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                       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, 2000      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



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 31, 2001 (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 $40 billion.

      The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of January 31, 2001, was approximately 1.7 billion.

                       DOCUMENTS INCORPORATED BY REFERENCE

      There is incorporated by reference in Part II and Part III of this Annual
Report on Form 10-K certain of the information contained in the registrant's
proxy statement for its annual meeting of stockholders to be held April 26,
2001, which will be filed by the registrant within 120 days after December 31,
2000.

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<PAGE>
                           COMPAQ COMPUTER CORPORATION

                             FORM 10-K ANNUAL REPORT

                       FISCAL YEAR ENDED DECEMBER 31, 2000

                                TABLE OF CONTENTS



                                     PART I



Item 1.           Business                                                     3

Item 2.           Properties                                                   8

Item 3.           Legal Proceedings                                            8

Item 4.           Submission of Matters to a Vote of Securities Holders        8



                                     PART II



Item 5.           Market for Registrant's Common Equity and Related
                    Stockholder Matters                                        9

Item 6.           Selected Consolidated Financial Data                        10

Item 7.           Management's Discussion and Analysis of Financial
                    Condition and Results of Operations                       11

Item 7a.          Market Risks                                                21

Item 8.           Financial Statements and Supplementary Data                 23

Item 9.           Changes in and Disagreements with Accountants on
                    Accounting and Financial Disclosures                      23


                                    PART III

Items 10-13.                                                                  51

                                     PART IV

Item 14.          Exhibits, Financial Statement Schedules, and Reports on
                    Form 8-K                                                  51

Signatures                                                                    55

                                       2
<PAGE>
PART I

ITEM 1.  BUSINESS

GENERAL

      Founded in 1982, Compaq Computer Corporation ("Compaq") is a leading
global provider of enterprise technology and solutions. Compaq designs,
develops, manufactures and markets hardware, software, solutions and services,
including industry-leading enterprise computing solutions, fault-tolerant
business-critical solutions, communication products, and desktop and portable
personal computers.

      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.

RECENT ACQUISITIONS AND DIVESTITURES

      In June 1998, Compaq completed the acquisition of Digital Equipment
Corporation ("Digital") for an aggregate purchase price of $9.1 billion. This
acquisition was accounted for as a purchase. Digital was an industry leader in
implementing and supporting networked business solutions in multi-vendor
environments based on high performance platforms with an established global
service and support team.

      In February 1999, Compaq acquired Shopping.Com ("SDC") for an aggregate
purchase price of $257 million. This acquisition was accounted for as a
purchase.

      In April 1999, Compaq acquired Zip2 Corp. ("Zip2") for an aggregate
purchase price of $341 million. This acquisition was accounted for as a
purchase.

      In August 1999, Compaq sold an 81.5 percent equity interest in AltaVista
Company (a business acquired in the Digital acquisition), SDC and Zip2
(collectively "AltaVista") to CMGI, Inc. ("CMGI") for CMGI stock valued at $1.8
billion.

      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. This acquisition was accounted for as a purchase.
Compaq subsequently established Custom Edge Incorporated (also known as Compaq
Direct) as a wholly owned subsidiary to operate the assets acquired from Inacom.

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

COMPAQ GLOBAL BUSINESS GROUPS

      During 2000, Compaq realigned the operations of its Enterprise Solutions
and Services segment, which resulted in the formation of two reportable
segments: Enterprise Computing and Compaq Global Services. These two segments
accounted for 50 percent of consolidated revenue and 86 percent of segment
operating income in 2000. Compaq's other two reportable segments, Commercial
Personal Computing and Consumer, were unaffected by the realignment. For further
information on Compaq's reportable segments, including revenues for the years
ended December 31, 2000, 1999 and 1998, see Management's Discussion and Analysis
of Financial Condition and Results of Operations and Note 12 of the Notes to
Consolidated Financial Statements.

                                       3
<PAGE>
COMPAQ PRODUCTS AND SERVICES

      Compaq, a leading global provider of technology and solutions, designs,
develops, manufactures and markets products and services that help customers
build a competitive advantage and succeed in the emerging Internet-based
economy. In 2001, Compaq plans to expand its leadership role with products that
address new technologies, reliability, high performance, competitive price
points and new markets. Compaq continues to invest in research and development
across all its product lines.

ENTERPRISE COMPUTING. Enterprise Computing designs, develops, manufactures and
markets advanced computing and telecommunication products, including
business-critical servers, industry-standard servers and storage products under
such industry-leading brands as Compaq NONSTOP(TM) HIMALAYA(TM) systems,
NONSTOP(TM) INTEGRITY(TM) systems, ALPHASERVER(TM) systems, PROLIANT(TM)
servers, PROSIGNIA(TM) servers, VAX(TM) systems, NEOSERVERS(TM), TASKSMART(TM)
servers, STORAGEWORKS(TM) systems and SANWORKS(TM) solutions. Compaq is the
market leader in the industry-standard server market with broad product
offerings centered on its Intel-based PROLIANT servers. Enterprise Computing
accounted for approximately 34 percent of Compaq's consolidated revenue in 2000.

COMPAQ GLOBAL SERVICES. Compaq Global Services delivers worldwide infrastructure
and solution design implementation, management, and support services through
Professional and Customer Services. Customer Services offerings include
business-critical services and high-availability support for multi-vendor
software and hardware products. Professional Services provides information
systems consulting, technical and application design services, systems
integration and project management services, network design, integration and
support services, and outsourcing and resource management services. Compaq
provides warranty support to its customers through its own service organization,
as well as through full-service resellers and independent service companies. In
addition to the support associated with product warranties, Compaq offers a
broad range of support services designed to maximize system uptime and optimize
system performance. Compaq Global Services accounted for approximately 16
percent of Compaq's consolidated revenue in 2000.

COMMERCIAL PERSONAL COMPUTING ("CPC"). CPC delivers standards-based computing
emphasizing Internet access through workstations, desktops, portables, monitors,
Internet access devices and life-cycle management products. CPC markets products
under such brands as Compaq DESKPRO(TM) desktops and ARMADA(TM) portables for
commercial businesses, PROSIGNIA desktops and portables for small and growing
businesses, DESKPRO and Professional workstations, AERO(TM) handheld PCs, and
Compaq IPAQ(TM) desktops and Pocket PCs. CPC accounted for approximately 31
percent of Compaq's consolidated revenue in 2000.

CONSUMER. Consumer targets home users with Internet-ready desktops and
portables, printers and related products, as well as Internet access and
e-services. Consumer markets Compaq PRESARIO(TM) desktop and portable products
directly to customers and through a network of retailers. Consumer accounted for
approximately 18 percent of Compaq's consolidated revenue in 2000.

GEOGRAPHICAL REGIONS

      Compaq operates in more than 200 countries worldwide and derived 55
percent of its revenue from sales outside the United States during 2000. 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 group's
performance plans. Over the last three years, approximately 36 percent of
Compaq's revenue was derived from EMEA. Most of the balance of the international
revenue comes from Japan, other countries in Asia-Pacific and Latin America. 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 Could Affect Future Results". Compaq

                                       4
<PAGE>
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.

PRODUCT DEVELOPMENT

      Compaq is actively engaged in the design and development of new products
and enhancements to its existing products. During 2000, 1999 and 1998, Compaq
spent $1.5 billion, $1.7 billion and $1.4 billion, respectively, on research
and development. In addition, Compaq purchased $3.2 billion of in-process
technology in connection with its acquisition of Digital in 1998.

      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 2000, 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.

      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. Certain of Compaq's products are
manufactured by third-party original equipment manufacturers.

      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. A number of products are built to forecast, as
required by specific customers.

      In February 2000, Compaq purchased certain configuration and distribution
assets of Inacom. These assets augmented Compaq's direct strategy, providing
best-in-class complex configuration capabilities along with end-to-end order
management and direct fulfillment capacity.

      Compaq believes that there is a sufficient number of vendors for most of
its components and subassemblies. A significant number of components, however,
are purchased from single sources 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 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.

                                       5
<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 2000,
Compaq experienced shortages in microprocessors, printed circuit assemblies and
capacitors, which constrained 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 distribution model to the needs of its customers.
Compaq's hardware products are sold primarily direct to large enterprise and
government customers, supplemented by dealers, value-added resellers and systems
integrators, and to small and medium-sized business and home customers
principally through dealers and consumer channels. Compaq also sells hardware
products directly through its sales force and to small and medium-sized
businesses and home customers in the U.S. through Compaq's Internet Web page at
www.compaq.com, and its toll free number, 1-800-AT-COMPAQ, as well as through
its mail order business that features a variety of personal computers, printers
and software products.

FINANCIAL SERVICES

      Compaq Financial Services Corporation ("CFS") provides customers with
flexible, Compaq-branded financing to fund their technology investments.
Headquartered in New Jersey, CFS currently operates in 39 countries and offers
financing programs that support Compaq's worldwide sales. CFS provides
customized enterprise financing solutions that encompass computers, networks and
technology upgrades, as well as asset tracking and disposal services for large
and multinational business customers. CFS also delivers an array of offerings
geared to small and medium-sized businesses, along with other offerings that
serve the consumer, educational and governmental marketplaces.

PATENTS, TRADEMARKS AND LICENSES

      Compaq and its subsidiaries held over 3,500 patents and had over 1,800
patent applications pending with the U.S. Patent and Trademark Office at the
close of 2000, as well as related international patents and patent applications.
In addition, Compaq, through its subsidiary, Compaq Information Technologies
Group, L.P., holds certain registered trademarks in the U.S. and in a number of
foreign countries. Compaq believes that patent and trademark protection plays an
important part in its business and complements the technological expertise,
innovative talent and marketing abilities of its employees.

      Compaq has from time to time entered into cross-licensing agreements with
other companies holding patents to technology related to Compaq's products, as
well as with companies using technology related to patents held by Compaq. Those
agreements have included companies such as IBM, Microsoft, Texas Instruments and
Intel.

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 seasonally higher revenue and earnings in the second half
of the year.

                                       6
<PAGE>
Should Compaq's retail business expand relative to its other businesses, Compaq
could experience an increase in the seasonality of its business and its
financial results could become more dependent on retail business fluctuations.

CUSTOMERS

      Compaq distributes products primarily through third-party resellers and as
a result, maintains individually significant accounts receivable balances from
various major resellers. If the financial condition and operations of these
resellers deteriorate, Compaq's operating results could be adversely affected.
One such reseller, Ingram Micro, Inc., accounted for approximately 14 percent of
consolidated revenue in 2000 and 11 percent of accounts receivable as of
December 31, 2000, predominately in the Commercial Personal Computing segment.
In 1999, Ingram Micro accounted for approximately 11 percent of consolidated
revenue and 8 percent of accounts receivable at December 31, 1999. During these
periods, no other customer of Compaq accounted for 10 percent or more of
consolidated revenue. In 2000, Compaq's two largest resellers represented
approximately 21 percent of consolidated revenue and 15 percent of accounts
receivable at December 31, 2000. In 1999, Compaq's four largest resellers
represented approximately 22 percent of consolidated revenue and 12 percent of
accounts receivable at December 31, 1999. Compaq generally has experienced
longer accounts receivable cycles in its emerging markets, in particular
Asia-Pacific and Latin America, when compared to its U.S. and European markets.
In the event that accounts receivable cycles in these developing markets
lengthen further or one or more of Compaq's larger resellers in these regions
fails, Compaq's operating results could be adversely affected.

BACKLOG

      Compaq's resellers typically purchase products on an as-needed basis and
resellers 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 life cycles. Therefore, Compaq
believes that backlog information is not material to an understanding of its
business.

COMPETITION

      The computer industry is intensely competitive with many U.S. 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
business 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 who 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, 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, America Online, Novell, Oracle and SAP,
among others; and to manage the competitive risks associated with these
relationships.

ENVIRONMENTAL LAWS AND REGULATIONS

      Compaq recognizes that operating in a manner that is compatible with the
environment is good for its community, employees, customers and business. Compaq
integrates numerous environmental

                                       7
<PAGE>
features in the product design and manufacturing process that reduce the
potential environmental impact during the life-cycle of its products and its
products are designed and manufactured to meet a variety of the world's
environmental standards and expectations. Compaq uses no chlorofluorocarbons in
its worldwide manufacturing operations and 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 and
compliance evaluations.

      Compaq is continuing to incur costs in connection with the investigation
and remediation of certain properties that it acquired in the business
combinations of Tandem Computers Incorporated and Digital. 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.
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 effects in the future
based on the nature of its operations and the purpose of environmental laws and
regulations. However, environmental cleanup periods are protracted in length and
environmental costs in future periods are subject to changes in environmental
remediation regulations, therefore, there can be no assurance that such laws or
future laws will not have a material adverse effect on Compaq.

EMPLOYEES

      At December 31, 2000, Compaq had approximately 70,100 full-time regular
employees and approximately 24,500 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 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 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 27 million and
28 million square feet of building space worldwide at December 31, 2000 and
1999, 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 2000.

