and implemented by Compaq. Compaq repurchased
approximately 10 million shares during 2000, for a cost of approximately $303
million under this program. The program was implemented to reduce the dilutive
impact of common shares issued under Compaq's equity incentive plans. On
December 1, 2000, the Board authorized a program for the repurchase of up to $1
billion of Compaq common shares. The systematic repurchase program initiated in
1998 has been suspended while this program is in effect. During 2001, total
shares repurchased under the new plan were 9 million, for a cost of
approximately $118 million. During 2000, total shares repurchased under the new
plan were 22 million, for a cost of approximately $370 million. Compaq accounts
for treasury stock using the cost method.

         In April 1999, Compaq redeemed the four million outstanding shares of
the Digital Series A 8-7/8 percent Cumulative Preferred Stock, par value $1.00
per share. The redemption price was $400 million, plus accrued and unpaid
dividends of $9 million. Compaq realized a gain of $22 million on the redemption
that was recorded directly to retained earnings.

         In connection with the announced proposed merger of Compaq and HP, on
September 3, 2001, the Board adopted a stockholder rights plan and declared
a dividend distribution of one right for each outstanding share of Compaq common
stock to stockholders of record as of the close of business on September 17,
2001. Each right entitles the registered holder to purchase from Compaq a unit
consisting of one one-thousandth of a share of Compaq's Series A Junior
Participating Preferred Stock, par value $.01 per share, at a purchase price of
$70.00 per unit, subject to adjustment. The rights expire on September 3, 2011
unless such date is extended or the rights are earlier redeemed or exchanged by
Compaq.

NOTE 10.  PENSION AND OTHER BENEFIT PROGRAMS

         Compaq sponsors a number of defined benefit and other postretirement
employee benefit plans ("OPEB Plans"). Benefits under the defined benefit
pension plans are generally based on pay and service. In the United States, the
defined benefit plan is a cash balance plan, under which the benefit is usually
paid as a lump sum.

         Compaq's accumulated other comprehensive loss related to additional
minimum pension liability as of December 31, 2001 and 2000 was $191 million
($124 million, net of tax) and $17 million ($11 million, net of tax),
respectively, for plans where the accumulated benefit obligation exceeded the
fair market value of assets.

         The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for which the accumulated benefit obligations exceed
plan assets approximated $1.3 billion, $1.1 billion and $809 million,
respectively, for the year ended December 31, 2001, and $401 million, $324
million and $154 million, respectively, for the year ended December 31, 2000.
The measurement dates of the plans were October 31, 2001 and 2000.



                                       58
<PAGE>


         Information regarding Compaq's defined benefit and OPEB Plans was as
follows:

<Table>
<Caption>
                                                         Year Ended December 31, 2001           Year Ended December 31, 2000
                                                  -------------------------------------   ---------------------------------------
                                                   Defined Benefit Pension                Defined Benefit Pension
                                                           Plans                                   Plans
                                                  ------------------------   OPEB Plans   ------------------------     OPEB Plans
(In millions, except assumptions)                    U.S.        Foreign        (1)           U.S.       Foreign           (1)
---------------------------------                 ----------    ----------   ----------   -----------   ----------     ----------

<S>                                               <C>           <C>          <C>           <C>          <C>            <C>
Change in benefit obligation
  Benefit obligation at beginning of year         $    1,941    $    1,767   $      338    $    2,085   $    1,728     $      344
  Service cost                                            36            62            4            40           66              6
  Interest cost                                          148            96           26           147           94             25
  Plan amendments                                         --           (62)         (25)           --            3             --
  Actuarial (gain) loss                                  (69)           88           64          (127)         144            (11)
  Curtailment gain                                        --            (6)          --            --           (7)            --
  Benefits paid                                         (103)          (63)         (33)         (204)         (70)           (30)
  Currency loss                                           --           (75)          --            --         (172)            (1)
  Other                                                   --            13            6            --          (19)             5
                                                  ----------    ----------   ----------    ----------   ----------     ----------
    Projected benefit obligation at end of year        1,953         1,820          380         1,941        1,767            338
                                                  ----------    ----------   ----------    ----------   ----------     ----------
Change in plan assets
  Fair value of plan assets at beginning of year       2,344         1,834           --         2,371        1,827             --
  Actual return on plan assets                          (286)         (266)          --           174          233             --
  Employer contributions                                   3            49           27             3           28             25
  Benefits paid                                         (103)          (63)         (33)         (204)         (70)           (30)
  Currency loss                                           --           (69)          --            --         (161)            --
  Other                                                   --            10            6            --          (23)             5
                                                  ----------    ----------   ----------    ----------   ----------     ----------
    Fair value of plan assets at end of year           1,958         1,495           --         2,344        1,834             --
                                                  ----------    ----------   ----------    ----------   ----------     ----------
Funded status                                              5          (325)        (380)          403           67           (338)
Unrecognized net actuarial (gain) loss                   238           547           48          (179)          82            (22)
Unrecognized prior service cost                           --           (21)         (22)           --           50              3
                                                  ----------    ----------   ----------    ----------   ----------     ----------
  Prepaid (accrued) benefit cost                         243           201         (354)          224          199           (357)
  Contributions after measurement date                    --             8           --            --            8             --
                                                  ----------    ----------   ----------    ----------   ----------     ----------
    Prepaid (accrued) benefit cost                $      243    $      209   $     (354)   $      224   $      207     $     (357)
                                                  ==========    ==========   ==========    ==========   ==========     ==========
Amounts included in the Consolidated Balance
 Sheet are composed of:
  Prepaid benefit cost                            $      249    $      305   $       --    $      230   $      344     $       --
  Accrued benefit liability                               (6)         (308)        (354)           (6)        (170)          (357)
  Other assets                                            --            21           --            --           16             --
  Accumulated other comprehensive loss                    --           191           --            --           17             --
                                                  ----------    ----------   ----------    ----------   ----------     ----------
    Net amount recognized                         $      243    $      209   $     (354)   $      224   $      207     $     (357)
                                                  ==========    ==========   ==========    ==========   ==========     ==========
Weighted average assumptions as of October 31
  Discount rate                                         7.50%         5.55%        7.50%         8.00%        5.75%          8.00%
  Expected return on plan assets                        9.00%         7.30%         N/A          9.00%        7.35%           N/A
  Rate of compensation increase                         4.50%         3.50%         N/A          4.50%        3.60%           N/A
  Healthcare cost trend rate, current year               N/A           N/A        10.00%          N/A          N/A           5.50%
  Healthcare cost trend rate, ultimate year              N/A           N/A         5.00%          N/A          N/A           5.00%
  Trend rate decreases to the ultimate rate
   in the year                                           N/A           N/A         2006           N/A          N/A           2001
Components of net periodic benefit cost
  Service cost                                    $       36    $       62   $        4    $       40   $       66     $        6
  Interest cost                                          148            96           26           147           94             25
  Expected return on plan assets                        (201)         (123)          --          (199)        (125)            --
  Settlement/curtailment gain                             --            --           --           (17)          (3)            --
  Other                                                   --             6            1            --            9              1
                                                  ----------    ----------   ----------    ----------   ----------     ----------
    Net periodic pension cost                     $      (17)   $       41   $       31    $      (29)  $       41     $       32
                                                  ==========    ==========   ==========    ==========   ==========     ==========
</Table>

(1) The OPEB Plans are consolidated to include both United States and foreign
    results as foreign results are not material for separate disclosure.



                                       59
<PAGE>


         Assumed healthcare cost trend rates could have an effect on the amounts
reported for the healthcare plans. A one-percentage point increase in rates
would result in an increase of $3 million in the total service and interest
costs components and a $30 million increase in the postretirement benefit
obligation. Conversely, a one-percentage point decrease in rates would result in
a decrease of $3 million in total service and interest costs and a $26 million
decrease in the postretirement benefit obligation.

         Compaq has defined contribution plans under which Compaq makes matching
contributions based on employee contributions. These plans are intended to
qualify as deferred compensation plans under Section 401(k) of the Internal
Revenue Code of 1986. Contributions are invested at the direction of the
employee in one or more funds, including a fund that consists of common stock of
Compaq. Amounts charged to expense were $141 million, $138 million and $121
million in 2001, 2000 and 1999, respectively.

         Compaq has an incentive compensation plan for the majority of its
employees. Payments under the plan are based on a uniform percentage of
employees' base pay as determined by a matrix using financial performance as
defined by the plan and customer satisfaction results. Payments are made
semiannually. For the year ended December 31, 2001, no amount was charged to
expense. Amounts charged to expense were $106 million and $26 million in 2000
and 1999, respectively.

NOTE 11.  SEGMENT DATA

         Segment results reflect changes made during 2001 in the organization of
Compaq's businesses and its expense allocation methodology. Compaq has combined
its commercial personal computing business with its consumer business to form
the Access segment. In addition, the results of Compaq's financing business,
which were previously reflected in the Other segment category, were included in
the Compaq Global Services segment in 2001. Further, Compaq allocated certain
shared expenses that were previously reported in unallocated corporate and
shared expenses, such as information management, facilities and marketing costs,
to the segments during 2001. The effect of this change in expense allocation was
to lower segment operating profit by the amount of the allocated costs.
Financial data for prior periods has been restated to conform to the current
presentation. Compaq has three reportable segments: Enterprise Computing, Access
and Compaq Global Services.

         Enterprise Computing designs, develops, manufactures and markets
advanced computing and telecommunications products and solutions for enterprise
customers worldwide. The Enterprise Computing segment consists of three global
business units: Industry Standard Servers, Business Critical Solutions and
Enterprise Storage. Industry Standard Servers designs and manufactures
industry-standard ProLiant servers, which are building blocks for information
technology infrastructures, and integrates these with software and services to
provide information technology solutions for companies of all sizes. Business
Critical Solutions provides NonStop Himalaya and high performance AlphaServer
systems with Tru64 UNIX, OpenVMS and Linux operating systems for solutions that
deliver the highest levels of availability, performance, scale and manageability
for the telecommunications, financial services, high performance technical
computing and other business-critical market segments. Enterprise Storage
provides global storage solutions through the development and delivery of
StorageWorks by Compaq storage area networks, automated backup solutions,
network attached storage and a complete suite of SANworks by Compaq storage
management solutions.



                                       60
<PAGE>

         The Access segment delivers products and solutions designed to provide
home and business users with anytime, anywhere access to information,
communication and entertainment. For the business customer, the Access segment
offers a broad range of innovative commercial computing devices, services and
solutions. These include desktop, notebook, workstation and thin client products
marketed under the Evo, DeskPro, Armada and other brands, as well as a full line
of Compaq branded monitor and networking products - all designed to help
customers simplify their business computing environments. For the consumer
customer, the Access segment offers a wide range of innovative products and
technologies that all work together to help the home or home office user
simplify their life, connect their world and have fun. These include Presario
branded desktop and notebook Internet PCs and a line of monitors and printers
sold under the Compaq brand. In addition, the Access segment offers an
innovative line of personal devices and solutions marketed under the iPAQ brand,
targeting the convergence of business and home computing. These include
handhelds, such as the award-winning iPAQ Pocket PC, as well as personal
entertainment and communications products, home networking products, desktop
computers, microportable projectors and Internet access appliances. Internet
access appliances are devices used to access the Internet.

         The Compaq Global Services segment consists of four global business
units: Customer Support, Systems Integration, Managed Services and Financial
Services. Customer Support offerings include lifecycle support services,
business-critical services and high availability support services for
multi-vendor, multi-technology hardware and software products. Customer
Support also manages and delivers warranty support to its customers through its
own service organization, as well as through full-service resellers and
independent service companies. Systems Integration offerings include end-to-end
information systems consulting, technical and application design services,
systems integration, Internet and network architecture, project management
services and e-business solutions. Managed Services offerings include
outsourcing and resource management services, as well as business continuity and
recovery services. Financial Services offerings include customized enterprise
financing solutions that encompass computers, networks and technology upgrades,
as well as asset management services for large and multi-national business
customers. Financial Services also offers an array of specialized financial
services to small and medium-sized businesses and the consumer, educational and
government marketplaces.

         The accounting policies of the segments are the same as those used in
the preparation of Compaq's consolidated financial statements. Compaq evaluates
the performance of its operating segments based on segment operating income,
which includes sales and marketing expenses, research and development costs and
other overhead charges directly attributable to the operating segment. Certain
expenses, which are managed outside of the operating segments, are excluded.
These consist primarily of corporate expenses, other income and expense items,
and other non-recurring charges such as restructuring and related activities.
Corporate expenses consist primarily of general and administrative expenses that
are separately managed. Compaq does not include inter-segment transfers for
management reporting purposes. Asset information by operating segment is not
reported since Compaq does not identify assets by segment.



                                       61
<PAGE>


         Summary financial data by business segment follows:

<Table>
<Caption>
(In millions)                                2001          2000           1999
------------                              ----------    ----------    ----------

<S>                                        <C>           <C>           <C>
ENTERPRISE COMPUTING
        Revenue                            $   10,699    $   14,253    $   12,947
        Operating income                          163         1,656           674
ACCESS
        Revenue                                15,193        20,624        18,128
        Operating income (loss)                  (587)          145          (437)
COMPAQ GLOBAL SERVICES
        Revenue                                 7,789         7,483         7,413
        Operating income                        1,062           884           998
SEGMENT ELIMINATIONS AND OTHER
        Revenue                                  (127)         (138)          (41)
        Operating income (loss)                     1           (43)         (289)
CONSOLIDATED SEGMENT TOTALS
        Revenue                            $   33,554    $   42,222    $   38,447
        Operating income                   $      639    $    2,642    $      946
</Table>

         A reconciliation of Compaq's consolidated segment operating income to
consolidated income (loss) before income taxes follows:

<Table>
<Caption>
Year ended December 31 (In millions)                2001         2000          1999
------------------------------------            ----------    ----------    ----------

<S>                                             <C>           <C>           <C>
Consolidated segment operating income           $      639    $    2,642    $      946
Unallocated corporate expenses                        (160)         (350)         (298)
Restructuring and related activities                  (742)           86          (868)
Merger-related costs                                   (44)           --            --
Other income (expense), net                           (466)       (1,503)        1,154
                                                ----------    ----------    ----------
Income (loss) before income taxes               $     (773)   $      875    $      934
                                                ==========    ==========    ==========
</Table>

         Geographic revenue and long-lived assets related to operations as of
and for the years ended December 31 were as follows:

<Table>
<Caption>
  (In millions)                                          2001        2000         1999
  -------------                                      ----------   ----------   ----------
<S>                                                  <C>          <C>          <C>
  Revenue:
     United States                                   $   12,892   $   18,854   $   17,313
     Europe, Middle East and Africa                      12,189       14,142       14,396
     Other                                                8,473        9,226        6,738
                                                     ----------   ----------   ----------
                                                     $   33,554   $   42,222   $   38,447
                                                     ==========   ==========   ==========
  Long-lived assets:
     United States                                   $    2,215   $    2,229   $    2,332
     Other                                                  984        1,202          917
                                                     ----------   ----------   ----------
                                                     $    3,199   $    3,431   $    3,249
                                                     ==========   ==========   ==========
</Table>



                                       62
<PAGE>

NOTE 12.  RESTRUCTURING AND RELATED ACTIVITIES

         In the first and second quarters of 2001, Compaq's management approved
restructuring plans to realign its organization and reduce operating costs.
Compaq combined its commercial and consumer personal computer operations into a
single Access segment. Compaq also implemented significant changes in its
business model and supply chain operations. These actions were designed to
simplify product offerings, derive greater internal operating efficiencies,
lower order cycle time, reduce channel inventory and improve account and order
management. In addition, Compaq consolidated certain functions within its global
business units and reduced administrative functions. Accordingly, Compaq planned
to reduce associated employee positions by approximately 4,500 and 4,000
worldwide in connection with the first and second quarter plans, respectively.

         Restructuring and related charges of $249 million and $493 million were
expensed during the first and second quarters of 2001, respectively. The first
quarter charge was comprised of $173 million related to employee separations,
$64 million of related asset impairment charges and $12 million for other exit
costs. The second quarter charge was comprised of $303 million related to
employee separations, $138 million of related asset impairment charges, $40
million for facility closure costs and $12 million for other exit costs. During
the fourth quarter of 2001, Compaq reversed excess reserves of $68 million for
employee separation costs accrued in conjunction with the first and second
quarter plans and expensed an additional charge of approximately the same amount
for additional reductions of 1,400 employee positions as approved by management
to further achieve its objectives of realigning its organization and reducing
operating costs. Employee separation benefits under each plan were similar and
included severance, medical and other benefits. As of December 31, 2001, Compaq
completed 9,200 of the planned 9,900 employee separations under the 2001 plans.
Compaq expects to substantially complete the initiatives contemplated under the
restructuring plans by March 31, 2002.

         Components of accrued restructuring costs and amounts charged against
the 2001 plans as of December 31, 2001 were as follows:

<Table>
<Caption>


                                                                          ADJUSTMENTS
                                                        BEGINNING            AND            DECEMBER 31,
 (In millions)                                          ACCRUAL          EXPENDITURES          2001
 -------------                                       ---------------   ---------------   ---------------

<S>                                                  <C>               <C>               <C>
 Employee separations                                $           476   $           245   $           231
 Facility closure costs                                           40                15                25
 Other exit costs                                                 24                16                 8
                                                     ---------------   ---------------   ---------------
                                                     $           540   $           276   $           264
                                                     ===============   ===============   ===============
</Table>

         The accrual at December 31, 2001 includes $164 million related to
future cash payments to employees separated prior to December 31, 2001.


                                       63

<PAGE>
NOTE 13. DERIVATIVE FINANCIAL INSTRUMENTS, CONCENTRATIONS, AND COMMITMENTS,
CONTINGENCIES AND LITIGATION

Derivative Financial Instruments

         Compaq manufactures and sells its products in 200 countries and, as a
result, is exposed to movements in foreign currency exchange rates. The primary
purpose of Compaq's foreign currency hedging activities is to manage the
volatility associated with foreign currency revenues and other assets and
liabilities created in the normal course of business. Compaq primarily utilizes
forward exchange contracts to protect against exposure related to those assets
and liabilities that affect the income statement when remeasured according to
accounting principles generally accepted in the United States. In addition,
Compaq utilizes forward exchange contracts to offset the effect of exchange rate
fluctuations on forecasted expenses expected to be incurred in non-functional
currencies. Compaq also utilizes forward exchange contracts, which qualify as
cash flow hedges. These are intended to offset the effect of exchange rate
fluctuations on forecasted sales. Compaq does not hold or issue financial
instruments for trading purposes nor does it hold or issue leveraged derivative
financial instruments.

         Principal currencies hedged include the Euro, Japanese yen and British
pound sterling. At December 31, 2001 such forward exchange contracts were
recorded at their fair value with gains of $167 million and losses of $59
million and are reflected in leases and other accounts receivable or other
current liabilities in Compaq's consolidated balance sheet. The maturity dates
of the forward exchange contracts outstanding at December 31, 2001 ranged from
three days to two years.

         Compaq's program to reduce currency exposure associated with the net
monetary assets of Compaq's international subsidiaries includes agreements to
exchange various foreign currencies for U.S. dollars. Gains and losses resulting
from these contracts offset the foreign exchange gains or losses on the
underlying assets or liabilities being hedged and are recorded in other income
and expense.

         For forward exchange contracts designated as cash flow hedges, gains
and losses are recorded in other comprehensive income until the foreign currency
denominated sales transactions are recognized in earnings. For the year ended
December 31, 2001 net gains on derivatives of $26 million were reclassified to
net revenues to match the underlying sales transactions being hedged. Forward
exchange contracts are used to hedge a portion of forecasted foreign currency
denominated sales for up to 6 months in the future. Hedge ineffectiveness had no
material impact on earnings for the year ended December 31, 2001. No cash flow
hedges were discontinued during the year ended December 31, 2001. Compaq
estimates that net derivative gains of $14 million included in accumulated other
comprehensive income at December 31, 2001 will be reclassified into earnings
during the next twelve months.

         Compaq enters into various other types of financial instruments in the
normal course of business. Fair values for certain financial instruments are
based on quoted market prices. For other financial instruments, fair values are
based on the appropriate pricing models using current market information. The
amounts ultimately realized upon settlement of these financial instruments will
depend on actual market conditions during the remaining life of the instruments.
Carrying values of cash and cash equivalents, accounts receivable, accounts
payable and other current liabilities reflected in the December 31, 2001 and
2000 consolidated balance sheet approximate fair value at these dates.


                                       64
<PAGE>
Concentrations of risk

         Compaq participates in a highly volatile industry that is characterized
by intense industry-wide competition for market share. Industry participants
confront aggressive pricing practices, continually changing customer demand
patterns and rapid technological developments. Compaq's operating results could
be adversely affected should Compaq be unable to successfully anticipate
customer demand accurately, manage its product transitions, inventory levels and
manufacturing processes efficiently, distribute its products quickly in response
to customer demand, differentiate its products from those of its competitors or
compete successfully in the markets for its new products.

         Compaq depends on many third-party suppliers for key components
contained in its product offerings and certain other supply chain functions. For
some of these components, Compaq may only use a single source supplier. From
time to time, the supply for key components in its products lags behind
worldwide demand. If the supply of a key material component is delayed or
curtailed, Compaq's ability to ship the related product in desired quantities
and in a timely manner could be adversely affected. In the event that the
financial condition of Compaq's third-party suppliers for key components was to
erode, the delay or curtailment of deliveries of key material components could
occur. Further, Compaq's reliance on third-party suppliers of key material
components exposes it to potential product quality issues that could affect the
reliability and performance of its product set. Compaq's inability to ship its
products in desired quantities and in a timely manner due to a delay or
curtailment of the supply of material components, or product quality issues
arising from faulty components manufactured by third-party suppliers, could
adversely affect the market for its products and lead to a reduction in its
revenues. Compaq's attempts to mitigate the risk of reliance on third-party
suppliers by working closely on product plans, coordinated product
introductions, purchases on the spot market and selected strategic purchases
could also fail.

         Compaq's cash and cash equivalents, foreign currency forward exchange
contracts and accounts receivable are subject to potential credit risk. Compaq's
cash management, foreign currency and investment policies restrict investments
to low risk, highly liquid securities and Compaq performs ongoing evaluations of
the relative credit standing of the financial institutions with which it deals.

         Compaq distributes a significant portion of its sales in the Access
business segment through indirect distributors and resellers and as a result,
maintains individually significant accounts receivable balances from those
companies. If the financial condition and operations of these companies
deteriorate, Compaq's operating results could be adversely affected. One such
distributor, Ingram Micro, Inc., ("Ingram") accounted for approximately 11
percent of consolidated revenue in 2001, predominantly in the Access segment and
6 percent of accounts receivable as of December 31, 2001. In 2000, Ingram
accounted for approximately 14 percent of consolidated revenue and 11 percent of
accounts receivable at December 31, 2000. During these periods, no other
customer of Compaq accounted for 10 percent or more of consolidated revenue.
Compaq generally has experienced longer accounts receivable cycles in its
emerging markets, in particular Asia-Pacific and Latin America, when compared
with its United States and European markets. In the event that accounts
receivable cycles in these developing markets significantly deteriorate or one
or more of Compaq's larger resellers in these regions fails, Compaq's operating
results could be adversely affected.

         Compaq frequently utilizes forward exchange contracts to protect Compaq
from the effects of foreign currency. In the event of a failure to honor one of
these foreign currency forward exchange contracts by one of the banks with which
Compaq has contracted, management believes any loss, which could be material,
would be limited to the exchange rate differential from the time the contract
was made until the time it was compensated.


                                       65
<PAGE>

Lease commitments

         Compaq leases certain manufacturing and office facilities and equipment
under non-cancelable operating leases with terms from one to thirty years. Rent
expense for 2001, 2000 and 1999 was $343 million, $347 million and $283 million,
respectively.

         Compaq's minimum rental commitments under non-cancelable operating
leases at December 31, 2001 were approximately $233 million in 2002, $185
million in 2003, $125 million in 2004, $108 million in 2005, $90 million in
2006 and $348 million thereafter.

Contingencies

         Certain of Compaq's resellers finance a portion of their inventories
through third-party finance companies. Under the terms of the financing
arrangements, Compaq may be required to repurchase certain products from the
finance companies. These arrangements have not had a material adverse effect on
Compaq's operating results in the past. Further, Compaq does not expect to incur
material charges related to these arrangements in future periods, as Compaq
would likely resell any repurchased product.

Litigation

         Compaq is subject to legal proceedings and claims that arise in the
ordinary course of business. Compaq does not believe that the outcome of any of
those matters will have a material adverse effect on Compaq's consolidated
financial position, operating results or cash flows.