                                       8
<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 31, 2001, Compaq
had approximately 91,000 stockholders of record. The reported high and low
closing stock prices, as reported on the NYSE Composite Transaction Tape, were
as follows:

                                   2000                         1999
-------------------------------------------------------------------------------
                             High         Low             High         Low
                         -------------------------     ------------------------

1st Quarter                $ 33.00     $ 24.69           $ 49.25     $ 30.13
2nd Quarter                  30.25       24.50             31.56       21.19
3rd Quarter                  34.63       25.00             28.00       22.25
4th Quarter                  31.42       14.70             28.75       18.69

      DIVIDENDS, DIVIDEND REINVESTMENT AND DIRECT STOCK PURCHASE PLAN. Compaq
paid quarterly dividends of $0.025 during 2000 and in the fourth quarter 1999
and $0.02 per share for the first three quarters of 1999. 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.

                                       9
<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 Form 10-K.
<TABLE>
<CAPTION>
Year ended December 31 (In millions, except per share amounts)             2000         1999        1998(1)       1997        1996
                                                                         --------     --------     --------     --------    --------
<S>                                                                      <C>          <C>          <C>          <C>         <C>
STATEMENT OF INCOME
Revenue:
    Products ........................................................    $ 35,667     $ 31,902     $ 27,372     $ 24,122    $ 19,611
    Services ........................................................       6,716        6,623        3,797          462         398
                                                                         --------     --------     --------     --------    --------
         Total revenue ..............................................      42,383       38,525       31,169       24,584      20,009
                                                                         --------     --------     --------     --------    --------
Cost of sales:
    Products ........................................................      27,624       25,263       21,383       17,500      14,565
    Services ........................................................       4,793        4,535        2,597          333         290
                                                                         --------     --------     --------     --------    --------
         Total cost of sales ........................................      32,417       29,798       23,980       17,833      14,855
                                                                         --------     --------     --------     --------    --------
Selling, general and administrative expense .........................       6,044        6,341        4,978        2,947       2,507
Research and development ............................................       1,469        1,660        1,353          817         695
Restructuring and related activities(2) .............................         (86)         868          393         --            52
Purchased in-process technology(3) ..................................        --           --          3,196          208        --
Other (income) expense, net(4) ......................................       1,664       (1,076)         (69)          21          17
                                                                         --------     --------     --------     --------    --------
                                                                            9,091        7,793        9,851        3,993       3,271
                                                                         --------     --------     --------     --------    --------
Income (loss) before income taxes ...................................         875          934       (2,662)       2,758       1,883
Provision for income taxes ..........................................         280          365           81          903         565
                                                                         --------     --------     --------     --------    --------
Income (loss) before cumulative effect of
  accounting change..................................................         595          569       (2,743)       1,855       1,318
Cumulative effect of accounting change, net of tax(5) ...............         (26)        --           --           --          --
                                                                         --------     --------     --------     --------    --------
Net income (loss) ...................................................    $    569     $    569     $ (2,743)    $  1,855    $  1,318
                                                                         ========     ========     ========     ========    ========
Earnings (loss) per common share:
Basic:
   Before cumulative effect of accounting change ....................    $   0.35     $   0.35     $  (1.71)    $   1.23    $   0.90
   Cumulative effect of accounting change, net of tax ...............       (0.02)        --           --           --          --
                                                                         --------     --------     --------     --------    --------
                                                                         $   0.33     $   0.35     $  (1.71)    $   1.23    $   0.90
                                                                         ========     ========     ========     ========    ========
Diluted:
   Before cumulative effect of accounting change ....................    $   0.34     $   0.34     $  (1.71)    $   1.19    $   0.87
   Cumulative effect of accounting change, net of tax ...............       (0.01)        --           --           --          --
                                                                         --------     --------     --------     --------    --------
                                                                         $   0.33     $   0.34     $  (1.71)    $   1.19    $   0.87
                                                                         ========     ========     ========     ========    ========
Shares used in computing earnings (loss) per common share:
    Basic ...........................................................       1,702        1,693        1,608        1,505       1,472
    Diluted .........................................................       1,742        1,735        1,608        1,564       1,516

Cash dividends per common share .....................................    $   0.10     $  0.085     $  0.065     $  0.015    $   --
FINANCIAL POSITION
Current assets ......................................................    $ 15,111     $ 13,849     $ 15,167     $ 12,017    $ 10,089
Total assets ........................................................      24,856       27,277       23,051       14,631      12,331
Current liabilities .................................................      11,549       11,838       10,733        5,202       4,741
Long-term obligations(6) ............................................         575         --            422         --           300
Stockholders' equity ................................................      12,080       14,834       11,351        9,429       7,290
</TABLE>

                                       10
<PAGE>
(1)   1998 results reflect the acquisition of Digital in June 1998.

(2)   Represents an $86 million release of restructuring reserves in 2000; an
      $868 million charge for restructuring and related charges in 1999; a $393
      million charge for restructuring and asset impairments in 1998 in
      connection with the Digital acquisition and the closing of certain Compaq
      facilities; and a $52 million charge related to restructuring actions
      taken by Tandem during 1996.

(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 $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, 2000, Compaq adopted Staff Accounting  Bulletin No.
      101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, as amended.

(6)   Includes $422 million of minority interest acquired in 1998 related to
      Digital preferred stock which was redeemed in April 1999.


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

      Founded in 1982, Compaq Computer Corporation ("Compaq") is a leading
global provider of enterprise technology and solutions. Compaq designs,
develops, manufactures and markets hardware, software, solutions and services,
including industry-leading enterprise computing solutions, fault-tolerant
business-critical solutions, communciation products, and desktop and portable
personal computers that are sold in more than 200 countries.

      The following discussion should be read in conjunction with the
consolidated financial statements. 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.

RESULTS OF OPERATIONS

      Compaq completed the acquisitions of Digital Equipment Corporation
("Digital"), Shopping.Com ("SDC") and Zip2 Corp. ("Zip2") and purchased certain
assets and liabilities of InaCom Corp. ("Inacom") in June 1998, February 1999,
April 1999 and February 2000, respectively. These transactions were accounted
for as purchases. In August 1999, Compaq sold a majority interest in SDC, Zip2
and the AltaVista Company, a business acquired in the Digital acquisition
(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, 2000, as
applicable.

      During 2000, Compaq realigned the operations of its Enterprise Solutions
and Services segment, which resulted in the formation of two reportable
segments: Enterprise Computing and Compaq Global Services. These two segments
accounted for 50 percent of consolidated revenue and 86 percent of segment
operating income in 2000. Compaq's other two reportable segments, Commercial
Personal Computing and Consumer, were unaffected by the realignment. Enterprise
Computing designs, develops, manufactures and markets advanced computing and
telecommunication products, including business-critical servers,
industry-standard servers and storage products. Compaq Global Services delivers
worldwide infrastructure and solution design implementation, management, and
support services through Professional and Customer Services. Commercial Personal
Computing delivers standards-based computing emphasizing Internet access through
workstations, desktops, portables, monitors, Internet access devices and
life-cycle management products. The Consumer segment targets home users with
Internet-ready desktops and portables, printers and related products, as well as
Internet access and e-services. Financial data for prior periods has been
restated to conform to the current presentation.

                                       11
<PAGE>
      Summary financial data by business segment follows:

(In millions)                                 2000         1999          1998
                                            --------     --------      --------
ENTERPRISE COMPUTING
        Revenue .......................     $ 14,316     $ 12,974      $ 10,498
        Operating income ..............        2,140        1,201           948
COMPAQ GLOBAL SERVICES
        Revenue .......................        6,993        7,162         3,990
        Operating income ..............          944        1,148           776
COMMERCIAL PERSONAL COMPUTING
        Revenue .......................       13,136       12,185        11,846
        Operating income (loss) .......          289         (448)          (46)
CONSUMER
        Revenue .......................        7,586        5,994         4,932
        Operating income ..............          170          262           183
OTHER
        Revenue .......................          352          210           (97)
        Operating income (loss) .......           27         (281)         (115)
CONSOLIDATED SEGMENT TOTALS
        Revenue .......................     $ 42,383     $ 38,525      $ 31,169
        Operating income ..............     $  3,570     $  1,882      $  1,746

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

Year ended December 31 (In millions)                2000      1999       1998
                                                  -------    -------    -------
Consolidated segment operating income .........   $ 3,570    $ 1,882    $ 1,746
Corporate and unallocated shared expenses .....    (1,117)    (1,156)      (888)
Restructuring and related activities ..........        86       (868)      (393)
Purchased in-process technology ...............      --         --       (3,196)
Other income (expense), net ...................    (1,664)     1,076         69
                                                  -------    -------    -------
Income (loss) before income taxes .............   $   875    $   934    $(2,662)
                                                  =======    =======    =======

OVERVIEW

      Compaq reported 2000 consolidated revenue of $42.4 billion, an increase of
$3.9 billion, or 10 percent, compared with the prior year. Strong growth in
Consumer, Enterprise Computing and Commercial Personal Computing drove higher
revenue. Consolidated revenue in 1999 increased $7.4 billion, or 24 percent,
compared with 1998 primarily due to higher revenues from Compaq Global Services,
Enterprise Computing and Consumer. Revenue in 1998 reflects the acquisition of
Digital from June 1998 through the remainder of the year while 1999 and 2000
revenue reflects Digital amounts for the entire year.

      Consolidated gross margin of $10.0 billion (23.5 percent of revenue) in
2000 improved 0.9 percentage points compared with the prior year reflecting
Compaq's strategy to drive profitable growth. Stronger margins in Commercial
Personal Computing and Enterprise Computing led to the overall improvement in
gross margin. Consolidated gross margin declined 0.4 percentage points in 1999
compared to 1998, primarily due to lower margins in Commercial Personal
Computing.

      Consolidated operating expense was $7.5 billion in 2000, a decline of $488
million, or 6.1 percent, compared with 1999. As a percentage of revenue,
operating expense declined significantly to 17.7 percent from 20.8 percent in
the prior year due to solid execution of spending discipline. Operating expense
increased $1.7 billion, or 26 percent, in 1999 compared with 1998 primarily as a
result of the Digital acquisition.

                                       12
<PAGE>
      The effective tax rate was 32 percent for the year ended December 31, 2000
compared with 39.1 percent for 1999. The higher effective tax rate in 1999 was
primarily due to the gain on sale of businesses and restructuring and related
charges.

      Consolidated net income of $569 million was unchanged from the prior year.
Earnings per diluted common share were $0.33 for the year ended December 31,
2000 compared to $0.34 in 1999. Consolidated net income included a $1.1 billion,
net of tax, impairment charge for certain equity investments in 2000, while 1999
consolidated net income included a $670 million, net of tax, gain on sale of a
business and a $600 million, net of tax, charge for restructuring and related
activities. The consolidated net loss of $2.7 billion in 1998 included a
one-time charge for purchased in-process technology of $3.2 billion related to
the acquisition of Digital.

      Effective January 1, 2000, Compaq adopted Staff Accounting Bulletin No.
101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, as amended ("SAB 101"), issued
by the Securities and Exchange Commission 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 $38 million ($26 million,
net of tax). This accounting change did not have a material effect on revenue or
quarterly earnings during 2000. Compaq has restated its results for the first
three quarters of the year ended December 31, 2000, as reflected in the Selected
Quarterly Financial Data on page 50.

ENTERPRISE COMPUTING

      Enterprise Computing revenue increased $1.3 billion, or 10 percent, in
2000 compared with the prior year and represented 34 percent of consolidated
revenue. In 1999, revenue from this segment increased $2.5 billion, or 24
percent, compared with 1998. Enterprise Computing revenue consisted of the
following:

Year ended December 31 (In millions)              2000        1999        1998
                                                --------    --------    --------
Industry Standard Servers(1) ...............    $  5,847    $  4,604    $  4,529
Storage Products ...........................       5,240       5,066       3,444
Business Critical Servers(1) ...............       3,226       3,225       2,334
Other ......................................           3          79         191
                                                --------    --------    --------
                                                $ 14,316    $ 12,974    $ 10,498
                                                ========    ========    ========

      Industry Standard Servers revenue grew 27 percent during 2000 compared
with the prior year. Revenue benefited from higher average unit prices, which
were aided by mid-year component shortages and a richer server mix. Demand was
strong across all regions as both corporate and Internet service provider
customers continued to build out their data centers. Revenue growth was
strongest in the Compaq PROLIANT(TM) dense rack-optimized server line as an
increasing number of customers valued the simplicity and space-saving economies
provided by dense servers. Also, higher-end server revenue was strong with solid
sales in industry-leading 4-way and 8-way servers. In 1999, Industry Standard
Servers revenue benefited from a higher market share in North America compared
with 1998.