         Compaq and certain of its current and former officers and directors are
named in two consolidated class action lawsuits pending in the United States
District Court for the Southern District of Texas, Houston Division ("USDC -
Houston"). One lawsuit was filed in 1998 and the other in 1999. The 1998
litigation consolidates five class action lawsuits brought by persons who
purchased Compaq common stock from July 10, 1997 through March 6, 1998. It
asserts claims under Section 10(b) of the Securities Exchange Act of 1934
("Exchange Act") and Rule 10b-5 promulgated thereunder and Section 20(a) of the
Exchange Act. Allegations in the 1998 lawsuit include the claim that the
defendants withheld information and made misleading statements about channel
inventory and factoring of receivables in order to inflate the market price of
Compaq's common stock and further alleges that certain individual defendants
sold Compaq common stock at the inflated prices. The 1999 litigation also
consolidates a number of class action lawsuits. The litigation is brought on
behalf of purchasers of Compaq common stock between January 27, 1999 and April
9, 1999. It asserts claims for alleged violations of Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder, Section 20(a) of the
Exchange Act, and Sections 11 and 15 of the Securities Act of 1933 ("Securities
Act"). Allegations in the 1999 litigation include the claim that certain
defendants and Compaq issued a series of materially false and misleading
statements concerning Compaq's prospects in 1999 in order to inflate the market
price of Compaq's common stock and further alleges that certain individual
defendants sold Compaq common stock at the inflated prices. Lead counsels for
the plaintiffs have been appointed in both the 1998 and 1999 litigation. The
plaintiffs seek monetary damages, interest, costs and expenses in both the 1998
and 1999 litigation. In the 1998 litigation, USDC - Houston entered an order
granting class certification. Compaq appealed class certification to United
States Court of Appeals for the Fifth Circuit ("Fifth Circuit Appellate Court").
On July 25, 2001, Fifth Circuit Appellate Court vacated USDC - Houston's order
certifying a class and appointing class representatives and remanded the case to
USDC - Houston for further proceedings in accordance with its opinion. On August
8, 2001, plaintiffs' filed a petition for rehearing before Fifth Circuit
Appellate Court. Compaq filed an opposition to the petition. On January 14,
2002, the Fifth Circuit Appellate Court denied plaintiffs' petition for
rehearing. The case returns to USDC - Houston for further proceedings in
accordance with the Fifth Circuit Appellate Court's earlier opinion. All
discovery on the 1998 litigation has been stayed during the appeal. On December
12, 2000,


                                       66
<PAGE>

USDC-Houston judge dismissed the consolidated amended complaint in the 1999
litigation after finding that it failed to comply with pleading requirements
under the law. The plaintiffs filed a second amended complaint on January 31,
2001. Compaq moved to dismiss the second amended complaint on March 6, 2001 and
is awaiting a ruling. Compaq is vigorously defending both lawsuits.

         Several purported class action lawsuits were filed against Digital
during 1994 alleging violations of Federal securities laws arising from alleged
misrepresentations and omissions in connection with Digital's issuance and sale
of Series A 87/8 percent Cumulative Preferred Stock and Digital's financial
results for the quarter ended April 2, 1994. During 1995, the lawsuits were
consolidated into three cases, which were pending before the United States
District Court for the District of Massachusetts. Compaq settled all remaining
class action lawsuits relating to this matter for approximately $5 million on
July 11, 2001.

         Compaq is vigorously defending several consumer class action lawsuits
alleging certain defects in its computers. One set of five related cases,
involving claims in North Carolina, Illinois, Texas, Washington and California
state courts with respect to certain desktop computers sold in 1996 and 1997, is
in the process of being resolved. A Texas court has preliminarily approved a
proposed settlement agreement under which Compaq will offer some combination of
cash, coupons and software updates to qualifying class members. If approved,
Compaq believes that this settlement will not have a material adverse effect on
Compaq's consolidated financial position or its results of operations. Two other
consumer class action lawsuits, (LaPray v. Compaq and Sprung v. Compaq) are part
of a series of similar lawsuits filed against other major computer
manufacturers, involving claims that the computer industry sold computers with
allegedly defective floppy disk controllers. LaPray is pending in the District
Court of Jefferson County, Texas, 60th Judicial District in Beaumont ("State
District Court - Beaumont") while Sprung is pending in the United States
District Court for the District of Colorado ("USDC - Colorado"). A class
certification hearing was held in LaPray on June 8, 2001. State District Court -
Beaumont entered an order granting class certification on July 23, 2001. Compaq
has appealed the class certification order. The Sprung case has been stayed
while USDC - Colorado considers Compaq's motion to dismiss. Compaq continues to
provide information to the Federal government and state attorneys general in
California and Illinois in response to inquiries regarding floppy disk
controllers in computers sold to government entities.


                                       67
<PAGE>

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

         The table below sets forth selected unaudited financial data for each
quarter of the last two years.

<Table>
<Caption>
                                                                   1ST        2ND        3RD        4TH
(In millions, except per share amounts)                          QUARTER    QUARTER    QUARTER    QUARTER
---------------------------------------                          -------    -------    -------    -------
<S>                                                              <C>        <C>        <C>        <C>
2001(1)
Revenue                                                          $ 9,181    $ 8,481    $ 7,436    $ 8,456
Gross margin                                                       2,076      1,846      1,445      1,745

Income (loss) before cumulative effect of accounting change(2)        91       (239)      (507)        92
  Basic earnings (loss) per common share(3)                      $  0.05    $ (0.14)   $ (0.30)   $  0.05
  Diluted earnings (loss) per common share(3)                    $  0.05    $ (0.14)   $ (0.30)   $  0.05

Net income (loss)(4)                                                (131)      (239)      (507)        92
  Basic earnings (loss) per common share(3)                      $ (0.08)   $ (0.14)   $ (0.30)   $  0.05
  Diluted earnings (loss) per common share(3)                    $ (0.08)   $ (0.14)   $ (0.30)   $  0.05

2000(1)
Revenue                                                          $ 9,475    $10,098    $11,171    $11,478
Gross margin                                                       2,154      2,351      2,637      2,663

Income (loss) before cumulative effect of accounting change(5)       322        388        557       (672)
      Basic earnings (loss) per common share(3)                  $  0.19    $  0.23    $  0.32    $ (0.39)
      Diluted earnings (loss) per common share(3)                $  0.19    $  0.22    $  0.31    $ (0.39)

Net income (loss) (4)                                                296        388        557       (672)
      Basic earnings (loss) per common share(3)                  $  0.17    $  0.23    $  0.32    $ (0.39)
      Diluted earnings (loss) per common share(3)                $  0.17    $  0.22    $  0.31    $ (0.39)
</Table>

(1)  Pursuant to the adoption of EITF 01-9 effective January 1, 2001, Compaq has
     adjusted its results for the first three quarters of 2001 and reclassified
     charges related to certain financing costs to conform to the new
     presentation for all periods shown.

(2)  Includes restructuring and related charges of $249 million and $493 million
     in the first and second quarters of 2001, respectively, and net investment
     losses of $514 million in the third quarter of 2001.

(3)  Earnings (loss) per common share are computed independently for each of the
     quarters presented and therefore may not sum to the total for the year.

(4)  Includes a cumulative effect charge related to the adoption of EITF 01-9 of
     $222 million, net of tax, in the first quarter of 2001 and a cumulative
     effect charge related to the adoption of SAB 101 of $26 million, net of
     tax, in the first quarter of 2000.

(5)  Includes an $86 million release of restructuring reserves and net
     investment losses of $1.7 billion in the fourth quarter of 2000.


                                       68
<PAGE>

REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Stockholders of Compaq Computer Corporation

We have audited the consolidated financial statements of Compaq Computer
Corporation as of December 31, 2001 and 2000 and for each of the two years in
the period ended December 31, 2001 and have issued our report thereon dated
January 16, 2002 (included elsewhere in this Annual Report on Form 10-K). Our
audits also included the financial statement schedule as of December 31, 2001
and 2000 and for each of the two years in the period ended December 31, 2001
listed in Item 14(a) of this Annual Report on Form 10-K. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.


                                       Ernst & Young LLP

Houston, Texas
January 16, 2002


                                       69
<PAGE>

                      REPORT OF INDEPENDENT ACCOUNTANTS ON
                          FINANCIAL STATEMENT SCHEDULE

To the Stockholders and Board of Directors
of Compaq Computer Corporation

Our audit of the consolidated financial statements referred to in our report
dated January 25, 2000 appearing in this Annual Report on Form 10-K of Compaq
Computer Corporation also included an audit of the financial statement schedule
listed in Item 14(a) of this Form 10-K for the year ended December 31, 1999. In
our opinion, the financial statement schedule for the year ended December 31,
1999 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. We have not audited the consolidated financial statements or
financial statement schedule of Compaq Computer Corporation for any period
subsequent to December 31, 1999.



PricewaterhouseCoopers LLP
Houston, Texas
January 25, 2000

                                       70
<PAGE>
                                                                     SCHEDULE II

                           COMPAQ COMPUTER CORPORATION
                        VALUATION AND QUALIFYING ACCOUNTS

<Table>
<Caption>
Year ended December 31 (In millions)                  2001      2000      1999
------------------------------------                  -----     -----     -----
<S>                                                   <C>       <C>       <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance, beginning of period                          $ 211     $ 222     $ 318
Additions charged to expense                             98        82        43
Deductions (Accounts receivable write-offs)             (79)      (93)     (139)
                                                      -----     -----     -----
Balance, end of period                                $ 230     $ 211     $ 222
                                                      -----     -----     -----
</Table>


                                       71
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURES.

        None.


                                       72
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following persons are directors of Compaq Computer Corporation ("Compaq").

LAWRENCE T. BABBIO, JR., age 57, has been a director of Compaq since 1995. Mr.
Babbio has served as Vice Chairman and President of Verizon Communications, Inc.
(formerly Bell Atlantic Corporation ("Bell Atlantic")) since 2000. In 1997 he
was elected President and Chief Operating Officer - Network Group, and Chairman
- Global Wireless Group of Bell Atlantic. In 1995, he was elected Vice Chairman
of Bell Atlantic. Mr. Babbio is also a director of ARAMARK Corporation.

MICHAEL D. CAPELLAS, age 47, was elected Chairman and Chief Executive Officer of
Compaq in 2000. Prior to that time he served as President and Chief Executive
Officer and was appointed a director in 1999, and also served as Chief Operating
Officer earlier that year. Mr. Capellas joined Compaq in 1998 as Senior Vice
President, Information Management and Chief Information Officer. Prior to
joining Compaq, he was Senior Vice President and General Manager of the global
energy business of Oracle Corporation from 1997 through 1998, and Director of
Supply Chain Management for SAP America, Inc. from 1996 through 1997. From 1981
through 1996, Mr. Capellas held several management positions at Schlumberger
Limited, including serving as head of worldwide information services. Mr.
Capellas also serves as a director of Dynegy, Inc.

JUDITH L. CRAVEN, age 56, has been a director of Compaq since 1998. Dr. Craven
served as President of the United Way of the Texas Gulf Coast from 1992 to 1998.
Prior to heading the United Way of the Texas Gulf Coast, Dr. Craven was Vice
President for Multicultural Affairs at the University of Texas Health Science
Center at Houston, and Dean of the School of Allied Health Sciences; Director of
Public Health for the City of Houston; and Chief of Anesthesia at Riverside
General Hospital. Dr. Craven serves on the Boards of Directors at Belo Corp.,
Valic Corporation, Luby's, Inc., SYSCO Corporation and Sun America Mutual Funds.

GEORGE H. HEILMEIER, age 65, has been a director of Compaq since 1994. Dr.
Heilmeier is Chairman Emeritus of Telcordia Technologies (formerly Bell
Communications Research, Inc. ("Bellcore")). He served as Chairman and Chief
Executive Officer of Bellcore from 1996 to 1997 and President and Chief
Executive Officer from 1991 to 1996. He was Senior Vice President and Chief
Technical Officer of Texas Instruments Incorporated from 1983 to 1991. He is a
member of the Defense Science Board, the President's National Security Agency
Advisory Board and the National Academy of Engineering. Dr. Heilmeier is also a
director of TRW, Inc., Teletech Holdings, Automatic Data Processing, and INET
Technologies, Inc.

SANFORD M. LITVACK, age 65, has been a director of Compaq since 2001. Mr.
Litvack is of counsel with the law firm of Dewey Ballantine LLP. Mr. Litvack
served as Vice Chairman of the Board of The Walt Disney Company ("Disney") from
1999 to 2000. From 1994 until his appointment as Vice Chairman, he served as
Senior Executive Vice President and Chief of Corporate Operations. Prior to
joining Disney in 1991, Mr. Litvack was a member of the Executive Committee and
Chairman of the Litigation Department of Dewey Ballantine LLP. Mr. Litvack is
also a director of PacifiCare Health Systems, Inc. and Antigenics, Inc.

THOMAS J. PERKINS, age 70, has been a director of Compaq since 1997. Mr. Perkins
has been a General Partner of Kleiner Perkins Caufield & Byers, a private
investment partnership, since 1972, and has served as either a general or
limited partner of numerous funds formed by Kleiner Perkins Caufield & Byers.
Mr. Perkins served as Chairman of the Board of Directors of Tandem Computers
Incorporated from 1974 until 1997. He is also a director of News Corporation.


                                       73
<PAGE>

LUCILLE S. SALHANY, age 55, has served as a director of Compaq since 1997. She
has been Chief Executive Officer and President of LifeFX Networks, Inc. since
1999. She was President of J.H. Media Limited from 1997 to 1999. Ms. Salhany
served as President and Chief Executive Officer of United Paramount Network from
1994 to 1997. From 1993 to 1994, she served as Chairman of FOX Broadcasting
Company and she was a member of the Board of Directors of Fox Inc. From 1991 to
1993 she served as Chairman of Twentieth Century Fox Television. Ms. Salhany is
a director of Boston Restaurant Associates, Inc., LifeFX, Inc., and iMedium.

The following persons are executive officers of Compaq.

MICHAEL D. CAPELLAS, whose biographical information is set forth above in Item
10.

PETER BLACKMORE, age 54, was elected Executive Vice President, Worldwide Sales
and Services in 2000. Prior to that time, Mr. Blackmore served as Senior Vice
President, Sales and Services earlier in 2000, and Senior Vice President, Sales
and Marketing from 1999. Mr. Blackmore joined Compaq in 1991 as Manager, Major
Accounts Marketing, Europe, and served in a number of senior sales and marketing
positions.

MICHAEL J. WINKLER, age 56, was elected Executive Vice President, Global
Business Units in 2000. Prior to that time, Mr. Winkler was Senior Vice
President and Group General Manager, Commercial Personal Computing Group, a
position to which he was elected in 1996. Mr. Winkler joined Compaq in 1995 as
Senior Vice President, Portable PC Division. Prior to joining Compaq, Mr.
Winkler was Vice President and General Manager of Toshiba Computer Systems.

JEFF CLARKE, age 40, was elected Senior Vice President, Finance and
Administration and Chief Financial Officer in 2001. Prior to that time, Mr.
Clarke was Vice President, Finance and Strategy, Worldwide Sales and Services
from 1999 and Vice President, Corporate Strategy, Finance, from 1998. Mr. Clarke
joined Digital Equipment Corporation ("Digital") in 1985 and served in a variety
of financial management roles prior to Compaq's acquisition of Digital in 1998.

YVONNE R. JACKSON, age 52, joined Compaq in 1999 as Senior Vice President, Human
Resources, Organization and Environment. Prior to joining Compaq, Ms. Jackson
was Senior Vice President of Worldwide Human Resources for Burger King
Corporation, a position she had held since 1993.

ROBERT V. NAPIER, age 55, was elected Senior Vice President, Global Business
Solutions and Chief Information Officer in 2000. Mr. Napier joined Compaq in
August 1999 as Senior Vice President, Information Management and Chief
Information Officer. Prior to joining Compaq, he was Senior Vice President and
Chief Information Officer of Mariner Post-Acute Network, a position he had held
since 1998, and Chief Information Officer of Delphi Automotive Systems from 1997
to 1998.

SHANE V. ROBISON, age 48, joined Compaq in 2000 as Senior Vice President,
Technology and Chief Technology Officer. Prior to joining Compaq, Mr. Robison
was President of Internet Technology and Development at AT&T Labs, a position he
had held since 1999. Prior to AT&T Labs, he was Executive Vice President,
Research and Development and then President, Design Productivity Group, of
Cadence Design Systems, Inc., from 1995 to 1999.

THOMAS C. SIEKMAN, age 60, was elected Senior Vice President and General Counsel
in 1998 at the time of Compaq's acquisition of Digital. Mr. Siekman had been
Vice President and General Counsel of Digital since 1993. Prior to 1993, he was
Vice President and Deputy General Counsel of Digital.


                                       74
<PAGE>

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires Compaq's directors and executive officers, and holders of more than 10
percent of Compaq's common stock, to file with the SEC initial reports of
ownership and reports of changes in ownership of Compaq's common stock. Compaq
believes that during the fiscal year ended December 31, 2001, except for one
delayed filing by Mr. Robison concerning his acquisition of Compaq stock in the
Deferred Compensation Plan, its directors and executive officers complied with
all of these filing requirements. In making this statement, Compaq has relied
solely on a review of copies of reports filed under Section 16(a) furnished to
Compaq and on the written representations of its directors and executive
officers. Based on stockholder public filings with the SEC, we do not believe
any other stockholders are subject to Section 16(a) filing requirements.


                                       75
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

Tables I through III give information about the cash compensation, restricted
stock, and stock options awarded to each of the named executive officers. The
notes to these tables provide more specific information. Compaq's compensation
policies are discussed in the Human Resources Committee Report set forth below.

TABLE I: SUMMARY COMPENSATION

<Table>
<Caption>
                                                ANNUAL COMPENSATION(1)                          LONG-TERM COMPENSATION
                                     ---------------------------------------------   --------------------------------------------
                                                                                     RESTRICTED     SECURITIES
                                                                    OTHER ANNUAL       STOCK        UNDERLYING       ALL OTHER
         NAME                 YEAR     SALARY       BONUS(2)       COMPENSATION(3)    AWARDS(4)       OPTIONS     COMPENSATION(5)
         ----                 ----   -----------   -----------     ---------------   -----------    ----------    ---------------
<S>                           <C>    <C>           <C>              <C>              <C>               <C>          <C>
Michael D. Capellas           2001   $ 1,600,000   $        --      $ 2,132,940(6)   $        --       850,000      $    96,000
Chairman and Chief            2000     1,234,641     3,806,330          139,293       24,444,000       850,000           73,431
Executive Officer             1999       850,000     1,000,000               --        4,987,500     1,800,000           76,739

Peter Blackmore               2001       640,385            --               --               --       400,000           10,200
Executive Vice President,     2000       511,885       858,139           86,506        1,916,600       475,000           10,200
Worldwide Sales and           1999       425,000       400,000               --               --       525,000           48,720
Services

Michael J. Winkler            2001       620,192            --               --               --       350,000           37,212
Executive Vice President,     2000       593,517       702,630               --        1,642,800       450,000           31,783
Global Business Units         1999       500,000       250,000               --               --       325,000          144,554

Jeff Clarke
Senior Vice President,
Finance and Administration
and Chief Financial Officer   2001       469,710            --               --               --       425,000(7)        13,769

Shane V. Robison
Senior Vice President,
Technology and                2001       500,000            --               --               --       225,000               --
Chief Technology Officer      2000        92,307     1,000,000(8)            --        1,126,000       500,000            5,538
</Table>

(1)  Includes cash compensation earned by the named executive officers,
     including amounts earned but deferred. Mr. Robison joined Compaq as an
     executive officer in 2000 and Mr. Clarke first became an executive officer
     of Compaq in 2001.

(2)  Unless otherwise indicated, amounts reflected include payments under
     Compaq's management incentive program and profit-sharing program. No
     payments were made under either program for 2001 performance.

(3)  Compaq believes that the value of any other benefits to any named executive
     officer other than Mr. Capellas in 2001 did not exceed $50,000 or fall
     within any other category requiring inclusion.


                                       76
<PAGE>

(4)  In connection with his being named Chairman of the Board of Directors,
     Compaq granted Mr. Capellas 970,000 shares of restricted common stock in
     2000. This restricted stock vests as follows: 500,000 shares vest only upon
     attainment of certain performance objectives (250,000 based upon attainment
     of stock price targets and 250,000 based upon relative earnings per share
     ("EPS") growth over three consecutive four-quarter performance periods, the
     first of which ended in third quarter 2001 but, because performance targets
     were not met, none of the restrictions lapsed); 300,000 vest in increments
     of 100,000 each on November 1, 2001, 2002, and 2003, respectively; and
     170,000 shares vested thirty days from the date of the grant. The
     restricted stock granted to Mr. Capellas in 1999 vests on the fifth
     anniversary of his election if he is then an employee of Compaq, subject to
     earlier vesting as follows: 50,000 of such shares vest if the price of
     Compaq's common stock, $.01 par value per share, is at least $35 per share
     for thirty consecutive trading days, 50,000 of such shares vest if such
     price is at least $40 per share, and 100,000 of such shares vest if such
     price is at least $50 per share. The restricted stock granted to the other
     named officers was granted on May 15, 2000, with the exception of Mr.
     Robison, who was granted 40,000 shares upon hire (October 25, 2000), and
     vests based on the attainment of performance objectives approved by the
     Committee (for 2001, quarterly EPS targets were used and no restrictions
     lapsed in 2001 because performance criteria were not met), with full
     vesting in May 2004 if the shares have not vested previously as a result of
     performance. Per the terms of the governing Equity Incentive Plan and
     executive agreements, this restricted stock will vest fully upon a change
     in control. No dividends are paid on unvested shares of this restricted
     stock. The dollar value of restricted stock reported in the table was
     calculated by multiplying the number of shares awarded by the closing price
     on the date of the grants, which was $27.38 for Messrs. Blackmore and
     Winkler and $28.15 for Mr. Robison.

     The dollar value of restricted stock held by each executive officer as of
     December 31, 2001 is as follows, based on $9.76 per share, the closing
     price of Compaq's common stock on December 31, 2001:

<Table>
<Caption>
                       Number of Restricted            Value of Restricted
     Executive       shares as of 12/31/2001         Shares as of 12/31/2001
     ---------       -----------------------         -----------------------
<S>                  <C>                             <C>
     Capellas                900,000                       $8,784,000
     Blackmore                52,500                          512,400
     Winkler                  45,000                          439,200
     Robison                  40,000                          390,400
</Table>

(5)  Unless otherwise stated, amounts in this column consist of contributions by
     Compaq to Compaq's defined contribution plan, deferred compensation plan,
     and/or supplemental savings plan. The amounts for 1999 include deferred
     unfunded bonuses, the payment of which was subject to conditions
     established by the Human Resources Committee, of $40,000 to Mr. Capellas,
     $48,720 to Mr. Blackmore, and $110,000 to Mr. Winkler.

(6)  Includes value of loan forgiveness in the amount of $2,033,006, and $99,934
     of imputed income associated with company-paid financial and legal
     services, family members' travel when accompanying Mr. Capellas on
     business, club dues, and gross-up for taxes imposed on certain of those
     amounts. The loan forgiveness occurred pursuant to Mr. Capellas' 2000
     employment agreement, which provides that one-third of the balance of a
     $5,000,000 loan to purchase stock made to Mr. Capellas in 1999, including
     accrued interest on the loan, would be forgiven on November 1, 2001, with
     half of the remaining balance to be forgiven on November 1, 2002 and the
     final balance on November 1, 2003 so long as Mr. Capellas remains employed.
     In accordance with federal income tax requirements, Mr. Capellas was taxed
     on the full amount of the loan forgiveness upon entering into the
     employment agreement in 2000 although the conditions to the forgiveness had
     not yet been met.

(7)  Includes a grant of 175,000 shares in March 2001 upon becoming an executive
     officer and a grant of 250,000 shares effective December 13, 2001 as part
     of annual grant program.

(8)  Mr. Robison received a sign-on bonus in the amount of $1,000,000, repayable
     to Compaq in the event that Mr. Robison voluntarily resigns from Compaq or
     is discharged for cause within the first two years of his employment.