      Storage Products revenue increased 3 percent during the year. Strong
growth in enterprise storage, which consisted of external storage, software and
high-end tape, was offset by lower attached storage. Enterprise storage growth
was driven by solid sales in software and strong acceptance of Compaq's
Enterprise Network Storage Architecture solutions. Revenue benefited from an
increase in overall storage capacity shipped of 67 percent to 70,000 terabytes
during the year, partially offset by

------------
(1) Compaq ALPHASERVER(TM) and PROLIANT(TM) systems product revenue does not
include attached and enterprise storage, which is captured in Storage Products.

                                       13
<PAGE>
aggressive price declines per unit of capacity. Storage Products revenue growth
in 1999 resulted primarily from the Digital acquisition.

      Business Critical Servers revenue was essentially unchanged in 2000
compared with the prior year due to product transition to the Compaq ALPHA(TM)
GS Series and related component shortages which have since been resolved. The
increase in Business Critical Servers revenue in 1999 was primarily due to the
acquisition of Digital.

      Enterprise Computing operating income increased $939 million, or 78
percent, in 2000 compared with the prior year due to strong revenue growth and
higher gross margins, as well as lower operating expenses. Margins improved due
to a mix shift toward the high-end and increased enterprise storage. Strong
demand for industry standard servers drove higher average unit prices. Operating
expense declined in whole dollars and as a percentage of revenue in the
Enterprise Computing segment due to a continued focus on cost control and
expense reduction. Operating income improved in 1999 compared with 1998 due to
stronger performance in Storage Products, a decline in operating expense as a
percentage of revenue and a full year of Digital business.

COMPAQ GLOBAL SERVICES

      Compaq Global Services revenue decreased $169 million, or 2 percent, in
2000 compared with the prior year and represented 16 percent of consolidated
revenue. Compaq Global Services revenue consisted of the following:

Year ended December 31 (In millions)              2000        1999        1998
                                                --------    --------    --------
Customer Services(2) .......................    $  4,336    $  4,356    $  2,462
Professional Services(2) ...................       2,657       2,806       1,528
                                                --------    --------    --------
                                                $  6,993    $  7,162    $  3,990
                                                ========    ========    ========

      Adjusted for the effects of currency, Compaq Global Services revenue
increased 3 percent. The decline in Compaq Global Services revenue during the
year was primarily a result of lower Professional Services revenue. Adjusted for
the effects of currency, Professional Services revenue was essentially
unchanged. Compaq has narrowed its focus for Professional Services to target
areas of opportunity that are consistent with its Internet-related service
strategy and continues to realign its workforce to support growth plans.
Customer Services revenue grew 5 percent adjusted for the effects of currency,
in line with the market. Such growth was aided by strong attachment of services
with product sales and continued penetration of business-critical services.
Compaq Global Service revenue increased $3.2 billion, or 79 percent, in 1999
compared with 1998, benefiting from a full year of the Digital business acquired
in June 1998. Customer Services benefited from significant growth in
Asia-Pacific, Latin America and Greater China, reflecting recovery from Asian
and Latin American economic crises. Revenue also improved as a result of growth
in software support and business-critical services. Outsourcing business and
e-business strengths favorably impacted Professional Services revenue.

      Compaq Global Services operating income declined $204 million, or 18
percent, in 2000 compared with the prior year. Given the substantial portion of
international business within Compaq Global Services, currency declines
significantly impacted operating income during 2000. While profitability in the
Customer Services business remains strong, Professional Services operating
results were lower primarily due to workforce rebalancing and reskilling.
Operating expense increased primarily due to investment in direct sales
capability. Operating income was higher in 1999 compared with 1998 primarily due
to a full year of Digital business.

------------
(2) Compaq Global Services revenue includes revenue from the sale of products
made in connection with providing solutions and services to customers.


                                       14
<PAGE>
COMMERCIAL PERSONAL COMPUTING

      Commercial Personal Computing revenue increased $951 million, or 8
percent, in 2000 compared with the prior year and represented 31 percent of
consolidated revenue. Revenue grew across all regions, benefiting from higher
unit sales of portables and Compaq IPAQ(TM) products, offset in part by lower
unit sales of desktops. In 1999, Commercial Personal Computing revenue increased
$339 million, or 3 percent, compared with 1998. Overall unit sales growth in
1999 was partially offset by declining average unit prices, which were lower due
to competitive pricing and a shift in product mix. Demand for portable products
shifted from higher-end mobility and power to lower cost during 1999.

      Compaq completed the purchase of key assets from Inacom during the first
quarter of 2000 and subsequently established Custom Edge Incorporated as a
wholly owned subsidiary (also known as Compaq Direct). This purchase adds custom
configuration capabilities and direct fulfillment logistics that enable Compaq
to better meet customer needs in North America.

      Commercial Personal Computing operating income increased $737 million,
from a loss of $448 million in 1999 to income of $289 million in 2000. Operating
results 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 portables and supply chain
efficiencies. Operating expense declined due to persistent focus on streamlining
processes and increasing efficiencies. Commercial Personal Computing operating
loss increased $402 million in 1999 as compared with 1998 due primarily to lower
gross margins which resulted from average unit prices falling faster than costs.
Costs for processors, memory and hard drives for desktops and portables declined
during the year. Gross margin also suffered from aggressive competitive bidding.
Operating expenses declined slightly in 1999 as a percentage of revenue due to
an increased focus on sales and marketing spending as well as support costs.

CONSUMER

      Consumer revenue increased $1.6 billion, or 27 percent, in 2000 compared
with the prior year and accounted for 18 percent of consolidated revenue.
Consumer revenue benefited from strong international sales growth, particularly
in Asia-Pacific and Latin America. Higher unit sales of desktops and portables
also contributed to revenue growth. The Consumer segment continues to hold the
number one worldwide consumer PC market share position (according to
International Data Corporation). The "beyond the box" business, which includes
Internet access, Internet traffic, printers, software, financing and warranty
upgrades, increased 86 percent compared with the prior year. Consumer revenue
increased $1.1 billion, or 22 percent, in 1999 compared with 1998. Revenue
benefited from high unit growth driven by strong consumer demand, partially
offset by a decline in average unit prices. Component costs continued to
decline, which allowed Compaq to reach lower price points, thus spurring
consumer demand. An increase in international sales also drove total revenue
higher, particularly in Latin America and Asia-Pacific. Higher revenue from
Internet access and traffic benefited the Consumer segment in 1999.

      Consumer operating income declined $92 million, or 35 percent, in 2000
compared with the prior year. The decline in operating income was primarily due
to a downturn in the U.S. consumer PC market that occurred late in the fourth
quarter of 2000. Higher component costs also contributed to lower operating
income. Operating expenses were relatively unchanged as a percentage of revenue.
Consumer operating income increased $79 million, or 43 percent, in 1999 compared
with 1998. The increase in operating income was attributable to higher revenue,
which resulted in higher gross margin in absolute dollars, and slightly lower
operating expenses as a percentage of revenue.

                                       15
<PAGE>
CORPORATE AND UNALLOCATED SHARED EXPENSES

      The results of the business segments exclude separately managed corporate
and unallocated shared expenses, which consisted primarily of general and
administrative costs as well as other items not controlled by the business
segments. Corporate and unallocated shared expenses declined from $1.2 billion
in 1999 to $1.1 billion in 2000. Corporate and unallocated shared expenses
increased $268 million in 1999 due to higher information management, acquisition
integration and other general shared costs.

RESTRUCTURING AND RELATED ACTIVITIES

      During 2000, Compaq substantially completed all of the actions
contemplated under the 1998 and 1999 restructuring plans. In December 2000,
Compaq reversed excess reserves of $86 million for employee separations,
facility closure costs and other costs related to the 1999 plan. Accrued costs
under both plans at December 31, 2000 included amounts for actions that have
already been taken, but for which expenditures have not yet been made.

      In September 1999, Compaq's management approved a restructuring plan to
realign Compaq's organization, reduce infrastructure and overhead, and eliminate
excess and duplicative facilities. Restructuring and related charges of $868
million ($600 million, net of tax) were expensed. These charges were composed of
$787 million of accrued restructuring costs, $58 million of related asset
impairment charges and a $23 million pension curtailment loss to recognize a
change in Compaq's projected pension benefit obligation in connection with
employee separations. Costs for employee separations related to approximately
7,000 employees worldwide affecting the majority of business functions, job
classes and regions, predominantly occurring in North America and Europe.
Employee separation benefits include severance, medical and other benefits.

      In June 1998, Compaq recorded a restructuring charge of approximately $1.7
billion to integrate the operations of Compaq and Digital, consolidate
duplicative facilities, improve service delivery and reduce overhead.
Approximately $1.5 billion was related to the acquisition of Digital and
recorded as a component of purchase accounting and $286 million related to
Compaq and was charged to operations. During 1998, Compaq also recorded a $107
million charge related to asset impairments.

      An analysis of the accrued costs and amounts charged against the provision
follows:

<TABLE>
<CAPTION>
                                                                                                       EXPENDITURES
                                                          BEGINNING                    DECEMBER 31,         AND         DECEMBER 31,
(In millions)                                              ACCRUAL     EXPENDITURES       1999          ADJUSTMENTS         2000
                                                          ---------    ------------    ------------    -------------    ------------
<S>                                                       <C>          <C>             <C>             <C>              <C>
1999 PLAN
Employee separations ..................................   $     491    $        (68)   $        423    $        (321)   $        102
Facility closure costs ................................          96            --                96              (50)             46
Contract cancellation and other exit costs ............         200            (167)             33              (28)              5
                                                          ---------    ------------    ------------    -------------    ------------
                                                          $     787    $       (235)   $        552    $        (399)   $        153
                                                          ---------    ------------    ------------    -------------    ------------
1998 PLAN
Employee separations ..................................   $   1,131    $       (962)   $        169    $        (106)   $         63
Facility closure costs ................................         414            (184)            230             (124)            106
Relocation ............................................          99             (65)             34              (18)             16
Other exit costs ......................................         100             (83)             17              (12)              5
                                                          ---------    ------------    ------------    -------------    ------------
                                                          $   1,744    $     (1,294)   $        450    $        (260)   $        190
                                                          ---------    ------------    ------------    -------------    ------------
                                                          $   2,531    $     (1,529)   $      1,002    $        (659)   $        343
                                                          =========    ============    ============    =============    ============
</TABLE>

                                       16
<PAGE>
      Employee separations related to the 1998 and 1999 restructuring plans were
1,100 and 4,900, respectively, during 2000. Total employee separations related
to the 1998 and 1999 restructuring plans were 23,400 as of December 31, 2000.

OTHER INCOME AND EXPENSE

      Other income and expense changed from income of $1.1 billion in 1999 to a
$1.7 billion expense in 2000, primarily due to a gain on sale of businesses
recorded in 1999 and an investment impairment charge recorded in 2000. 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. 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). Compaq
recorded a $1.8 billion ($1.1 billion, net of tax) impairment charge during 2000
for certain equity investments, principally Compaq's CMGI investment, that were
judged to have experienced an other than temporary decline in value. Excluding
the investment impairment charge noted above, net investment income was $188
million ($122 million, net of tax) in 2000 compared with $67 million ($44
million, net of tax) in 1999.

PURCHASED IN-PROCESS TECHNOLOGY

      As previously reported, upon consummation of the Digital acquisition in
June 1998, Compaq expensed approximately $3.2 billion of purchased in-process
technology that had not yet reached technological feasibility and had no
alternative future use. The value was determined by estimating the costs to
develop the purchased in-process technology into commercially viable products,
estimating the resulting net cash flows from such projects and discounting the
net cash flows back to their present values. If these projects are not
successfully developed, Compaq's revenue and profitability may be adversely
affected in future periods. Additionally, the value of other intangible assets
acquired may become impaired. Compaq is continually monitoring its development
projects and as expected in the normal course of product development, certain
projects have experienced delays and other projects are being evaluated due to
changes in strategic direction and market conditions.

LIQUIDITY AND CAPITAL RESOURCES

      Compaq's cash and cash equivalents decreased to $2.6 billion at December
31, 2000, from $2.7 billion at December 31, 1999. The decrease resulted
primarily from $1.2 billion used in investing activities, offset in part by $565
million and $298 million provided by operating activities and financing
activities, respectively.

      Net cash of $565 million provided by operating activities consisted
primarily of net income adjusted for non-cash items of $3.1 billion, offset by
$3.0 billion used in working capital and other activities. Net cash used in
working capital and other activities resulted primarily from an increase in
receivables and other assets as well as cash payments for restructuring
activities, partially offset by an increase in other current liabilities. Days
sales outstanding were 53 days and 52 days for 2000 and 1999, respectively. From
time to time, Compaq may sell accounts receivable when it is economically
beneficial. Accounts receivable sold were $328 million and $238 million at
December 31, 2000 and 1999, respectively. Inventory turns were 14.4 and 14.8 in
2000 and 1999, respectively.

      Net cash of $1.2 billion used in investing activities resulted primarily
from the following items. Compaq paid cash of $370 million for the acquisition
of Inacom. Compaq also used cash of $1.1 billion for capital expenditures, net
of disposals. Cash of $364 million was used in other investing activities. These
items were partially offset by a $636 million decrease in short-term
investments.