TABLE II: 2001 STOCK OPTION EXERCISES AND YEAR-END OPTION VALUES

<Table>
<Caption>
                                                                                            VALUE OF
                                                       NUMBER OF UNEXERCISED        UNEXERCISED IN-THE-MONEY
                     2001 STOCK OPTION EXERCISES   OPTIONS AT DECEMBER 31, 2001   OPTIONS AT DECEMBER 31, 2001
                     ---------------------------   ----------------------------   ----------------------------
                     SHARES       VALUE REALIZED   EXERCISABLE    UNEXERCISABLE   EXERCISABLE    UNEXERCISABLE
                     ------       --------------   -----------    -------------   -----------    -------------
<S>                  <C>          <C>              <C>            <C>             <C>            <C>
Michael D. Capellas    --            $   --         1,185,843       2,514,157       $     --        $   --
Peter Blackmore        --                --           852,915       1,084,585        516,000            --
Michael J. Winkler     --                --         1,376,674       1,094,990             --            --
Jeff Clarke            --                --            96,370         555,290             --            --
Shane V. Robison       --                --           145,833         579,167             --            --
</Table>


                                       77
<PAGE>

TABLE III: 2001 STOCK OPTION GRANTS

<Table>
<Caption>
                                                                                              GAIN BASED ON
                                                                                      ASSUMED RATES OF STOCK PRICE
                                        2001 STOCK OPTIONS GRANTS                    APPRECIATION FOR OPTION TERM(1)
                                     -------------------------------                 -------------------------------
                                     PERCENT OF 2001   EXERCISE/BASE
                         OPTIONS     EMPLOYEE OPTION     PRICE PER      EXPIRATION   ASSUMED RATE      ASSUMED RATE
                        GRANTED(2)       GRANTS            SHARE           DATE            5%               10%
                        ----------   ---------------   -------------    ----------   ------------      ------------
<S>                     <C>          <C>               <C>              <C>          <C>               <C>
Michael D. Capellas       850,000          1.27%          $ 9.79        12/12/2011    $5,233,391        $13,262,307

Peter Blackmore           400,000          0.60%            9.79        12/12/2011     2,462,772          6,241,086

Michael J. Winkler        350,000          0.52%            9.79        12/12/2011     2,154,926          5,460,950

Jeff Clarke               175,000          0.26%           18.50         3/14/2011     2,036,064          5,159,733
                          250,000          0.37%            9.79        12/12/2011     1,539,233          3,900,679

Shane V. Robison          225,000          0.34%            9.79        12/12/2011     1,385,309          3,510,611

ALL STOCKHOLDERS:
Approximately
1.7 billion shares
outstanding on
December 13, 2001           N/A             N/A             N/A            N/A       $10.5 billion     $26.5 billion

Named executive
officers' gains as a
percent of all
stockholders' gains                                                                        0.14%               0.14%
</Table>

(1)  The potential gain is calculated from the closing price of Compaq common
     stock on the date of grants to the named executive officers. These amounts
     represent certain assumed rates of appreciation only. Actual gains, if any,
     on stock option exercises and Compaq common stock holdings are dependent on
     the future performance of Compaq common stock.

(2)  Option grants vest over 48 months from the date of grant and expire upon
     the earlier of one year after termination of employment or ten years from
     the date of grant. Options granted prior to September 1, 2001 will vest
     upon stockholder approval of the proposed merger with Hewlett-Packard
     Company ("HP"), and employees who incur a severance-qualifying termination
     as a result of the merger within one year of the closing will have three
     years from the date of termination to exercise those options. Options
     granted after September 1, 2001 will not vest upon stockholder approval of
     the proposed HP merger but will vest if the employee incurs a
     severance-qualifying termination as a result of the merger within one year
     of the closing, with the employee having one year from the date of
     termination to exercise those options.

         Compaq entered into a new employment agreement with Mr. Capellas in
October 2000 upon his appointment as Chairman of the Board. That agreement was
amended effective November 1, 2001. Under this employment agreement, which has a
three-year initial term and is renewable annually thereafter, Mr. Capellas
receives an annual base salary of no less than $1.6 million and is eligible for
a target annual cash bonus of two times his base salary. The actual amount of
any such cash bonus will be based on performance. Mr. Capellas is also eligible
for long-term incentives, including stock options and other performance-based
rewards, on the same basis as other executive officers. The total target value
of Mr. Capellas' long-term incentive opportunity, on an annual basis, is seven
to ten times his base salary.


                                       78
<PAGE>

         Upon entering into the 2000 employment agreement, Mr. Capellas was
granted 970,000 shares of restricted stock under Compaq's 1989 Equity Incentive
Plan. This restricted stock vests partially over time and partially based only
on performance. More specifically, 170,000 shares vested thirty days from the
date of the grant, and another 300,000 shares vest over time, with 100,000
shares vesting on November 1, 2001 and another 200,000 shares to vest in
increments of 100,000 each on November 1, 2002, and November 1, 2003. The
remaining 500,000 shares will vest only upon attainment of certain performance
objectives. Of those 500,000 shares, 250,000 will vest based on Compaq's stock
performance. The other 250,000 shares will vest based on relative growth in EPS
(compared to the average growth in EPS for International Business Machines,
Inc., HP, and Dell Computer Corporation over three four-quarter performance
periods. The performance objectives for vesting were not met during 2001, and,
as a result, Mr. Capellas did not vest in any of these performance-based shares
during 2001. If the performance objectives are not met in the periods allowed
(by November 1, 2004 for stock price targets and through third quarter of 2003
for relative growth in EPS), Mr. Capellas will no longer be eligible to vest in
these shares.

         The 2000 employment agreement also provides that Compaq will forgive,
over a three-year retention period, the balance of a $5 million loan made to Mr.
Capellas under his original employment agreement (at an interest rate of 5.67
percent per annum), which was used to purchase Compaq stock. The first third of
the principal of the loan and the accrued interest (a total of $2,033,006) were
forgiven on November 1, 2001, with half of the then-remaining balance to be
forgiven on November 1, 2002 and the final balance on November 1, 2003. The
agreement provided for payment of a special one-time cash bonus of $850,000,
which was paid in 2000, and a tax-assistance loan (at an interest rate of 6.09
percent per annum) of $2.5 million to help defray the immediate tax impact of
the future loan forgiveness and partial vesting of the restricted stock.

         Mr. Capellas will be eligible for severance benefits, including
separation payments totaling three times his annual base salary, under certain
qualifying circumstances. In particular, Mr. Capellas will be deemed to have
incurred a Qualifying Termination entitling him to severance benefits if his
employment is terminated without cause, if he resigns for Good Reason (which
includes removal from the position of Chief Executive Officer or failure to be
named Chief Executive Officer following a change in control, removal
from/failure to be elected Chairman of the Board, assignment of duties
inconsistent with his position, receipt of a notice of non-renewal of his
employment agreement, or a material reduction in total target compensation that
is not part of an across-the-board reduction for other executive officers), or
if his employment is involuntarily terminated for any reason within 180 days of
a change in control. In the event of a Qualifying Termination, the agreement
also provides for accelerated or continued vesting in certain portions of the
restricted stock granted to Mr. Capellas under both the amended 2000 and
original employment agreements, continued vesting in outstanding stock options
over the separation pay period (which is 24 months following termination),
payment of a pro-rated annual incentive, continued health insurance, certain
financial counseling and outplacement services, reimbursement of legal fees, and
accelerated forgiveness of the 1999 loan. In addition, in the event of a
Qualifying Termination within one year following a change in control, Mr.
Capellas will be entitled to a gross-up of any excise taxes imposed under the
Internal Revenue Code. If Mr. Capellas separates from employment with Compaq as
a result of death or disability, he will receive a severance payment of 1.5
times the sum of his base annual salary and his target annual bonus, among other
severance benefits. Mr. Capellas' employment agreement contains restrictions on
competitive activities and solicitation of Compaq employees, and his receipt of
severance benefits is contingent upon his execution of a release of claims.


                                       79
<PAGE>

        Compaq has also entered into severance agreements with its other
executive officers, and these agreements were amended in September 2001. Under
the terms of the agreements, in the event of a Qualifying Termination the
executive officers will be eligible for a severance payment of two times the sum
of their annual salary and target annual incentive (with the amount being
increased to three times in the event of a Qualifying Termination within one
year following a change in control), continued health insurance, certain
financial counseling and outplacement services, and reimbursement of legal fees.
In addition, in the event of a Qualifying Termination within one year following
a change in control, the executives will be entitled to payment of a prorated
target annual incentive and gross-up for any excise taxes imposed under the
Internal Revenue Code. For purposes of these severance agreements, a Qualifying
Termination includes involuntary termination without cause, involuntary
termination for any reason within 180 days after a change in control, and
resignation for Good Reason (defined, generally, as a material reduction in
responsibilities, reduction in base annual salary of 10 percent or more that is
not part of an across-the-board reduction for executive officers, failure to be
named an executive officer of the surviving entity following a change in
control, or receipt of a notice of non-renewal of the severance agreement). The
executive officers are also eligible for a severance payment of 1.5 times the
sum of their base annual salary and target annual bonus if their employment is
terminated due to death or disability. These agreements also contain
restrictions on competitive activities and solicitation of Compaq employees, and
receipt of severance benefits is contingent upon execution of a release of
claims.

         Pursuant to their amended executive severance agreements, Messrs.
Blackmore, Winkler, Clarke and Robison are eligible to receive a retention
payment of 1.5 times the sum of their base annual salary and target annual bonus
upon completion of the proposed merger with HP and a second retention payment of
1.5 times the sum of their base annual salary and target annual bonus one year
following the closing of the merger, provided they remain employed by HP. These
retention payments are contingent upon completion of the merger and will be
offset by any severance payments for which the employee becomes eligible during
the year following completion of the merger. Mr. Capellas declined to
participate in the retention program.

         Compaq's stock option plans provide for full vesting of outstanding
options and restricted stock in the event of a change in control of Compaq.
Pursuant to the amendments to the executive severance agreements and Mr.
Capellas' employment agreement, restricted stock held by these executive
officers will vest upon completion of a transaction constituting a change in
control rather than on stockholder approval of such a transaction.

         Compaq's executive officers in the United States are eligible to
participate in Compaq's defined contribution plan and deferred compensation and
supplemental savings plan. Amounts contributed to the defined contribution plan
and deferred compensation and supplemental savings plan are included in the
Summary Compensation Table under the caption "Executive Compensation."

HUMAN RESOURCES COMMITTEE REPORT

         The Human Resources Committee of the Board of Directors, which is
composed of independent directors, ensures that Compaq's human resource and
compensation policies support and enhance its strategic objectives. The
Committee reviews and advises the Board of Directors about Compaq's human
resource strategies, oversees executive succession planning, adopts the policies
that govern Compaq's compensation programs, sets the compensation of executive
officers, and administers Compaq's cash bonus and stock equity plans.


                                       80
<PAGE>

COMPAQ'S COMPENSATION PROGRAMS. The Committee establishes compensation programs
designed to attract, retain, and reward executives who will lead Compaq in
achieving its business goals in a highly competitive and rapidly changing
industry and ensures that management compensation is reasonable in light of
Compaq's objectives, performance, and compensation for similar personnel at
other companies. In 2001 the compensation mix for executive officers consisted
of base salaries, potential bonuses (though none were paid for 2001
performance), and stock option awards. Much of an officer's compensation depends
on Compaq's financial performance and stockholder return.

         Comparative compensation data in 2001 was derived from an analysis of
independent surveys of compensation practices by Compaq and external
consultants. Information from the computer and electronics industry segments is
used wherever available. The Committee believes these sources provide accurate
information to evaluate the pay practices of the companies with which Compaq
competes to hire and retain executives.

EXECUTIVE OFFICER CASH COMPENSATION. Compaq targets executive base salary ranges
at the 50th to 75th percentile of relevant market data. The Committee annually
establishes each executive officer's overall targeted compensation (base salary,
cash incentives, and equity interests and other long-term incentives), including
the Chief Executive Officer's, based on its evaluation of the officer's
performance and contribution in the previous year and on competitive pay
practices. In January 2001, the Committee approved base pay increases for
executive officers to reflect their individual performance in 2000 and to ensure
competitive compensation practices. However, the Committee determined in January
2002 that salary increases will not be made in 2002 due to the general economic
climate and overall company performance, as well as competitive data on market
practices in reaction to economic and industry downturns. These same factors led
the Committee to decide that no annual cash bonuses would be paid for 2001
performance.

         These decisions, however, were not based on individual performance
assessments, but, rather, as a response to a challenging business environment.
While the bonus program was not funded due to overall company financial
performance and, therefore, individual bonuses will not be paid, the Committee
recognizes the need to focus on individual contributions and reviewed executive
officer performance relative to a number of criteria (focusing on financial
performance, customer satisfaction, operational objectives, and people
management) under Compaq's Balanced Scorecard program.

RETENTION PROGRAM. In light of the uncertainties for employees associated with
the proposed merger with HP, the Committee became concerned that some of
Compaq's key employees, including executive officers, would leave Compaq to
pursue other employment opportunities. In particular, the Committee determined
that the proposed transaction with HP could constitute a change in control for
purposes of the existing executive officer agreements and that many of Compaq's
executive officers could qualify for severance benefits as a result of changes
associated with the merger. In order to aid in retaining these executives and
other key employees, the Committee approved a retention program, which is being
implemented in phases, to provide cash incentives to employees throughout Compaq
who are critical to ongoing business efforts, completion of the proposed merger,
and post-merger integration. As part of this retention effort, the Committee
approved amendments to the existing executive officer agreements to provide that
contingent upon completion of the merger, the executives would be eligible for
retention payments equal to three times the sum of their base salary and target
annual bonus at the time of completion of the merger, payable one-half at
completion of the merger and the remaining amounts one year later, provided the
individual remains employed by HP. The retention payments will be offset by any
severance for which the executive becomes eligible during the year following the
completion of the merger. Mr. Capellas declined to participate in the retention
program.