      Cash provided by financing activities of $298 million consisted primarily
of increases in long-term debt and short-term borrowings of $575 million and
$258 million, respectively, partially offset by common stock transactions of
$365 million and dividends paid to stockholders of $170 million.

                                       17
<PAGE>
      Estimated future uses of cash in 2001 include capital expenditures for
land, buildings and equipment of approximately $1.0 billion, purchases of
equipment to be leased to third parties of approximately $475 million and
approximately $630 million for the repurchase of Compaq common shares.

      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, 2000, the estimated costs to be incurred to
develop the purchased in-process technology into commercially viable products
totaled approximately $1.4 billion in the aggregate through the year 2004 ($430
million in 2001, $420 million in 2002, $380 million in 2003 and $200 million in
2004).

      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 $2.2 billion
revolving credit facility that expires in September 2001 and a $3.0 billion
revolving credit facility that expires in October 2002. The facilities bear
interest at LIBOR plus 0.625 percent and LIBOR plus 0.325 percent, respectively.
Both of these facilities were unused at December 31, 2000 and 1999. Compaq also
operates two short-term commercial paper programs: a $1.5 billion program in the
name of Compaq Computer Corporation and a $1.0 billion program in the name of
Compaq Financial Services Corporation ("CFS"). Both programs are supported by
the $3.0 billion credit facility. Outstanding commercial paper reduces available
borrowings under this credit facility. At December 31, 2000, Compaq had $418
million and $218 million in commercial paper outstanding under the Compaq and
CFS programs, respectively, with a weighted average interest rate of 7.5
percent. The carrying amounts of the borrowings under the commercial paper
programs approximate their fair value. Additionally, Compaq maintains various
uncommitted lines of credit, which totaled approximately $275 million at
December 31, 2000. There were no outstanding borrowings against these lines at
December 31, 2000 and 1999. Compaq believes that these sources of credit provide
sufficient financial flexibility to meet future funding requirements. Compaq
continually evaluates the need to establish other sources of working capital and
will pursue those it considers appropriate based upon its needs and market
conditions.

      Compaq filed a $2.0 billion shelf registration statement for debt
securities with the Securities and Exchange Commission during the second quarter
of 2000. In August 2000, Compaq placed under the registration statement $300
million of unsecured 7.65 percent notes that mature on August 1, 2005, and $275
million of unsecured 7.45 percent notes that mature on August 1, 2002
(collectively, the "Notes"), unless previously redeemed. Interest will be paid
on the Notes on February 1 and August 1 of each year, beginning on February 1,
2001. The fair value of the Notes approximates carrying value. The financing is
for general corporate purposes (including investments in CFS and other
subsidiaries), capital expenditures, and repayment of outstanding indebtedness
(including commercial paper issued for working capital purposes). Compaq has the
capacity to issue an additional $1.4 billion of debt securities under the shelf
registration statement.

FACTORS THAT MAY AFFECT 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
Annual Report.

      COMPONENT SHORTAGES COULD CURTAIL PRODUCTION. From time to time, supply
for key components in Compaq's products lags behind worldwide demand. In the
event that 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. Compaq attempts to mitigate the risks of component
shortages by

                                       18
<PAGE>
working closely with key suppliers on product plans, coordinated product
introductions, purchases on the spot market and selected strategic purchases.

      DELAYS IN IMPLEMENTATION OF CHANGES IN DELIVERY MODELS COULD NEGATIVELY
AFFECT FINANCIAL RESULTS. Compaq sells directly to end users in all market
sectors, but the largest proportion of direct sales is in large enterprise
accounts. Products in Commercial Personal Computing are sold primarily through
third-party resellers while products in Consumer are sold principally through
retail outlets. As compared to Compaq, many Compaq competitors sell a higher
percentage of their personal computer products directly to end user customers.
Direct sales may afford such competitors an advantage that will allow them to
price products lower than Compaq's products are priced or to compete on terms of
service that Compaq cannot match. Compaq has established a variety of programs
designed to achieve similar operational capabilities by simplifying its
product-set and pricing model, re-engineering the channel delivery model and
more rapidly expanding e-commerce capabilities for large, medium and small
businesses.

      COMPETITIVE ENVIRONMENT 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. Competition creates an aggressive pricing
environment, which continues to put pressure on revenue, gross margins and
market share, which is particularly acute during market slowdowns.

      UNANTICIPATED DELAYS IN PRODUCT SCHEDULES COULD AFFECT PRODUCT DEMAND. The
process of developing new high-technology products and services is complex and
often uncertain. Successful product transitions and deployment of new products
requires accurate predictions of the product development schedule as well as
volumes, product mix, customer demand and configuration. Compaq may also
anticipate demand and perceived market acceptance that differs from the
product's realizable customer demand and revenue stream. Further, in the face of
intense competition in the industry, any delay in a new product rollout could
decrease any advantage Compaq may have to be the first to market. A failure on
the part of Compaq to carry out a product rollout in the time frame anticipated
and in the quantities appropriately matching current customer demand could
directly affect the future demand for the product and the profitability of
Compaq's operations.

      NEW FORM FACTORS INTRODUCE UNCERTAINTY INTO THE MARKET. The increasing
reliance on the Internet is creating new dynamics in the computer industry. As
businesses and consumers turn to the Internet, speed and connectivity may become
more critical than stand-alone power for client devices. Compaq is introducing a
new generation of Internet devices built around simple form factors, customized
functions and wireless mobility. Compaq's products will vie for customer
acceptance and market share against those of computer companies as well as
consumer electronics and telecommunications companies. Hardware products, which
are Compaq's traditional area of strength, may become less important than
service offerings in attracting and retaining customers. In addition, as new
form factors are adopted, sales of traditional personal computers may decline.

      CHANGES IN THE SERVICES BUSINESS COULD ADVERSELY AFFECT EARNINGS. Compaq's
Global Services business has traditionally provided services that included the
design and implementation of high-end proprietary systems. If the trend for
design and implementation of systems continues to move from proprietary
environments to industry standard products, Compaq will need to continue and
accelerate retraining its services personnel to compete in the new environment.
There can be no assurance that Compaq will be able to successfully continue
training, attracting and retaining the necessary personnel to achieve this
transition as Compaq adapts its service practices to changing conditions.

                                       19
<PAGE>
      COMPETITION FOR TALENTED EMPLOYEES COULD HAMPER BUSINESS OPERATIONS.
Compaq, like all technology companies, must compete for talented employees in a
market where the demand for such individuals exceeds the number of qualified
candidates. As a result, Compaq's human resources organization focuses
significant efforts on attracting and retaining individuals in key technology
positions internationally. These efforts have generated positive results in
terms of both reducing attrition rates and filling openings created by prior
employee losses. Declining stock market prices, however, make retention more
difficult as prior equity grants contain less value and key employees pursue
equity opportunities elsewhere. Should Compaq experience a substantial loss of
talent or an inability to attract talent for key openings, particularly in
critical markets, the resulting talent gaps could impact Compaq's ability to
meet its business objectives.

       CREDIT RISKS COULD INCREASE IF FINANCIAL CONDITION OF RESELLERS OR
EQUIPMENT LESSEES ERODES. Much of Compaq's revenue results from selling products
through distributors and resellers. Compaq continually monitors and manages the
credit it extends to distributors and resellers and attempts to limit credit
risks by utilizing risk transfer arrangements and obtaining security interests.
The industry's trend from indirect sales models to direct sales models may
reduce the market opportunities for the number of distributors or resellers in
the market. Compaq's business could be adversely affected in the event that the
financial condition of its distributors and resellers erodes. Upon the financial
failure of a distributor or reseller, Compaq could experience disruptions in
distribution as well as a loss associated with the unsecured portion of any
outstanding accounts receivable. Additionally, through its wholly owned
subsidiary, CFS, 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 value of leased equipment
are reasonable, there can be no assurance that such allowances will cover actual
losses or that estimated residual values will be realized.

      DELAYS IN NEW SYSTEMS IMPLEMENTATION COULD HAMPER OPERATIONAL EFFICIENCY.
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 2001, Compaq is focusing on
improvements required to support more direct sales and changes in manufacturing
supply chain operations. Efforts to improve systems infrastructure and increase
system security could be hampered by the need to balance increased operational
efficiency against budgetary constraints. Delays in implementing further
improvements could adversely affect inventory levels, cash and related
profitability.

      QUARTERLY SALES CYCLE MAKES PLANNING AND OPERATIONAL EFFICIENCIES
DIFFICULT. Compaq, like other computer companies, generally sells more products
in the third month of each quarter than in the first and second months. 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, or component pricing
movements, can adversely impact inventory levels, cash and related profitability
in a manner that is disproportionate to the number of days in the quarter
affected.

      MINORITY INVESTMENTS COULD ADVERSELY AFFECT LIQUIDITY AND EARNINGS. Compaq
holds minority interests in companies having operations or technology in areas
within Compaq's strategic focus. Some of these investments are in research and
development, start-up or development stage companies or companies where
operations are not yet sufficient to establish them as going concerns. As a
result, Compaq may be called upon under contractual or other terms to provide
funding for operations of such companies and may share in the losses of such
entities. Certain investments are in publicly traded companies whose share
prices are highly volatile. Adverse changes in market conditions or poor
operating results of underlying

                                       20
<PAGE>
investments could result in Compaq incurring losses or an inability to recover
the carrying value of its investments.

      DOING BUSINESS IN CERTAIN LOCATIONS CREATES ADDITIONAL RISKS.
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 as financial instability among resellers in these regions
and the volatility of economic conditions in countries that are dependent on
exports from the U.S. and European markets. Compaq generally has experienced
longer accounts receivable cycles in emerging markets, in particular
Asia-Pacific and Latin America, when compared with U.S. and European markets.
Compaq is also subject to any political and financial instability in the
countries in which it operates, including inflation, recession, currency
devaluation and interest rate fluctuations. Compaq continues to monitor its
business operations in these regions and takes various measures to manage risks
in these areas.

      EXPENSE CONSTRAINTS COULD IMPEDE OPERATIONS. Compaq is focused on bringing
its operational expense to appropriate levels for each of its businesses while
simultaneously implementing extensive new programs. The significant risks
associated with these actions include the failure to expend sufficient revenue
generating advertising and marketing funds, unanticipated consequences of
reductions in personnel devoted to ongoing programs, and the failure to meet
operating expense targets by not matching commitments in new programs to
reductions in ongoing programs.

      INCOME TAXES. Compaq anticipates an effective tax rate of 30 percent for
2001. Compaq's manufacturing entity in Singapore is subject to a tax holiday
that is not expected to extend beyond 2001. Compaq's tax rate has historically
been heavily dependent upon the proportion of earnings derived from its
Singaporean manufacturing subsidiary and its ability to reinvest those earnings
permanently outside the United States. If Compaq's intercompany transfer pricing
with respect to its Singaporean manufacturing subsidiary for prior years require
significant adjustment due to audits or regulatory changes, Compaq's overall tax
rate could increase.

      At December 31, 2000, Compaq had a deferred tax asset of $379 million
related to net operating loss carryforwards which, if not utilized, will
generally expire between 2001 and 2020 and credit carryforwards of approximately
$1.1 billion, which, if not utilized, will generally expire between 2001 and
2014. Compaq had a valuation allowance of $434 million as of December 31, 2000
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.

      CURRENCY FLUCTUATIONS. Compaq's risks associated with currency
fluctuations are discussed in Item 7A below.

ITEM 7A.  MARKET RISKS

      Compaq is exposed to market risks, which include changes in U.S. 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.

                                       21
<PAGE>
      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 included all fixed income
investments, interest rate swaps, and foreign exchange contracts in the
value-at-risk calculation. See Note 1 and Note 13 in the Notes to the
Consolidated Financial Statements for further information regarding these
instruments. The holding period for these instruments varies from one day to
nine months, with the exception of instruments held by CFS which have holding
periods up to four years. The measured value-at-risk from holding derivative and
other financial instruments, using a 95 percent confidence level and assuming
normal market conditions during the years ended December 31, 2000 and 1999, was
immaterial.

      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. Compaq primarily uses forward exchange contracts to hedge
those assets and liabilities that impact 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 option contracts from time to time as well as short-term forward
exchange contracts to protect against currency exchange risks associated with
the anticipated revenues 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 impact 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.

      Changes in interest rates affect interest income earned on Compaq's cash
equivalents and short-term investments, and interest expense on short-term
borrowings. Compaq does not enter into derivative transactions related to its
cash, cash equivalents or short-term investments. 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.

      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, 2000, the fair value of
Compaq's available-for-sale investments was $461 million. A 20 percent adverse
change in equity prices would result in an approximate $92 million decrease in
the fair value of Compaq's available-for-sale securities as of December 31,
2000.

      Because of the foregoing factors (Factors That May Affect Future Results
and 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.