                                       81
<PAGE>

STOCK EQUITY PLANS. The Human Resources Committee and the Board of Directors
believe that management's ownership of a significant equity interest in Compaq
is an important incentive in building stockholder wealth and aligning the
long-term interests of management and stockholders. Therefore, the Committee
grants stock options at option prices not less than the fair market value of
Compaq common stock on the grant date; as a result, stock options have no value
unless the share price increases over the fair market value on the date of
grant. Option awards contribute to the retention of key executives since
executives realize the benefits of options only as they vest based on tenure
after the grant. The Committee uses competitive market data, historical option
grant practices, and projected value to determine an appropriate range of awards
for executive officers. The Committee establishes ranges for awards to other key
employees based upon level and contribution and delegates to the Chief Executive
Officer the authority to make stock option awards to these employees. The
Committee made annual grants to executive officers and key employees effective
December 13, 2001, at an option price of $9.79.

         The Human Resources Committee also monitors compliance with the
Executive Stock Ownership Policy. The Executive Stock Ownership Policy requires
the Chief Executive Officer to own 250,000 shares and requires each of the other
executive officers to own 10,000 shares for each year as an executive officer.
New executive officers have three years to meet this goal. Mr. Capellas' stock
ownership meets the requirement and all other executive officers either meet or
are making satisfactory progress toward their ownership goals.

         Compaq is subject to Internal Revenue Code Section 162(m), which could
limit the deductibility of certain compensation payments to its executive
officers. Compaq generally intends to comply with the requirements of Section
162(m); however, it also weighs the burdens of such compliance against the
benefits to be obtained by Compaq, and pays compensation that is not fully
deductible if it determines that such payments are in Compaq's best interests.

HUMAN RESOURCES COMMITTEE

         Lawrence T. Babbio, Jr., Chairman
         Judith L. Craven

DIRECTORS' COMPENSATION

         Board members who are not Compaq employees receive an annual retainer
of $35,000. Directors serving on the Audit Committee receive an additional
annual cash retainer of $10,000. Directors serving on the Corporate Governance
Committee or the Human Resources Committee receive an additional cash annual
retainer of $5,000. Each committee chair receives an additional annual cash
retainer of $10,000. Non-employee directors also receive a meeting fee of $1,000
for Board or committee meetings held on a day other than the day of a regularly
scheduled meeting (directors do not receive any fees for regularly scheduled
meetings). Directors are reimbursed for travel and certain other expenses
incurred in connection with their duties as directors.

         Compaq's stock option plans for non-employee directors authorize three
different types of grants. First, each newly-appointed non-employee director
receives an initial option grant for 31,250 shares of common stock; second, each
non-employee director who has been serving more than one year receives an annual
option grant for 25,000 shares of common stock upon re-election; and finally,
prior to each annual meeting each non-employee director may elect to receive all
or a portion of the following year's annual cash retainer in the form of a stock
option grant, for which the number of shares and the exercise price are based
upon 50 percent of the closing price of the common stock on the day of the
annual meeting. The exercise price of the annual stock option grants in 2001 was
$17.00 per share, and the price for the grants in lieu of cash retainer was
$8.50 per share. In January 2001, Mr. Litvack received an initial option grant
with an exercise price of $22.40 per share.


                                       82
<PAGE>

         As part of Compaq's charitable giving strategy, Compaq established a
directors' charitable donation program funded by life insurance. Upon the death
of a director who has served for at least three years, Compaq will donate $1
million to charitable organizations recommended by the director. Compaq will be
reimbursed by life insurance proceeds. Individual directors derive no financial
benefit from this program since Compaq makes all charitable donations. Upon
completion of Compaq's merger with HP, the rights of two non-employee directors
of Compaq, which are not currently vested, will become vested. At such time,
Compaq will end the directors' charitable donation program and make charitable
donations aggregating $12 million on behalf of all participating directors and
former directors.

STOCK PERFORMANCE GRAPH

         The following graph compares Compaq's cumulative total stockholder
return to the S&P 500 Index and the S&P Computers (Hardware) Index over a
five-year period, beginning December 31, 1996, and ending December 31, 2001. The
total stockholder return assumes $100 invested at the beginning of the period in
Compaq common stock, the S&P Computers (Hardware) Index, and the S&P 500 Index.
It also assumes reinvestment of all dividends. Past financial performance should
not be considered to be a reliable indicator of future performance, and
investors should not use historical trends to anticipate results or trends in
future periods.


[GRAPH TO COME]


COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN

<Table>
<Caption>
                                  1996         1997       1998       1999       2000       2001
                                  ----        ------     ------     ------     ------     ------
<S>                               <C>         <C>        <C>        <C>        <C>         <C>
Compaq                             100        190.02     283.08     183.00     102.23      66.87
S&P Computers (Hardware) Index     100        146.38     256.49     369.79     234.88     230.98
S&P 500 Index                      100        133.36     171.48     207.56     188.66     166.24
</Table>


                                       83
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table gives information about the ownership of Compaq
common stock as of December 31, 2001, by (1) each director; (2) each of the
Chief Executive Officer and the four most highly compensated other executive
officers during 2001 (all such persons collectively, the "named executive
officers"); and (3) all executive officers and directors (including nominees) as
a group. There were no holders known to Compaq to own beneficially 5 percent or
more of its outstanding common stock as of such date. Beneficial ownership of
securities is defined by the SEC to mean generally the power to vote or dispose
of securities, regardless of economic interest. Compaq had approximately 1.7
billion shares of common stock outstanding as of December 31, 2001.

COMMON STOCK OWNERSHIP

<Table>
<Caption>
                                                       NUMBER OF SHARES
                                                   ------------------------       PERCENT OF
NAME OF OWNER                                      OPTIONS(1)      TOTAL(1)       OUTSTANDING
-------------                                      ----------     ---------       -----------
<S>                                                 <C>           <C>             <C>
Michael D. Capellas                                 1,323,344     2,637,545            *
Lawrence T. Babbio, Jr                                273,594       298,594            *
Judith L. Craven                                       46,416        56,416            *
George H. Heilmeier                                   358,500       374,000            *
Sanford M. Litvack                                     31,250        39,335            *
Thomas J. Perkins                                      72,447       958,811(2)         *
Lucille S. Salhany                                    261,669       276,669            *
Peter Blackmore                                       906,039       972,575            *
Michael J. Winkler                                  1,445,007     1,548,570            *
Jeff Clarke                                           120,630       127,647            *
Shane V. Robison                                      176,040       218,031            *

All executive officers and directors (including
nominees) as a group (14 persons)                   5,850,506     8,487,856            *
</Table>

*    Less than 1 percent

(1)  Includes Compaq stock options that are currently exercisable or that will
     become exercisable by March 1, 2002.

(2)  Includes 886,364 shares of common stock held by trusts.

         On September 3, 2001, Compaq and HP announced that a definitive merger
agreement was unanimously approved by both Boards of Directors, subject to,
among other conditions, regulatory approval and affirmative stockholders' vote
by both companies. Under the terms of the agreement dated as of September 4,
2001, Compaq stockholders will receive .06325 of a newly issued HP share for
each outstanding share of Compaq common stock. Subject to regulatory and
stockholder approvals, which Compaq and HP are in the process of seeking, and
other customary closing conditions, the transaction is expected to close in the
first half of 2002.


                                       84
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain relationships

         Compaq has business relationships with organizations with which certain
of our directors are affiliated. However, none of these arrangements are
material to either Compaq or any of those organizations. Compaq has not retained
and does not propose to retain any law firm or investment banking firm with
which a director is affiliated.

Related transactions

         In 1999, Compaq made a loan of $5,000,000 to Michael D. Capellas,
Chairman and Chief Executive Officer, to purchase Compaq stock to meet Compaq's
stock ownership requirements for executive officers. The interest rate on the
loan was 5.67 percent, annually. Compaq entered into a new employment agreement
with Mr. Capellas in 2000, wherein Compaq agreed to forgive the 1999 stock
purchase loan over a period of three years, beginning on November 1, 2001,
provided that Mr. Capellas remained employed by Compaq. In the 2000 employment
agreement, Compaq also agreed to loan Mr. Capellas $2,500,000 at an annual
interest rate of 6.09 percent to assist him with the tax obligations arising
from his new agreement and the loan forgiveness in particular (which, according
to federal tax requirements, was taxable to Mr. Capellas in full upon entering
the agreement although the conditions for forgiveness had not yet been met). The
tax assistance loan is secured by 125,000 shares of Compaq common stock owned by
Mr. Capellas. Should Mr. Capellas incur a Qualifying Termination, as defined in
his employment agreement, the 1999 stock purchase loan would be forgiven in full
upon his separation. The tax assistance loan would remain payable in accordance
with its original terms. On September 30, 2001, the point at which this
indebtedness was highest and immediately before the first portion of the initial
stock purchase loan was forgiven, the total indebtedness for both loans was
$8,018,589. On November 1, 2001, $2,033,006 of this debt was forgiven pursuant
to the terms of Mr. Capellas' employment agreement, and as of December 31, 2001,
the total outstanding indebtedness was $6,010,898, including additional interest
on the tax assistance loan at 6.09 percent.

Independent Auditors

Ernst & Young LLP served as Compaq's independent auditors for the audit of
Compaq's financial statements for 2000 and 2001. During 2001, Compaq incurred
audit fees of approximately $10 million, audit-related service fees of
approximately $5 million and other non-audit service fees (primarily consisting
of fees for tax services) of approximately $9 million. Compaq did not incur any
fees from Ernst & Young LLP for any other services, including consulting
services related to financial information system design and implementation work
during 2001. Since the appointment of Ernst & Young LLP in early 2000, Compaq's
policy has been to engage its independent auditors to perform only audit,
accounting and tax related services and not to engage its independent auditors
in the rendering of systems and other consulting services.


                                       85
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

     (a) The following documents are filed as a part of this report:

         1. Financial Statements:

               Audit Reports
               Consolidated Balance Sheet at December 31, 2001 and 2000
               Consolidated Statement of Income for each of the three years in
                  the period ended December 31, 2001
               Consolidated Statement of Cash Flows for each of the three years
                  in the period ended December 31, 2001
               Consolidated Statement of Stockholders' Equity for each of the
                  three years in the period ended December 31, 2001
               Notes to Consolidated Financial Statements

               Financial Statement Schedule:
                  Audit Reports
                  Schedule II: Valuation and Qualifying Accounts for each of the
                     three years in the period ended December 31, 2001


               All other schedules are omitted as the required information is
                  inapplicable or the information is presented in the
                  consolidated financial statements and notes thereto in Item 8
                  above.

         2. Exhibits.

               Exhibits identified in parentheses below, on file with the
                  Commission are incorporated by reference as exhibits.

<Table>
<Caption>
   EXHIBIT NO.                       DESCRIPTION OF EXHIBITS
   -----------                       -----------------------
<S>             <C>
      2.1       Agreement and Plan of Reorganization dated September 4, 2001, by
                and among Hewlett-Packard Company, Heloise Merger Corporation
                and Compaq Computer Corporation. (Exhibit 2.1 to Form 8-K dated
                September 3, 2001 as filed September 4, 2001).

      3.1       Restated Certificate of Amendment. (Exhibit 3.1 to Form 10-K for
                the year ended December 31, 1997).

      3.2       By-laws. (Exhibit No. 3.2 to Form 10-Q for the quarter ended
                September 30, 1997).

      3.3       Audit Committee Charter. (Appendix B to the Proxy Statement
                filed on Schedule 14A dated March 12, 2001).

      4.1       Indenture dated May 2, 2000 between Compaq Computer Corporation
                and the Bank of New York, as Trustee (Exhibit 4.1 to
                Registration Statement of Compaq Computer Corporation on Form
                S-3. (Reg. No. 333-36750)). (Exhibit 4.1 to Form 10-Q for the
                quarter ended September 30, 2000).

      4.2       Designation of Terms of Compaq Computer Corporation 7.45% Global
                Note due August 1, 2002 and 7.65% Global Note due August 1,
                2005. (Exhibit 4.2 to Form 10-Q for the quarter ended September
                30, 2000).
</Table>


                                       86
<PAGE>

<Table>
<S>             <C>
      4.3       Form of Compaq Computer Corporation 7.45% global Note Due August
                1, 2002. (Exhibit 4.3 to Form 10-Q for the quarter ended
                September 30, 2000).

      4.4       Form of Compaq Computer Corporation 7.65% Global Note Due August
                1, 2005. (Exhibit 4.4 to Form 10-Q for the quarter ended
                September 30, 2000).

      4.5       Rights Agreement dated as of September 4, 2001, between Compaq
                Computer Corporation and EquiServe Trust Company, N.A., as
                Rights Agent. (Exhibit 4.1 to Form 8-K dated September 4, 2001
                as filed September 5, 2001).

     10.1       1985 Stock Option Plan, as amended. (Exhibit 10.3 to Form 10-K
                for the year ended December 31, 1991, Commission File No.
                1-09026).*

     10.2       Amendment to the 1985 Stock Option Plan. (Exhibit 10.3 to Form
                10-Q for the quarter ended September 30, 2001).*

     10.3       1985 Executive and Key Employees Stock Option Plan, as amended.
                (Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 1989,
                Commission File No. 1-09026).*

     10.4       Amendment to the 1985 Executive and Key Employee Stock Option
                Plan. (Exhibit 10.4 to Form 10-Q for the quarter ended September
                30, 2001).*

     10.5       1985 Nonqualified Stock Option Plan, as amended. (Exhibit 10.4
                to Form 10-Q for the quarter ended June 30, 1989, Commission
                File No. 1-09026).*

     10.6       Amendment to the 1985 Nonqualified Stock Option Plan. (Exhibit
                10.5 to Form 10-Q for the quarter ended September 30, 2001).*

     10.7       Forms of Stock Option Agreements relating to Exhibits 10.1, 10.3
                and 10.5. (Exhibit 10.6 to Form 10-K for the year ended December
                31, 1987, Commission File No. 1-09026).*

     10.8       1989 Equity Incentive Plan, as amended. (Exhibit 10.6 to Form
                10-K for the year ended December 31, 1997).*

     10.9       Amendment to the 1989 Equity Incentive Plan. (Exhibit 10.6 to
                Form 10-Q for the quarter ended September 30, 2001).*

     10.10      Form of Stock Option Notice relating to Exhibit 10.8, as
                amended. (Exhibit 10.7 to Form 10-K for the year ended December
                31, 1996, Commission File No. 1-09026).*

     10.11      1995 Equity Incentive Plan, as amended. (Exhibit 10.8 to Form
                10-K for the year ended December 31, 1997).*

     10.12      Amendment to 1995 Equity Incentive Plan. (Exhibit 10.7 to Form
                10-Q for the quarter ended September 30, 2001).*

     10.13      Form of Stock Option Notice relating to Exhibit 10.11, as
                amended. (Exhibit 10.9 to Form 10-K for the year ended December
                31, 1997).*

     10.14      Bonus Incentive Plan. (Exhibit 10.11 to Form 10-K for the year
                ended December 31, 1995, Commission File No. 1-09026).*

     10.15      Stock Option Plan for Non-Employee Directors, as amended
                (Exhibit 10.11 to Form 10-K for the year ended December 31,
                1997).*

     10.16      Amendment to the Non-Qualified Stock Option Plan for
                Non-Employee Directors. (Exhibit 10.10 to Form 10-Q for the
                quarter ended September 30, 2001).*

     10.17      Forms of Stock Option Notice relating to Exhibit 10.15. (Exhibit
                10.9 to Form 10-K for the year ended December 31, 1997).*

     10.18      Form of letter agreement between Compaq and its executive
                officers. (Exhibit 10.16 to Form 10-K for the year ended
                December 31, 1991, Commission File No. 1-09026).*

     10.19      Deferred Compensation and Supplemental Savings Plan. (Exhibit
                4.1 to Registration Statement No. 333-42375 on Form S-8 filed
                December 16, 1997).*

     10.20      First Amendment to Deferred Compensation and Supplemental
                Savings Plan. (Exhibit 4.2 to Registration Statement No.
                333-42375 on Form S-8 filed December 16, 1997).*

     10.21      1998 Stock Option Plan. (Exhibit 10.20 to Form 10-Q for the
                quarter ended March 31, 1998).*
</Table>


                                       87
<PAGE>
<Table>
<S>             <C>
     10.22      Amendment to the 1998 Stock Option Plan. (Exhibit 10.8 to Form
                10-Q for the quarter ended September 30, 2001).*

     10.23      Form of Nonqualified Stock Option Agreement for Member of the
                Office of the Chief Executive Officer between Compaq and each of
                Benjamin M. Rosen, Robert Ted Enloe III and Frank P. Doyle.
                (Exhibit 10.17 to Form 10-K for the year ended December 31,
                1999).*

     10.24      2001 Stock Option Plan, as amended. (Appendix A to the Proxy
                Statement filed on Schedule 14A dated March 12, 2001).*

     10.25      Amendment to the 2001 Stock Option Plan. (Exhibit 10.9 to Form
                10-Q for the quarter ended September 30, 2001).*

     10.26      Form of Executive Severance Agreement. (Exhibit 10.11 to Form
                10-Q for the quarter ended September 30, 2001).*

     10.27      U.S. $1,750,000,000 Revolving Credit Agreement (364-Day) dated
                as of September 28, 2001 among Compaq Computer Corporation,
                Citibank, N.A., as sole Administrative Agent, Bank of America,
                N.A. and The Chase Manhattan Bank, as Co-Syndication Agents,
                Fleet National Bank and The Royal Bank of Scotland plc, as
                Co-Documentation Agents and the other banks party thereto.
                (Exhibit 10.1 to Form 10-Q for the quarter ended September 30,
                2001).

     10.28      $3,000,000,000 Credit Agreement dated as of September 22, 1997,
                among Compaq Computer Corporation, the banks signatory thereto
                and Bank of America National Trust and Savings Association, as
                Administrative Agent. (Exhibit 10.19 to Form 10-K for the year
                ended December 31, 1997).

     10.29      Amendment No. 1 to $3,000,000,000 Credit Agreement dated as of
                October 2, 1998, among Compaq Computer Corporation, the banks
                signatory thereto and Bank of America National Trust and Savings
                Association, as Administrative Agent. (Exhibit 10.22 to Form
                10-Q for the quarter ended September 30, 1998).

     10.30      Letter dated as of June 7, 2001, regarding Notice of the
                Company's Commitment Reduction to the $3,000,000,000 Credit
                Agreement among Compaq Computer Corporation, the banks signatory
                thereto and the Bank of America National Trust Savings
                Association, as Administrative Agent. (Exhibit 10.2 to Form 10-Q
                for the quarter ended September 30, 2001).

     10.31      $5,000,000 Promissory Note dated July 22, 1999, between Michael
                D. Capellas and Compaq Computer Corporation. (Exhibit 10.23 to
                Form 10-K for the year ended December 31, 1999).

     10.32      Purchase and Subscription Agreement dated June 29, 1999, by and
                among CMGI, Inc., and Zoom Newco, Inc., and Compaq Computer
                Corporation, Digital Equipment Corporation, and AltaVista
                Company, with Exhibits. (Exhibit 10.22 to Form 10Q for the
                quarter ended June 30, 1999). +

     10.33      Asset Purchase Agreement dated as of January 4, 2000 between
                Compaq Computer Corporation, ITY Corp. and InaCom Corp. with
                Exhibits. (Exhibit 10.25 to Form 10-K for the year ended
                December 31, 1999).

     10.34      First Amendment to the Asset Purchase Agreement dated as of
                February 16, 2000 between Compaq Computer Corporation, ITY Corp.
                and InaCom Corp. with Exhibits. (Exhibit 10.26 to Form 10-K for
                the year ended December 31, 1999).

     10.35      Revolving Credit Facility Commitment Letter dated February 16,
                2000 between Compaq Computer Corporation, ITY Corp. and InaCom
                Corp. (Exhibit 10.27 to Form 10-K for the year ended December
                31, 1999).

     10.36      Services, Supply and Sales Agreement dated February 16, 2000
                between Compaq Computer Corporation, ITY Corp. and InaCom Corp.
                (Exhibit 10.28 to Form 10-K for the year ended December 31,
                1999).
</Table>


                                       88
<PAGE>

<Table>
<S>             <C>
     10.37      Service Level Agreement dated February 16, 2000 between Compaq
                Computer Corporation, ITY Corp. and InaCom Corp. (Exhibit 10.29
                to Form 10-K for the year ended December 31, 1999).

     10.38      Retention Agreement dated September 8, 2000 between Compaq
                Computer Corporation and Michael J. Larson. (Exhibit 10.2 to
                Form 10-Q for the quarter ended September 30, 2000). *

     10.39      Employment Agreement effective as of October 20, 2000, between
                Compaq Computer Corporation and Michael D. Capellas. (Exhibit
                10.33 to Form 10-K for the year ended December 31, 2000).*

     10.40      Amendment to Employment Agreement dated December 26, 2001,
                between Compaq Computer Corporation and Michael D. Capellas.*

     10.41      Form of Executive Officers Severance Agreement. (Exhibit 10.33
                to Form 10-K for the year ended December 31, 2000). *

     10.42      Form of Restricted Stock Grant Notice - 1989 Equity Incentive
                Plan. (Exhibit 10.34 to Form 10-K for the year ended December
                31, 2000).*

     10.43      $2,500,000 Promissory Note dated October 20, 2000 between
                Michael Capellas and Compaq Computer Corporation.

     10.44      Security Agreement dated October 20, 2000 between Michael
                Capellas and Compaq Computer Corporation.

      21        Subsidiaries.

     23.1       Consent of Ernst & Young LLP, independent auditors.

     23.2       Consent of PricewaterhouseCoopers LLP, independent accountants.
</Table>

*    Indicates management contract or compensatory plan or arrangement.

+    Confidential treatment has been granted by the Commission for certain
     portions of this Exhibit. These portions have been redacted and marked with
     an [*].

(b)  Reports on Form 8-K.

     (i)  Report on Form 8-K, dated October 23, 2001, containing Compaq's news
          release dated October 23, 2001, reporting revenue of $7.5 billion for
          the third quarter ended September 30, 2001.

     (ii) Report on Form 8-K dated January 7, 2002, containing Compaq's news
          release dated January 7, 2002, reporting that revenue for its fourth
          quarter ending December 31, 2001, would exceed previous market
          expectations.

     (iii) Report on Form 8-K dated January 16, 2002, containing Compaq's news
          release dated January 16, 2002, reporting revenue of $8.5 billion for
          the fourth quarter ended December 31, 2001.

     (iv) Report on Form 8-K, dated January 17, 2002, containing Compaq's news
          release dated January 17, 2002, reporting that Compaq established a
          record date of January 28, 2002 for a special meeting of stockholders
          to consider and vote on the proposal to approve and adopt the Merger
          Agreement between Hewlett-Packard Company and Compaq and to approve
          the proposed business combination with Hewlett-Packard Company.


                                       89
<PAGE>

     (v)  Report on Form 8-K, dated January 25, 2002, containing Compaq's news
          release dated January 25, 2002, providing financial guidance for
          fiscal year 2002 of $0.32 earnings per share, an increase of $0.07
          from previous analyst consensus of $0.25 per share.

Compaq, the Compaq logo, AlphaServer, Armada, Evo, DeskPro, Himalaya, iPAQ,
NonStop, OpenVMS, Presario, ProLiant, StorageWorks, SANworks and Tru64 are
trademarks of Compaq Information Technologies Group, L.P. in the United States
and/or other countries. Microsoft, Outlook, Windows, Windows NT are trademarks
of Microsoft Corporation in the United States and other countries. Intel,
Celeron, Pentium, SpeedStep, and Itanium are trademarks of Intel Corporation in
the United States and other countries. UNIX is a trademark of The Open Group in
the United States and other countries. All other product names mentioned herein
may be trademarks or registered trademarks of their respective companies.


                                       90
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 30th day of
January, 2002.

                                     COMPAQ COMPUTER CORPORATION


                                     By:        /s/  MICHAEL D. CAPELLAS
                                         ---------------------------------------
                                         Michael D. Capellas, Chairman and Chief
                                                    Executive Officer


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.