                                       22
<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

                                                                      PAGE
Consolidated Financial Statements:
   Audit Reports                                                       24
   Consolidated Balance Sheet at December 31, 2000 and 1999            26
   Consolidated  Statement  of Income for each of the three years
      in the period ended December 31, 2000                            27
   Consolidated  Statement  of Cash  Flows  for each of the three
      years in the period ended December 31, 2000                      28
   Consolidated  Statement  of  Stockholders'  Equity for each of
      the three years in the period ended December 31, 2000            30
   Notes to Consolidated Financial Statements                          31

Financial Statement Schedule:
   Audit Reports                                                       57
   For each of the three years in the period ended December 31, 2000
   Schedule II: Valuation and Qualifying Accounts                      59


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

   None.

                                       23
<PAGE>
REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Stockholders of Compaq Computer Corporation

We have audited the accompanying consolidated balance sheet of Compaq Computer
Corporation as of December 31, 2000, and the related consolidated statement of
income, stockholders' equity, and cash flows for the year ended December 31,
2000. 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 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 audit provides 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, 2000, and the consolidated results of its operations
and its cash flows for the year ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.

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



                                                     /s/ Ernst and Young LLP
Houston, Texas
January 23, 2001

                                       24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS


To the Stockholders and Board of Directors
of Compaq Computer Corporation

In our opinion, the consolidated balance sheet as of December 31, 1999 and the
related consolidated statements of income, of cash flows and of stockholders'
equity for each of the two years in the period ended December 31, 1999 present
fairly, in all material respects, the financial position, results of operations
and cash flows of Compaq Computer Corporation and its subsidiaries at December
31, 1999 and for each of the two years in the period 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 audits. We conducted our audits 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
audits provide 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.


/s/ PricewaterhouseCoopers LLP
Houston, Texas
January 25, 2000

                                       25
<PAGE>
                           COMPAQ COMPUTER CORPORATION
                           CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31 (In millions, except par value)                                  2000        1999
                                                                           --------    --------
<S>                                                                        <C>         <C>
ASSETS
Current assets:
   Cash and cash equivalents ...........................................   $  2,569    $  2,666
   Short-term investments ..............................................       --           636
   Trade accounts receivable, net ......................................      6,715       5,622
   Leases and other accounts receivable ................................      1,677       1,063
   Inventories .........................................................      2,161       2,008
   Other assets ........................................................      1,989       1,854
                                                                           --------    --------
       Total current assets ............................................     15,111      13,849

Property, plant and equipment, net .....................................      3,431       3,249
Other assets, net ......................................................      6,314      10,179
                                                                           --------    --------
                                                                           $ 24,856    $ 27,277
                                                                           ========    ========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Short-term borrowings ...............................................   $    711    $    453
   Accounts payable ....................................................      4,233       4,380
   Deferred income .....................................................      1,089         972
   Other liabilities ...................................................      5,516       6,033
                                                                           --------    --------
       Total current liabilities .......................................     11,549      11,838
                                                                           --------    --------

Long-term debt .........................................................        575        --
                                                                           --------    --------
Postretirement and other postemployment benefits .......................        652         605
                                                                           --------    --------
Commitments and contingencies
                                                                           --------    --------
Stockholders' equity:
   Preferred stock, $.01 par value
       Shares authorized: 10 million shares; shares issued: none .......       --          --
   Common stock and capital in excess of $.01 par value
       Shares authorized: 3 billion
       Shares issued:  2000 - 1,742 million; 1999 - 1,715 million ......      8,039       7,627
   Retained earnings ...................................................      5,347       4,948
   Accumulated other comprehensive income ..............................         27       2,919
   Treasury stock (shares:  2000 - 53 million; 1999 - 21 million) ......     (1,333)       (660)
                                                                           --------    --------
       Total stockholders' equity ......................................     12,080      14,834
                                                                           --------    --------
                                                                           $ 24,856    $ 27,277
                                                                           ========    ========
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       26
<PAGE>
                           COMPAQ COMPUTER CORPORATION
                        CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended December 31 (In millions, except per share amounts)       2000        1999        1998
                                                                   --------    --------    --------
<S>                                                                <C>         <C>         <C>
Revenue:
    Products ...................................................   $ 35,667    $ 31,902    $ 27,372
    Services ...................................................      6,716       6,623       3,797
                                                                   --------    --------    --------
        Total revenue ..........................................     42,383      38,525      31,169
                                                                   --------    --------    --------
Cost of sales:
    Products ...................................................     27,624      25,263      21,383
    Services ...................................................      4,793       4,535       2,597
                                                                   --------    --------    --------
        Total cost of sales ....................................     32,417      29,798      23,980
                                                                   --------    --------    --------
Selling, general and administrative expense ....................      6,044       6,341       4,978
Research and development .......................................      1,469       1,660       1,353
Restructuring and related activities ...........................        (86)        868         393
Purchased in-process technology ................................       --          --         3,196
Other (income) expense, net ....................................      1,664      (1,076)        (69)
                                                                   --------    --------    --------
                                                                      9,091       7,793       9,851
                                                                   --------    --------    --------
Income (loss) before income taxes ..............................        875         934      (2,662)
Provision for income taxes .....................................        280         365          81
                                                                   --------    --------    --------
Income (loss) before cumulative effect of accounting change ....        595         569      (2,743)

Cumulative effect of accounting change, net of tax .............        (26)       --          --
                                                                   --------    --------    --------
Net income (loss) ..............................................   $    569    $    569    $ (2,743)
                                                                   ========    ========    ========
Earnings (loss) per common share:
Basic:
    Before cumulative effect of accounting change ..............   $   0.35    $   0.35    $  (1.71)
    Cumulative effect of accounting change, net of tax .........      (0.02)       --          --
                                                                   --------    --------    --------
                                                                   $   0.33    $   0.35    $  (1.71)
                                                                   ========    ========    ========
Diluted:
    Before cumulative effect of accounting change ..............   $   0.34    $   0.34    $  (1.71)
    Cumulative effect of accounting change, net of tax .........      (0.01)       --          --
                                                                   --------    --------    --------
                                                                   $   0.33    $   0.34    $  (1.71)
                                                                   ========    ========    ========
Shares used in computing earnings (loss) per common share:
    Basic ......................................................      1,702       1,693       1,608
                                                                   ========    ========    ========
    Diluted ....................................................      1,742       1,735       1,608
                                                                   ========    ========    ========
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       27
<PAGE>
                           COMPAQ COMPUTER CORPORATION
                      CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31 (In millions)                                           2000        1999        1998
                                                                             --------    --------    --------
<S>                                                                          <C>         <C>         <C>
Cash flows from operating activities:
     Net income (loss) ...................................................   $    569    $    569    $ (2,743)
     Adjustments to reconcile net income (loss) to net cash
        provided by operating activities:
           Depreciation and amortization .................................      1,407       1,402         893
             Investment impairment .......................................      1,756        --          --
             Gain on sale of businesses ..................................       --        (1,182)       --
           Restructuring and related activities ..........................        (86)        868         393
           Purchased in-process technology ...............................       --          --         3,196
           Deferred income taxes and other ...............................        (26)         21         (53)
           Changes in assets and liabilities, net of effects of
             acquired and divested businesses:
              Receivables ................................................     (1,920)        185      (1,736)
              Inventories ................................................        (72)        (97)        857
              Accounts payable ...........................................       (228)        135         589
              Other assets and liabilities ...............................       (835)       (598)       (518)
                                                                             --------    --------    --------
                  Net cash provided by operating activities ..............        565       1,303         878
                                                                             --------    --------    --------
Cash flows from investing activities:
      Capital expenditures, net ..........................................     (1,133)     (1,185)       (600)
      (Increase) decrease in short-term investments ......................        636        (636)        344
      Acquisition of businesses, net of cash acquired ....................       (370)       (517)     (1,413)
      Other investing activities, net ....................................       (364)       (131)       (798)
                                                                             --------    --------    --------
                  Net cash used in investing activities ..................     (1,231)     (2,469)     (2,467)
                                                                             --------    --------    --------
Cash flows from financing activities:
      Increase in short-term borrowings ..................................        258         453        --
      Issuance (repayment) of long-term debt .............................        575        --          (788)
      Common stock transactions, net .....................................       (365)        (93)         23
      Dividends to stockholders ..........................................       (170)       (136)        (95)
      Payments to retire Digital preferred stock .........................       --          (400)       --
      Other financing activities .........................................       --          --           (18)
                                                                             --------    --------    --------
                  Net cash provided by (used in) financing activities ....        298        (176)       (878)
                                                                             --------    --------    --------
Effect of exchange rate changes on cash and cash equivalents .............        271         (83)        140
                                                                             --------    --------    --------
                  Net decrease in cash and cash equivalents ..............        (97)     (1,425)     (2,327)
Cash and cash equivalents at the beginning of the year ...................      2,666       4,091       6,418
                                                                             --------    --------    --------
Cash and cash equivalents at the end of the year .........................   $  2,569    $  2,666    $  4,091
                                                                             ========    ========    ========
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       28
<PAGE>
                           COMPAQ COMPUTER CORPORATION
                CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)


SUPPLEMENTAL CASH FLOW INFORMATION
Year ended December 31 (In millions)         2000          1999          1998
                                           --------      --------      --------
Interest paid ........................     $    288      $    152      $    175
Income taxes paid ....................     $    488      $    415      $    259

ACQUISITION OF BUSINESSES
Fair value of:
      Assets acquired ................     $    499      $    811      $ 16,124
      Liabilities assumed ............         (129)         (201)       (7,109)
      Stock issued ...................         --            --          (4,284)
      Options issued .................         --             (60)         (249)
                                           --------      --------      --------
Cash paid ............................          370           550         4,482
Less: Cash acquired ..................         --             (33)       (3,069)
                                           --------      --------      --------
Net cash paid for acquisitions .......     $    370      $    517      $  1,413
                                           ========      ========      ========
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      $   --
                                           ========      ========      ========

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

                                       29
<PAGE>
                           COMPAQ COMPUTER CORPORATION
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                            COMMON STOCK
                                                      ------------------------              ACCUMULATED
                                                                 PAR VALUE AND                 OTHER                      TOTAL
                                                      NUMBER OF   CAPITAL IN    RETAINED   COMPREHENSIVE   TREASURY    STOCKHOLDERS'
(In millions)                                          SHARES    EXCESS OF PAR  EARNINGS   INCOME (LOSS)    STOCK         EQUITY
                                                      ---------  -------------  --------   -------------   --------    -------------
<S>                                                   <C>        <C>            <C>        <C>             <C>        <C>
Beginning balance, December 31, 1997 ..............       1,519  $       2,096  $  7,351   $         (18)  $   --     $       9,429
Comprehensive income:
   Net loss .......................................                               (2,743)                                    (2,743)
   Foreign currency translation adjustment ........                                                   20                         20
   Minimum pension liability adjustment ...........                                                  (38)                       (38)
                                                                                                                      -------------
Total comprehensive loss ..........................                                                                          (2,761)
                                                                                                                      -------------
   Issuance pursuant to stock option plans ........          36            407                                                  407
   Issuance pursuant to acquisitions ..............         141          4,533                                                4,533
   Stock option tax benefits and other ............           2            234                                                  234
   Cash dividends .................................                                 (107)                                      (107)
   Repurchase treasury stock, at cost .............                                                            (384)           (384)
                                                      ---------  -------------  --------   -------------   --------   -------------
Ending 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
                                                      =========  =============  ========   =============   ========   =============
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       30
<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 ("Compaq")
is a leading global provider of enterprise technology and solutions. Compaq
designs, develops, manufacturers and markets hardware, software, solutions and
services, including industry-leading enterprise computing solutions,
fault-tolerant business-critical solutions, communication products, and desktop
and portable personal computers that are sold in more than 200 countries.

      Compaq completed the acquisition of Digital Equipment Corporation
("Digital"), Shopping.Com ("SDC") and Zip2 Corp. ("Zip2") and purchased certain
assets and liabilities of InaCom Corp. ("Inacom") in June 1998, February 1999,
April 1999 and February 2000, respectively. These acquisitions were accounted
for as purchases. In August 1999, Compaq sold a majority interest in SDC, Zip2
and the AltaVista Company, a business acquired in the Digital acquisition
(collectively "AltaVista") to CMGI, Inc. ("CMGI"). Accordingly, Compaq's
consolidated financial statements included the results of operations from the
respective dates of acquisition through divestiture or December 31, 2000, 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.

USE OF ESTIMATES. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. Actual results could differ from those estimates.

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS. Cash equivalents include highly
liquid, temporary cash investments having original maturity dates of three
months or less. Short-term investments include certificate of deposits,
commercial paper and other investments not qualifying as cash equivalents. For
reporting purposes, such cash equivalents and short-term investments are stated
at cost plus accrued interest which approximates fair value.

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

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.
Certain of the investments carry restrictions on immediate disposition.
Investments in public companies 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 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. Declines in value that are judged to be other than temporary
are reported in other income and expense.

                                       31
<PAGE>
INTANGIBLE ASSETS. Intangible assets primarily relate to the value of the
installed customer base, proven research and development, and trademarks of
companies acquired, as well as 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. Generally, these criteria are met
at the time product is shipped. Provision is made at the time the related
revenue is recognized for estimated product returns, price protection and other
offerings which may occur under programs Compaq has with its customers. Compaq
provides for the estimated cost of product warranties upon shipment. When other
significant obligations remain after products are delivered, revenue is
recognized only after such obligations are fulfilled. Revenue from fixed price,
long-term contracts is generally recognized over the contract term using the
percentage of completion method, based on the achievement of external
milestones. 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 services is recognized ratably over the contractual period or as the
services are performed. Shipping and handling costs are included in cost of
goods sold.

FINANCING TRANSACTIONS. Compaq offers customer financing to assist customers in
their acquisition of Compaq's products through its leasing subsidiary, Compaq
Financial Services Corporation ("CFS"). 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 2000, 1999 and 1998 were $370 million, $385 million and
$336 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. Compaq accounts for income taxes under Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES. The asset and
liability approach is used to recognize 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.

                                       32
<PAGE>
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. Incremental shares of 40 million and 42
million in 2000 and 1999, respectively, were used in the calculation of diluted
earnings per common share. Diluted loss per common share for 1998 is based only
on the weighted average number of common shares outstanding during the period,
as the inclusion of 60 million common share equivalents would have been
antidilutive. Stock options to purchase 107 million, 66 million and 13 million
shares of common stock in 2000, 1999 and 1998, 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 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 8 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.

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, 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 management for making
operating decisions and assessing performance as the source of Compaq's
reportable operating segments. Compaq also discloses information about products
and services, geographical areas and major customers.

RECENT PRONOUNCEMENTS. Effective January 1, 2001, Compaq adopted Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, as amended ("FAS 133"). This statement establishes a new
model 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 impact of the adoption will be based on factors such as specific
derivative and hedging activities, market conditions and contractual
arrangements at the date of adoption. The effect of the adoption will not have a
significant impact on Compaq's financial position or results of operations in
2001.

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

NOTE 2. ACCOUNTING CHANGE

      Effective January 1, 2000, Compaq adopted Staff Accounting Bulletin No.
101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, as amended ("SAB 101"), issued
by the Securities and Exchange Commission 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

                                       33
<PAGE>
and quarterly earnings during 2000. Compaq has restated its results for the
first three quarters of the year ended December 31, 2000, as reflected in the
Selected Quarterly Financial Data on page 50. Pro forma results for prior years
are not disclosed due to immateriality.

NOTE 3. ACQUISITIONS AND DIVESTITURES

      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.

      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. In October 1999, CMGI converted the CMGI preferred shares held
by Compaq into 3.6 million CMGI common shares. The CMGI common shares acquired
by Compaq in this transaction carry certain restrictions whereby Compaq may 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). Compaq accounts for its minority investments in CMGI and AltaVista
under the cost method. 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.

      In June 1998, Compaq consummated its acquisition of Digital for an
aggregate purchase price of $9.1 billion. The purchase price consisted of
approximately $4.5 billion in cash, the issuance of approximately 141 million
shares of Compaq common stock valued at approximately $4.3 billion and the
issuance of approximately 25 million options to purchase Compaq common stock
valued at approximately $249 million. This acquisition was accounted for as a
purchase. The unaudited consolidated pro forma information for 1998 as if Compaq
and Digital had been combined as of the beginning of 1998 included revenue and
net income of $36.4 billion and $275 million, respectively, and basic and
diluted earnings per common share of $0.16 each.

NOTE 4. CERTAIN BALANCE SHEET COMPONENTS

      Compaq's trade accounts receivable are reported net of allowance for
doubtful accounts of $211 million and $222 million at December 31, 2000 and
1999, respectively. Other current assets include deferred tax assets of $1.7
billion and $1.5 billion at December 31, 2000 and 1999, respectively. The net
investment in lease receivables consisted of the following:

                                       34
<PAGE>
December 31 (In millions)                                 2000           1999
                                                        -------         -------
Minimum lease payment receivable ...............        $ 1,868         $ 1,160
Unguaranteed residual values ...................            122              59
Initial direct costs ...........................             21              12
Allowance ......................................            (27)            (12)
Unearned income ................................           (217)           (118)
                                                        -------         -------
                                                        $ 1,767         $ 1,101
                                                        =======         =======

      Contractual maturities of Compaq's lease receivables at December 31, 2000
were $866 million in 2001, $601 million in 2002, $328 million in 2003, $66
million in 2004 and $7 million in 2005. Compaq also leases its products to
customers under operating leases. Minimum future rentals under operating leases
at December 31, 2000 were $426 million in 2001, $244 million in 2002 and $48
million in 2003.

      Inventories consisted of the following:

December 31 (In millions)                               2000           1999
                                                       ------         ------
Raw material .............................             $  540         $  448
Work-in-progress .........................                298            394
Finished goods ...........................              1,323          1,166
                                                       ------         ------
                                                       $2,161         $2,008
                                                       ======         ======

      Property, plant and equipment consisted of the following:

December 31 (In millions)                                   2000         1999
                                                          --------     --------
Land .................................................    $    342     $    342
Buildings and leasehold improvements .................       1,493        1,572
Machinery and equipment ..............................       3,786        3,095
Equipment leased to third parties ....................       1,166          741
Construction-in-process ..............................         261          301
                                                          --------     --------
                                                             7,048        6,051
Less: Accumulated depreciation .......................      (3,617)      (2,802)
                                                          --------     --------
                                                          $  3,431     $  3,249
                                                          ========     ========

      Depreciation expense totaled $1.1 billion, $839 million and $606 million
in 2000, 1999 and 1998, respectively. Accumulated depreciation related to
equipment leased to third parties was $422 million and $224 million at December
31, 2000 and 1999, respectively.

      Other non-current assets consisted of the following:

December 31 (In millions)                               2000           1999
                                                      --------       --------
Investments ..................................        $    864       $  6,617
Intangible assets ............................           2,637          2,351
Deferred income taxes ........................           1,604            342
Other assets .................................           2,032          1,442
                                                      --------       --------
                                                         7,137         10,752
Less: Accumulated amortization ...............            (823)          (573)
                                                      --------       --------
                                                      $  6,314       $ 10,179
                                                      ========       ========

      Amortization expense related to intangible assets totaled $313 million,
$563 million and $287 million in 2000, 1999 and 1998, respectively. The cost
basis and fair value of Compaq's available-for-sale securities at December 31,
2000 was $350 million and $461 million, respectively. 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. At December 31, 1999, the cost basis and fair value of
available-for-sale securities was $857 million and $5.4 billion, respectively,
and the cumulative unrealized gain was $4.6 billion ($3.0 billion, net of tax).
Compaq made

                                       35
<PAGE>
cash purchases of investments of approximately $480 million and $89 million
during 2000 and 1999, respectively.

      Other current liabilities consisted of the following:

December 31 (In millions)                                     2000        1999
                                                            --------    --------
Salaries, wages and related items ......................    $    922    $    644
Accrued restructuring costs ............................         343       1,002
Income taxes payable ...................................         769         992
Accrued warranties .....................................         938         937
Other accrued liabilities ..............................       2,544       2,458
                                                            --------    --------
                                                            $  5,516    $  6,033
                                                            ========    ========

NOTE 5. BORROWINGS

      Compaq has a $2.2 billion revolving credit facility that expires in
September 2001 and a $3.0 billion revolving credit facility that expires in
October 2002. The facilities bear interest at LIBOR plus 0.625 percent and LIBOR
plus 0.325 percent, respectively. Fees associated with these facilities are
immaterial. Both of these facilities were unused at December 31, 2000 and 1999.
Compaq also operates two short-term commercial paper programs: a $1.5 billion
program in the name of Compaq Computer Corporation and a $1.0 billion program in
the name of CFS. Both programs are supported by the $3.0 billion credit
facility. Outstanding commercial paper reduces available borrowings under this
credit facility. At December 31, 2000, Compaq had $418 million and $218 million
in commercial paper outstanding under the Compaq and CFS programs, respectively,
with a weighted average interest rate of 7.5 percent. The carrying amounts of
the borrowings under the commercial paper program approximate their fair value.
Additionally, Compaq maintains various uncommitted lines of credit, which
totaled approximately $275 million at December 31, 2000. There were no
outstanding borrowings against these lines at December 31, 2000 and 1999.

      Compaq filed a $2.0 billion shelf registration statement for debt
securities with the Securities and Exchange Commission during the second quarter
of 2000. In August 2000, Compaq placed under the registration statement $300
million of unsecured 7.65 percent notes that mature on August 1, 2005, and $275
million of unsecured 7.45 percent notes that mature on August 1, 2002
(collectively, the "Notes"), unless previously redeemed. Interest will be paid
on the Notes on February 1 and August 1 of each year, beginning on February 1,
2001. The fair value of the Notes approximates carrying value. The financing is
for general corporate purposes (including investments in CFS and other
subsidiaries), capital expenditures and repayment of outstanding indebtedness
(including commercial paper issued for working capital purposes). Compaq has the
capacity to issue an additional $1.4 billion of debt securities under the shelf
registration statement.

NOTE 6. OTHER INCOME AND EXPENSE

      Other (income) expense consisted of the following:

Year ended December 31 (In millions)             2000        1999        1998
                                               --------    --------    --------
Investment (income) loss, net ..............   $  1,568    $    (67)   $     (9)
Gain on sale of businesses .................       --        (1,182)       --
Interest and dividend income ...............       (276)       (196)       (287)
Interest expense ...........................        273         211         166
Currency losses, net .......................         75         136          16
Other, net .................................         24          22          45
                                               --------    --------    --------
                                               $  1,664    $ (1,076)   $    (69)
                                               ========    ========    ========

      Net investment loss in 2000 included a $1.8 billion ($1.1 billion, net of
tax) impairment charge for certain equity investments judged to have experienced
an other than temporary decline in value, a $252 million ($164 million, net of
tax) realized gain on the sale of available-for-sale securities and a $77

                                       36
<PAGE>
million loss from investments accounted for under the equity method. Net
investment income in 1999 included a $126 million ($82 million, net of tax)
realized gain on the sale of available-for-sale securities and a $52 million
loss from investments accounted for under the equity method. Proceeds associated
with the sale of available-for-sale securities were $264 million and $149
million in 2000 and 1999, respectively.


NOTE 7. PROVISION FOR INCOME TAXES

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

Year ended December 31 (In millions)        2000          1999           1998
                                          --------      --------       --------
Domestic ...........................      $    200      $     94       $ (4,782)
Foreign ............................           675           840          2,120
                                          --------      --------       --------
                                          $    875      $    934       $ (2,662)
                                          ========      ========       ========

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

Year ended December 31 (In millions)             2000        1999        1998
                                               --------    --------    --------
Current tax expense (benefit)
  U.S. federal .............................   $    (91)   $      1    $    (92)
  State and local ..........................          5          11          (9)
  Foreign ..................................        353         460         312
                                               --------    --------    --------
     Total current .........................        267         472         211
                                               --------    --------    --------
Deferred tax expense (benefit)
  U.S. federal .............................        (91)         47        (429)
  State and local ..........................         (2)         43         (11)
  Foreign ..................................        106        (197)        310
                                               --------    --------    --------
     Total deferred ........................         13        (107)       (130)
                                               --------    --------    --------
     Total provision .......................   $    280    $    365    $     81
                                               ========    ========    ========


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

Year ended December 31 (In millions)             2000        1999        1998
                                               --------    --------    --------
Tax expense (benefit) at U.S. statutory rate.  $    306    $    327    $   (932)
Foreign tax effect, net .....................      --           (31)        (40)
Non-deductible purchased in-process
technology ..................................      --          --         1,119
Release of valuation allowance ..............      --          --           (77)
Disposition of businesses ...................      --            77        --
Recovery of operating subsidiary stock basis.       (61)       --          --
Other, net ..................................        35          (8)         11
                                               --------    --------    --------
                                               $    280    $    365    $     81
                                               ========    ========    ========

      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.

      The Singapore tax holiday for manufacturing operations will continue
through August 2001 and could be extended through August 2004 if cumulative
investment levels and other conditions are maintained. Compaq ceased utilization
of a portion of its Singaporean manufacturing subsidiary's production capacity
during 2000. Consequently, the profitability of this facility has decreased

                                       37
<PAGE>
significantly resulting in a corresponding decrease in the impact of the tax
holiday on Compaq's effective tax rate during 2000.

      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. In connection with the 1998
acquisition of Digital, Compaq recorded non-recurring, non-tax-deductible
charges for purchased in-process technology of approximately $3.2 billion.

      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 would become subject to incremental foreign
withholding, federal and state income tax if they were actually or deemed to be
remitted to the U.S. Compaq estimates an additional tax provision of
approximately $2.1 billion would be required if the full amount of approximately
$6.2 billion in accumulated earnings were actually or deemed distributed to the
U.S.