<Table>
<Caption>
                SIGNATURE                                      TITLE                                DATE
                ---------                                      -----                                ----
<S>                                                  <C>                                     <C>
                                                     Chairman and                            January 30, 2002
/s/    MICHAEL D. CAPELLAS                           Chief Executive Officer
--------------------------------------------         (principal executive officer)
           (Michael D. Capellas)

                                                     Senior Vice President,                  January 30, 2002
/s/    JEFF CLARKE                                   Finance and Administration, and
--------------------------------------------         Chief Financial Officer
              (Jeff Clarke)                          (principal financial officer and
                                                     principal accounting officer)


/s/    LAWRENCE T. BABBIO, JR.                       Director                                January 30, 2002
--------------------------------------------
        (Lawrence T. Babbio, Jr.)

/s/    JUDITH L.  CRAVEN                             Director                                January 30, 2002
--------------------------------------------
           (Judith L. Craven)

/s/    GEORGE H.  HEILMEIER                          Director                                January 30, 2002
--------------------------------------------
         (George H.  Heilmeier)

/s/    SANFORD M. LITVACK                            Director                                January 30, 2002
--------------------------------------------
          (Sanford M. Litvack)

/s/    THOMAS J. PERKINS                             Director                                January 30, 2002
--------------------------------------------
          (Thomas J.  Perkins)

/s/    LUCILLE S. SALHANY                            Director                                January 30, 2002
--------------------------------------------
          (Lucille S. Salhany)
</Table>


                                       91
<PAGE>
                                 EXHIBIT INDEX

<Table>
<Caption>
    EXHIBIT
    NUMBER                           DESCRIPTION OF EXHIBITS
    -------                          -----------------------
<S>             <C>
      2.1       Agreement and Plan of Reorganization dated September 4, 2001, by
                and among Hewlett-Packard Company, Heloise Merger Corporation
                and Compaq Computer Corporation. (Exhibit 2.1 to Form 8-K dated
                September 3, 2001 as filed September 4, 2001).

      3.1       Restated Certificate of Amendment. (Exhibit 3.1 to Form 10-K for
                the year ended December 31, 1997).

      3.2       By-laws. (Exhibit No. 3.2 to Form 10-Q for the quarter ended
                September 30, 1997).

      3.3       Audit Committee Charter. (Appendix B to the Proxy Statement
                filed on Schedule 14A dated March 12, 2001).

      4.1       Indenture dated May 2, 2000 between Compaq Computer Corporation
                and the Bank of New York, as Trustee (Exhibit 4.1 to
                Registration Statement of Compaq Computer Corporation on Form
                S-3. (Reg. No. 333-36750)). (Exhibit 4.1 to Form 10-Q for the
                quarter ended September 30, 2000).

      4.2       Designation of Terms of Compaq Computer Corporation 7.45% Global
                Note due August 1, 2002 and 7.65% Global Note due August 1,
                2005. (Exhibit 4.2 to Form 10-Q for the quarter ended September
                30, 2000).
</Table>


<PAGE>

<Table>
<S>             <C>
      4.3       Form of Compaq Computer Corporation 7.45% global Note Due August
                1, 2002. (Exhibit 4.3 to Form 10-Q for the quarter ended
                September 30, 2000).

      4.4       Form of Compaq Computer Corporation 7.65% Global Note Due August
                1, 2005. (Exhibit 4.4 to Form 10-Q for the quarter ended
                September 30, 2000).

      4.5       Rights Agreement dated as of September 4, 2001, between Compaq
                Computer Corporation and EquiServe Trust Company, N.A., as
                Rights Agent. (Exhibit 4.1 to Form 8-K dated September 4, 2001
                as filed September 5, 2001).

     10.1       1985 Stock Option Plan, as amended. (Exhibit 10.3 to Form 10-K
                for the year ended December 31, 1991, Commission File No.
                1-09026).*

     10.2       Amendment to the 1985 Stock Option Plan. (Exhibit 10.3 to Form
                10-Q for the quarter ended September 30, 2001).*

     10.3       1985 Executive and Key Employees Stock Option Plan, as amended.
                (Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 1989,
                Commission File No. 1-09026).*

     10.4       Amendment to the 1985 Executive and Key Employee Stock Option
                Plan. (Exhibit 10.4 to Form 10-Q for the quarter ended September
                30, 2001).*

     10.5       1985 Nonqualified Stock Option Plan, as amended. (Exhibit 10.4
                to Form 10-Q for the quarter ended June 30, 1989, Commission
                File No. 1-09026).*

     10.6       Amendment to the 1985 Nonqualified Stock Option Plan. (Exhibit
                10.5 to Form 10-Q for the quarter ended September 30, 2001).*

     10.7       Forms of Stock Option Agreements relating to Exhibits 10.1, 10.3
                and 10.5. (Exhibit 10.6 to Form 10-K for the year ended December
                31, 1987, Commission File No. 1-09026).*

     10.8       1989 Equity Incentive Plan, as amended. (Exhibit 10.6 to Form
                10-K for the year ended December 31, 1997).*

     10.9       Amendment to the 1989 Equity Incentive Plan. (Exhibit 10.6 to
                Form 10-Q for the quarter ended September 30, 2001).*

     10.10      Form of Stock Option Notice relating to Exhibit 10.8, as
                amended. (Exhibit 10.7 to Form 10-K for the year ended December
                31, 1996, Commission File No. 1-09026).*

     10.11      1995 Equity Incentive Plan, as amended. (Exhibit 10.8 to Form
                10-K for the year ended December 31, 1997).*

     10.12      Amendment to 1995 Equity Incentive Plan. (Exhibit 10.7 to Form
                10-Q for the quarter ended September 30, 2001).*

     10.13      Form of Stock Option Notice relating to Exhibit 10.11, as
                amended. (Exhibit 10.9 to Form 10-K for the year ended December
                31, 1997).*

     10.14      Bonus Incentive Plan. (Exhibit 10.11 to Form 10-K for the year
                ended December 31, 1995, Commission File No. 1-09026).*

     10.15      Stock Option Plan for Non-Employee Directors, as amended
                (Exhibit 10.11 to Form 10-K for the year ended December 31,
                1997).*

     10.16      Amendment to the Non-Qualified Stock Option Plan for
                Non-Employee Directors. (Exhibit 10.10 to Form 10-Q for the
                quarter ended September 30, 2001).*

     10.17      Forms of Stock Option Notice relating to Exhibit 10.15. (Exhibit
                10.9 to Form 10-K for the year ended December 31, 1997).*

     10.18      Form of letter agreement between Compaq and its executive
                officers. (Exhibit 10.16 to Form 10-K for the year ended
                December 31, 1991, Commission File No. 1-09026).*

     10.19      Deferred Compensation and Supplemental Savings Plan. (Exhibit
                4.1 to Registration Statement No. 333-42375 on Form S-8 filed
                December 16, 1997).*

     10.20      First Amendment to Deferred Compensation and Supplemental
                Savings Plan. (Exhibit 4.2 to Registration Statement No.
                333-42375 on Form S-8 filed December 16, 1997).*

     10.21      1998 Stock Option Plan. (Exhibit 10.20 to Form 10-Q for the
                quarter ended March 31, 1998).*
</Table>


<PAGE>
<Table>
<S>             <C>
     10.22      Amendment to the 1998 Stock Option Plan. (Exhibit 10.8 to Form
                10-Q for the quarter ended September 30, 2001).*

     10.23      Form of Nonqualified Stock Option Agreement for Member of the
                Office of the Chief Executive Officer between Compaq and each of
                Benjamin M. Rosen, Robert Ted Enloe III and Frank P. Doyle.
                (Exhibit 10.17 to Form 10-K for the year ended December 31,
                1999).*

     10.24      2001 Stock Option Plan, as amended. (Appendix A to the Proxy
                Statement filed on Schedule 14A dated March 12, 2001).*

     10.25      Amendment to the 2001 Stock Option Plan. (Exhibit 10.9 to Form
                10-Q for the quarter ended September 30, 2001).*

     10.26      Form of Executive Severance Agreement. (Exhibit 10.11 to Form
                10-Q for the quarter ended September 30, 2001).*

     10.27      U.S. $1,750,000,000 Revolving Credit Agreement (364-Day) dated
                as of September 28, 2001 among Compaq Computer Corporation,
                Citibank, N.A., as sole Administrative Agent, Bank of America,
                N.A. and The Chase Manhattan Bank, as Co-Syndication Agents,
                Fleet National Bank and The Royal Bank of Scotland plc, as
                Co-Documentation Agents and the other banks party thereto.
                (Exhibit 10.1 to Form 10-Q for the quarter ended September 30,
                2001).

     10.28      $3,000,000,000 Credit Agreement dated as of September 22, 1997,
                among Compaq Computer Corporation, the banks signatory thereto
                and Bank of America National Trust and Savings Association, as
                Administrative Agent. (Exhibit 10.19 to Form 10-K for the year
                ended December 31, 1997).

     10.29      Amendment No. 1 to $3,000,000,000 Credit Agreement dated as of
                October 2, 1998, among Compaq Computer Corporation, the banks
                signatory thereto and Bank of America National Trust and Savings
                Association, as Administrative Agent. (Exhibit 10.22 to Form
                10-Q for the quarter ended September 30, 1998).

     10.30      Letter dated as of June 7, 2001, regarding Notice of the
                Company's Commitment Reduction to the $3,000,000,000 Credit
                Agreement among Compaq Computer Corporation, the banks signatory
                thereto and the Bank of America National Trust Savings
                Association, as Administrative Agent. (Exhibit 10.2 to Form 10-Q
                for the quarter ended September 30, 2001).

     10.31      $5,000,000 Promissory Note dated July 22, 1999, between Michael
                D. Capellas and Compaq Computer Corporation. (Exhibit 10.23 to
                Form 10-K for the year ended December 31, 1999).

     10.32      Purchase and Subscription Agreement dated June 29, 1999, by and
                among CMGI, Inc., and Zoom Newco, Inc., and Compaq Computer
                Corporation, Digital Equipment Corporation, and AltaVista
                Company, with Exhibits. (Exhibit 10.22 to Form 10Q for the
                quarter ended June 30, 1999). +

     10.33      Asset Purchase Agreement dated as of January 4, 2000 between
                Compaq Computer Corporation, ITY Corp. and InaCom Corp. with
                Exhibits. (Exhibit 10.25 to Form 10-K for the year ended
                December 31, 1999).

     10.34      First Amendment to the Asset Purchase Agreement dated as of
                February 16, 2000 between Compaq Computer Corporation, ITY Corp.
                and InaCom Corp. with Exhibits. (Exhibit 10.26 to Form 10-K for
                the year ended December 31, 1999).

     10.35      Revolving Credit Facility Commitment Letter dated February 16,
                2000 between Compaq Computer Corporation, ITY Corp. and InaCom
                Corp. (Exhibit 10.27 to Form 10-K for the year ended December
                31, 1999).

     10.36      Services, Supply and Sales Agreement dated February 16, 2000
                between Compaq Computer Corporation, ITY Corp. and InaCom Corp.
                (Exhibit 10.28 to Form 10-K for the year ended December 31,
                1999).
</Table>


<PAGE>

<Table>
<S>             <C>
     10.37      Service Level Agreement dated February 16, 2000 between Compaq
                Computer Corporation, ITY Corp. and InaCom Corp. (Exhibit 10.29
                to Form 10-K for the year ended December 31, 1999).

     10.38      Retention Agreement dated September 8, 2000 between Compaq
                Computer Corporation and Michael J. Larson. (Exhibit 10.2 to
                Form 10-Q for the quarter ended September 30, 2000). *

     10.39      Employment Agreement effective as of October 20, 2000, between
                Compaq Computer Corporation and Michael D. Capellas. (Exhibit
                10.33 to Form 10-K for the year ended December 31, 2000).*

     10.40      Amendment to Employment Agreement dated December 26, 2001,
                between Compaq Computer Corporation and Michael D. Capellas.*

     10.41      Form of Executive Officers Severance Agreement. (Exhibit 10.33
                to Form 10-K for the year ended December 31, 2000). *

     10.42      Form of Restricted Stock Grant Notice - 1989 Equity Incentive
                Plan. (Exhibit 10.34 to Form 10-K for the year ended December
                31, 2000).*

     10.43      $2,500,000 Promissory Note dated October 20, 2000 between
                Michael Capellas and Compaq Computer Corporation.

     10.44      Security Agreement dated October 20, 2000 between Michael
                Capellas and Compaq Computer Corporation.

      21        Subsidiaries.

     23.1       Consent of Ernst & Young LLP, independent auditors.

     23.2       Consent of PricewaterhouseCoopers LLP, independent accountants.
</Table>

*    Indicates management contract or compensatory plan or arrangement.

+    Confidential treatment has been granted by the Commission for certain
     portions of this Exhibit. These portions have been redacted and marked with
     an [*].