      Compaq recorded a gross deferred tax asset of approximately $2.8 billion
in conjunction with the acquisition of Digital in 1998. This gross deferred tax
asset was reduced by a valuation allowance of $562 million, resulting in a net
increase in the deferred tax asset of approximately $2.2 billion in 1998. The
valuation allowance consisted principally of pre-acquisition tax loss
carryforwards and credit carryforwards incurred by Digital which management has
determined are more likely than not to expire unused. The valuation allowance
was reduced by $95 million during 2000 and $152 million during 1999 as a result
of tax loss and credit carryforward expirations.

      During 1998, Compaq recorded $65 million of other tax loss and credit
carryforwards for which a full valuation allowance was provided due to
uncertainty surrounding their realizability. In addition, the valuation
allowance was reduced by $77 million to reflect Tandem Computers Incorporated
("Tandem") credit carryforwards which, as a result of the liquidation of the
U.S. Tandem parent company at the close of 1998, are now believed more likely
than not to be realized. This reduction in the valuation allowance resulted in a
tax benefit in the 1998 deferred income tax provision.

      Deferred tax assets (liabilities) were as follows:

 December 31 (In millions)                                   2000        1999
                                                           --------    --------

 Loss carryforwards ....................................   $    379    $  1,230
 Credit carryforwards ..................................      1,109         960
 Accrued liabilities ...................................        748         655
 Tax versus financial reporting year-end ...............        446        --
 Capitalized research and development costs ............        349         449
 Receivable allowances and related reserves ............        278         380
 Inventory adjustments .................................        347         341
 Other .................................................        514         273
                                                           --------    --------
     Gross deferred tax assets .........................      4,170       4,288
                                                           --------    --------
 Equity investments ....................................        (46)     (1,604)
 Intangible assets .....................................       (333)       (382)
 Other .................................................        (87)        (27)
                                                           --------    --------
     Gross deferred tax liabilities ....................       (466)     (2,013)
                                                           --------    --------
 Deferred tax asset valuation allowance ................       (434)       (529)
                                                           --------    --------
                                                           $  3,270    $  1,746
                                                           ========    ========

      Tax loss carryforwards will generally expire between 2001 and 2020. Credit
carryforwards will generally expire between 2001 and 2014. U.S. tax laws limit
the annual utilization of tax loss and credit

                                       38
<PAGE>
carryforwards of acquired entities. These limitations should not materially
impact the utilization of the tax carryforwards.

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 (the "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 two years 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.

      Compaq had approximately 2 million shares of restricted stock outstanding
at December 31, 2000. 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, 2000, there were 336 million shares of common stock
reserved for issuance under all of Compaq's stock option plans. For all plans,
options of 107 million, 101 million and 88 million shares were exercisable at
December 31, 2000, 1999 and 1998 with a weighted average exercise price of
$20.16, $16.13 and $11.76, respectively. There were 31 million, 123 million and
217 million shares available for grant under the plans at December 31, 2000,
1999 and 1998, 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, 1997.............           171                                   $   13.63
      Options granted in the acquisition of Digital..            25     $  5.94  -   $ 39.23              22.23
      Options granted................................            13     $ 14.44  -   $ 42.00              33.35
      Options lapsed or canceled.....................           (16)                                      21.84
      Options exercised..............................           (36)    $  1.30  -   $ 39.23              11.39
                                                        -----------                              ----------------
  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
                                                        ===========                              ----------------
</TABLE>
                                       39
<PAGE>
      The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 2000:
<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          15            1.8       $    3.20          15        $   3.20
   5.01 to 10.00          20            3.7            8.82          20            8.82
  10.01 to 15.00           8            4.3           12.40           8           12.36
  15.01 to 20.00          77            9.0           17.67          13           16.22
  20.01 to 25.00          20            7.5           23.25          10           23.27
  25.01 to 30.00         122            8.7           26.54          22           26.61
     over $30.00          38            7.1           43.34          19           42.34
                    -----------   -------------   ---------     -----------    --------
                         300            7.7       $   23.45         107        $  20.16
                    ===========   =============   =========     ===========    ========
</TABLE>
      In April 1999, Compaq's stockholders approved the Compaq Computer
Corporation Employee Stock Purchase Plan (the "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 2000, employees purchased approximately 2 million shares
for approximately $61 million under the ESPP. At December 31, 2000, there were
approximately 23 million shares available for future purchases under the ESPP.

      The weighted average fair value per share of options granted during 2000,
1999 and 1998 was $11.80, $13.22 and $12.95, respectively. The weighted average
fair value per share of options granted under the ESPP during 2000 was $8.62.
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                     2000        1999        1998        2000
                                           --------    --------    --------    --------
<S>                                        <C>         <C>         <C>        <C>
Expected option life (in years) ........          6           5           5          .5
Risk-free interest rate ................        5.0%        5.5%        4.6%        6.3%
Volatility .............................       49.7%       39.8%       33.5%       55.9%
Dividend yield .........................        0.4%        0.3%        0.2%        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.

                                       40
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31 (In millions, except per share amounts)             2000       1999       1998
                                                                         --------   --------   --------
<S>                                                                      <C>        <C>        <C>
Income (loss) before income taxes:
    As reported ......................................................   $    875   $    934   $ (2,662)
    Pro forma ........................................................        293        623     (2,832)

Net income (loss):
    As reported ......................................................        569        569     (2,743)
    Pro forma ........................................................        191        367     (2,854)

Diluted earnings (loss) per share:
    As reported ......................................................       0.33       0.34      (1.71)
    Pro forma ........................................................       0.11       0.23      (1.77)
</TABLE>
NOTE 9. STOCKHOLDERS' EQUITY

      On December 29, 2000, the Board approved a cash dividend of $0.025 per
share of common stock, or approximately $43 million, to stockholders of record
as of December 31, 2000 to be paid in 2001. Total dividends declared in 2000,
1999 and 1998 were $170 million ($0.10 per share), $144 million ($0.085 per
share) and $107 million ($0.065 per share), respectively.

      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 new 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 new program is in effect. During 2000, total shares
repurchased to date 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.

NOTE 10. PENSION AND OTHER BENEFIT PROGRAMS

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

        Compaq recorded an additional minimum liability as of December 31, 2000
and 1999 totaling $33 million and $78 million, 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 $401 million, $324 million and $154 million, respectively,
for the year ended December 31, 2000, and $353 million, $332 million and $161
million for the year ended December 31, 1999. The measurement dates of the plans
were October 31, 2000 and 1999.

                                       41
<PAGE>
      Information regarding Compaq's defined benefit and OPEB Plans was as
follows:
<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31, 2000    YEAR ENDED DECEMBER 31, 1999
                                                                     ----------------------------    ----------------------------
                                                                      DEFINED BENEFIT      OPEB       DEFINED BENEFIT      OPEB
                                                                       PENSION PLANS       PLANS       PENSION PLANS       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 .........................  $ 2,085   $  1,728   $   344    $ 2,203   $  1,831   $   335
  Service cost ....................................................       40         66         6         41         65        10
  Interest cost ...................................................      147         94        25        140         96        24
                                                                        (127)       144       (11)       (99)       (37)        5
  Curtailment (gain) loss .........................................     --           (7)     --           13        (55)       (7)
  Benefits paid ...................................................     (204)       (70)      (30)      (213)      (120)      (27)
  Currency loss ...................................................     --         (172)       (1)      --         (101)       (1)
  Other ...........................................................     --          (16)        5       --           49         5
                                                                     -------   --------   -------    -------   --------   -------
    Projected benefit obligation at end of year ...................    1,941      1,767       338      2,085      1,728       344
                                                                     -------   --------   -------    -------   --------   -------
Change in plan assets
  Fair value of plan assets at beginning of year ..................    2,371      1,827      --        2,198      1,813      --
  Actual return on plan assets ....................................      174        233      --          381        209      --
  Benefits paid ...................................................     (204)       (70)      (30)      (213)      (120)      (26)
  Currency loss ...................................................     --         (161)     --         --         (114)     --
  Other ...........................................................        3          5        30          5         39        26
                                                                     -------   --------   -------    -------   --------   -------
     Fair value of plan assets at end of year .....................    2,344      1,834      --        2,371      1,827      --
                                                                     -------   --------   -------    -------   --------   -------
Funded status .....................................................      403         67      (338)       286         99      (344)
Unrecognized net actuarial (gain) loss ............................     (179)        82       (22)       (94)       124       (11)
Unrecognized prior service cost ...................................     --           50         3       --           45         4
                                                                     -------   --------   -------    -------   --------   -------
  Prepaid (accrued) benefit cost ..................................      224        199      (357)       192        268      (351)
  Contributions after measurement date ............................     --            8      --         --            5      --
                                                                     -------   --------   -------    -------   --------   -------
     Prepaid (accrued) benefit cost ...............................  $   224   $    207   $  (357)   $   192   $    273   $  (351)
                                                                     =======   ========   =======    =======   ========   =======
Amounts included in the Consolidated Balance Sheet are composed of:
  Prepaid benefit cost ............................................  $   230   $    344   $  --      $   199   $    377       $--
  Accrued benefit liability .......................................       (6)      (170)     (357)        (8)      (182)     (351)
  Other assets ....................................................     --           22      --         --           44      --
  Accumulated other comprehensive income ..........................     --           11      --            1         34      --
                                                                     -------   --------   -------    -------   --------   -------
    Net amount recognized .........................................  $   224   $    207   $  (357)   $   192   $    273   $  (351)
                                                                     -------   --------   -------    -------   --------   -------
Weighted average assumptions as of October 31
  Discount rate ...................................................     8.00%      5.75%     8.00%      7.50%      5.75%     7.50%
  Expected return on plan assets ..................................     9.00%      7.35%      N/A       9.00%      7.50%      N/A
  Rate of compensation increase ...................................     4.50%      3.60%      N/A       4.50%      3.30%      N/A
  Health care cost trend rate, current year .......................      N/A        N/A      5.50%       N/A        N/A      5.50%
  Health care 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      2001        N/A        N/A      2001

Components of net periodic benefit cost
  Service cost ....................................................  $    40   $     66   $     6    $    41   $     65   $    10
  Interest cost ...................................................      147         94        25        140         96        24
  Expected return on plan assets ..................................     (199)      (125)     --         (191)      (138)     --
  Settlement/curtailment gain .....................................      (17)        (3)     --           (9)        (4)       (7)
  Other ...........................................................     --            9         1        --           3        (1)
                                                                     -------   --------   -------    -------   --------   -------
    Net periodic pension cost .....................................  $   (29)  $     41   $    32    $   (19)  $     22   $    26
                                                                     =======   ========   =======    =======   ========   =======
</TABLE>
(1)   The OPEB Plans are consolidated to include both U.S. and foreign results.
      Foreign results are immaterial for separate disclosure.

                                       42
<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 $34 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 $29 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 $138 million, $121 million and $98
million in 2000, 1999 and 1998, 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. Amounts charged to expense were $106 million, $26 million and $68
million in 2000, 1999 and 1998, respectively.

NOTE 11. RESTRUCTURING AND RELATED ACTIVITIES

      During 2000, Compaq substantially completed all of the actions
contemplated under the 1998 and 1999 restructuring plans. In December 2000,
Compaq reversed excess reserves of $86 million for employee separations,
facility closure costs and other costs related to the 1999 plan. Accrued costs
under both plans at December 31, 2000 include amounts for actions that have
already been taken, but for which expenditures have not yet been made.

      In September 1999, Compaq's management approved a restructuring plan to
realign Compaq's organization, reduce infrastructure and overhead, and eliminate
excess and duplicative facilities. Restructuring and related charges of $868
million ($600 million, net of tax) were expensed. These charges were composed of
$787 million of accrued restructuring costs, $58 million of related asset
impairment charges and a $23 million pension curtailment loss to recognize a
change in Compaq's projected pension benefit obligation in connection with
employee separations. Costs for employee separations related to approximately
7,000 employees worldwide affecting the majority of business functions, job
classes and regions, predominantly occurring in North America and Europe.
Employee separation benefits include severance, medical and other benefits.

      In June 1998, Compaq recorded a restructuring charge of approximately $1.7
billion to integrate the operations of Compaq and Digital, consolidate
duplicative facilities, improve service delivery and reduce overhead.
Approximately $1.5 billion was related to the acquisition of Digital and
recorded as a component of purchase accounting and $286 million related to
Compaq and was charged to operations. During 1998, Compaq also recorded a $107
million charge related to asset impairments.

                                       43
<PAGE>
      An analysis of accrued costs and amounts charged against the provision
follows:
<TABLE>
<CAPTION>
                                                            BEGINNING                  DECEMBER 31,    EXPENDITURES     DECEMBER 31,
 (In millions)                                               ACCRUAL    EXPENDITURES      1999        AND ADJUSTMENTS      2000
                                                            ---------   ------------   ------------   ---------------   ------------
<S>                                                         <C>         <C>            <C>            <C>               <C>
 1999 PLAN
 Employee separations ....................................  $     491   $        (68)  $        423   $          (321)  $        102
 Facility closure costs ..................................         96           --               96               (50)            46
 Contract cancellation and other exit costs ..............        200           (167)            33               (28)             5
                                                            ---------   ------------   ------------   ---------------   ------------
                                                            $     787   $       (235)  $        552   $          (399)  $        153
                                                            ---------   ------------   ------------   ---------------   ------------
 1998 PLAN
 Employee separations ....................................  $   1,131   $       (962)  $        169   $          (106)  $         63
 Facility closure costs ..................................        414           (184)           230              (124)           106
 Relocation ..............................................         99            (65)            34               (18)            16
 Other exit costs ........................................        100            (83)            17               (12)             5
                                                            ---------   ------------   ------------   ---------------   ------------
                                                            $   1,744   $     (1,294)  $        450   $          (260)  $        190
                                                            ---------   ------------   ------------   ---------------   ------------
                                                            $   2,531   $     (1,529)  $      1,002   $          (659)  $        343
                                                            =========   ============   ============   ===============   ============
</TABLE>
      Employee separations related to the 1998 and 1999 restructuring plans were
1,100 and 4,900, respectively, during 2000. Total employee separations related
to the 1998 and 1999 restructuring plans were 23,400 as of December 31, 2000.

NOTE 12. SEGMENT DATA

      During 2000, Compaq realigned the operations of its Enterprise Solutions
and Services segment, which resulted in the formation of two reportable
segments: Enterprise Computing and Compaq Global Services. Compaq's other two
reportable segments, Commercial Personal Computing and Consumer, were unaffected
by the realignment. Enterprise Computing designs, develops, manufactures and
markets advanced computing and telecommunication products, including
business-critical servers, industry-standard servers and storage products.
Compaq Global Services delivers worldwide infrastructure and solution design
implementation, management and support services through Professional and
Customer Services. Commercial Personal Computing delivers standards-based
computing emphasizing Internet access through workstations, desktops, portables,
monitors, Internet access devices and life-cycle management products. The
Consumer segment targets home users with Internet-ready desktops and portables,
printers and related products, as well as Internet access and e-services.
Business activities that do not qualify for separate segment reporting are
aggregated in Other. Financial data for prior periods has been restated to
conform to the current presentation.

      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 and unallocated shared expenses, other income and
expense items, and other non-recurring charges such as purchased in-process
technology and restructuring and related activities. Corporate and unallocated
shared expenses consist primarily of indirect information management expenses,
certain costs related to business integration and other general and
administrative expenses that are separately managed. Gains and losses associated
with sale of businesses and investments are excluded from segment operating
income. 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.

                                       44
<PAGE>
      Summary financial data by operating segment was as follows:
Year ended December 31 (In millions)          2000         1999          1998
                                            --------     --------      --------
ENTERPRISE COMPUTING
        Revenue .......................     $ 14,316     $ 12,974      $ 10,498
        Operating income ..............        2,140        1,201           948
COMPAQ GLOBAL SERVICES
        Revenue .......................        6,993        7,162         3,990
        Operating income ..............          944        1,148           776
COMMERCIAL PERSONAL COMPUTING
        Revenue .......................       13,136       12,185        11,846
        Operating income (loss) .......          289         (448)          (46)
CONSUMER
        Revenue .......................        7,586        5,994         4,932
        Operating income ..............          170          262           183
OTHER
        Revenue .......................          352          210           (97)
        Operating income (loss) .......           27         (281)         (115)
CONSOLIDATED SEGMENT TOTALS
        Revenue .......................     $ 42,383     $ 38,525      $ 31,169
        Operating income ..............     $  3,570     $  1,882      $  1,746

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

Year ended December 31 (In millions)               2000       1999       1998
                                                 --------   --------   --------
Consolidated segment operating income .........  $  3,570   $  1,882   $  1,746
Corporate and unallocated shared expenses .....    (1,117)    (1,156)      (888)
Restructuring and related activities ..........        86       (868)      (393)
Purchased in-process technology ...............      --         --       (3,196)
Other income (expense), net ...................    (1,664)     1,076         69
                                                 --------   --------   --------
Income (loss) before income taxes .............  $    875   $    934   $ (2,662)
                                                 ========   ========   ========

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

(In millions)                                         2000      1999      1998
                                                    --------  --------  --------
  Revenue:
      United States ..............................  $ 18,966  $ 17,351  $ 13,981
      Europe, Middle East and Africa .............    14,178    14,420    11,929
      Other ......................................     9,239     6,754     5,259
                                                    --------  --------  --------
                                                    $ 42,383  $ 38,525  $ 31,169
                                                    ========  ========  ========
  Long-lived assets:
      United States ..............................  $  2,229  $  2,332  $  2,166
      Other ......................................     1,202       917       736
                                                    --------  --------  --------
                                                    $  3,431  $  3,249  $  2,902
                                                    ========  ========  ========

                                       45
<PAGE>
NOTE 13. COMMITMENTS, CONTINGENCIES, FINANCIAL INSTRUMENTS AND FACTORS THAT MAY
AFFECT FUTURE OPERATIONS

DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

      Compaq primarily utilizes forward contracts and purchased foreign currency
options to reduce its exposure to potentially adverse changes in foreign
currency exchange rates and simple interest rate swaps to reduce exposure to
interest rate volatility. Compaq does not hold or issue financial instruments
for trading purposes nor does it hold or issue leveraged derivative financial
instruments.

      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. At December 31, 2000 and
1999, such forward contracts to sell foreign currencies, net of forward
contracts to purchase foreign currencies aggregated $4.2 billion and $2.6
billion, respectively. Generally, gains and losses associated with currency rate
changes on these forward contracts are recorded currently to income and are
reflected in accounts receivable or other current liabilities in Compaq's
consolidated balance sheet, while the interest element is recognized over the
life of each contract. The amount recorded in the consolidated balance sheet
approximates the fair value of such contracts at December 31, 2000 and 1999. The
maturity dates of the forward contracts which were outstanding at December 31,
2000 ranged from three days to nine months, except for CFS which had forward
contracts with maturity dates up to three years.

      Compaq frequently utilizes forward contracts to protect Compaq from the
effects of currency fluctuations on anticipated but not firmly committed sales
which are expected to occur within a three-month period. These forward contracts
generally do not extend beyond the end of any quarter or year. Any gains or
losses and the interest element on these forward contracts are recognized as a
component of sales during each quarter. In prior years, Compaq hedged a portion
of its anticipated but not firmly committed sales of its international marketing
subsidiaries using purchased foreign currency options. Realized and unrealized
gains and the net premiums on these options are deferred and recognized as a
component of revenue in the same period that the related sales occur. Option
contracts aggregating $660 million were outstanding at December 31, 1999,
related to hedges of sales for the first half of the year. The unrealized gains
deferred on these contracts were not material.

      Compaq does periodically enter into interest rate swap transactions for
the purpose of hedging interest rate exposure on 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,
and not for speculation. At December 31, 1999, Compaq had entered into interest
rate swaps with a notional value of $250 million with maturity dates of up to
nine months. Amounts to be paid or received under interest rate swap agreements
are accrued as interest rates change and are recognized over the life of the
swap transactions as an adjustment to interest expense.

      In the event of a failure to honor one of these forward or swap 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. In the case of a default by a counterparty to an interest rate swap
transaction, management believes any loss would be limited to the interest rate
differential between market rates and the rates contractually set in the swap
contract. To the extent Compaq has option contracts outstanding, the amount of
any loss resulting from a breach of contract would be limited to the amount of
premiums paid for the options and the unrealized gain, if any, related to such
contracts.

      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

                                       46
<PAGE>
equivalents, short-term investments, accounts receivable, accounts payable and
other current liabilities reflected in the December 31, 2000 and 1999
consolidated balance sheet approximate fair value at these dates.

CONCENTRATION OF CREDIT RISK

      Compaq's cash, cash equivalents, short-term investments and accounts
receivable are subject to potential credit risk. Compaq's cash management 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 products primarily through third-party resellers and as
a result, maintains individually significant accounts receivable balances from
various major resellers. If the financial condition and operations of these
resellers deteriorate, Compaq's operating results could be adversely affected.
One such reseller, Ingram Micro, Inc., accounted for approximately 14 percent of
consolidated revenue in 2000 and 11 percent of accounts receivable as of
December 31, 2000, predominately in the Commercial Personal Computing segment.
In 1999, Ingram Micro accounted for approximately 11 percent of consolidated
revenue and 8 percent of accounts receivable at December 31, 1999. During these
periods, no other customer of Compaq accounted for 10 percent or more of
consolidated revenue. In 2000, Compaq's two largest resellers represented
approximately 21 percent of consolidated revenue and 15 percent of accounts
receivable at December 31, 2000. In 1999, Compaq's four largest resellers
represented approximately 22 percent of consolidated revenue and 12 percent of
accounts receivable at December 31, 1999. Compaq generally has experienced
longer accounts receivable cycles in its emerging markets, in particular
Asia-Pacific and Latin America, when compared to its U.S. and European markets.
In the event that accounts receivable cycles in these developing markets
lengthen further or one or more of Compaq's larger resellers in these regions
fails, Compaq's operating results could be adversely affected.

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, in limited circumstances, to repurchase
certain products from the finance companies. Additionally, Compaq has on
occasion guaranteed a portion of certain resellers' outstanding balances with
third-party finance companies and financial institutions. Guarantees under these
and other arrangements were not significant at December 31, 2000 or 1999.

      In January 2001, Compaq exercised an option to sell an investment in a
limited liability corporation accounted for under the equity method. Once the
sale of the investment closes and proceeds are received, Compaq expects to
record a gain.

FACTORS THAT MAY AFFECT FUTURE OPERATIONS

      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.

      Significant numbers of components are purchased from single sources due to
technology, availability, price, quality or other considerations. Key components
and processes currently obtained from single sources include certain of Compaq's
displays, microprocessors, application specific integrated circuits and other
custom chips, and certain processes relating to construction of the plastic

                                       47
<PAGE>
housing for Compaq's computers. In addition, new products introduced by Compaq
often initially utilize custom components obtained from only one source until
Compaq has evaluated whether there is a need for additional suppliers. In the
event that a supply of a key single-sourced material process or component were
delayed or curtailed, Compaq's ability to ship the related product in desired
quantities and in a timely manner could be adversely affected. Compaq attempts
to mitigate these risks by working closely with key suppliers on product plans,
strategic inventories and coordinated product introductions.

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. 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 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 of the 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. 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 of the 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, the court entered an order granting class certification on
July 18, 2000. Compaq has appealed class certification and is awaiting a
decision. Discovery has been stayed by order of the appellate court pending
their decision on the class certification appeal. On December 12, 2000, the
judge in the 1999 litigation dismissed the consolidated amended complaint after
finding that it failed to comply with pleading requirements under the law. The
plaintiffs filed a second amended complaint on January 31, 2001, which Compaq
will move to dismiss. Compaq is vigorously defending both lawsuits.

      Several purported class action lawsuits were filed against Digital during
1994 alleging violations of the 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. On August 8, 1995, the
Massachusetts federal court granted the defendants' motion to dismiss all three
cases in their entirety. On May 7, 1996, the United States Court of Appeals for
the First Circuit affirmed in part and reversed in part the dismissal of two of
the cases, and remanded for further proceedings. The parties are proceeding with
discovery.

      Compaq is vigorously defending consumer class action lawsuits alleging
various defects in computers sold by Compaq. These lawsuits are pending in
Texas, North Carolina, Illinois, California, Colorado and Washington. A class
has been certified in the North Carolina case. All of these cases are

                                       48
<PAGE>
in the discovery stage. Three of these class actions (Thurmond v. Compaq, 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.
Thurmond is pending in federal district court in Beaumont, Texas; LaPray in
Texas state court in Beaumont; Sprung in Colorado federal district court. No
class has been certified in any of these cases although a hearing on class
certification has been scheduled in the Thurmond case for March 19, 2001. Compaq
is also providing 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.

      Non-current other assets as of December 31, 2000 included approximately
$97 million ($22 million, net of reserve) owed to Compaq in connection with the
sale of products. Compaq believes such amounts were misdirected by its customers
to Inacom, which was acting as an agent for Compaq in connection with such
sales. Compaq believes that such funds were improperly applied to reduce
Inacom's indebtedness to its lenders. Inacom filed for bankruptcy on June 16,
2000 in the District of Delaware Bankruptcy Court. Compaq is seeking to realize
the full value of these receivables in an adversary proceeding filed October 20,
2000 against Inacom, Deutsche Bank, A.G. and other Inacom lenders. In the same
proceeding, Inacom has sued Compaq for approximately $41 million that Compaq is
holding as a setoff against the $97 million. Compaq has recorded a reserve of
$75 million related to this asset.

LEASE COMMITMENTS

      Compaq leases certain manufacturing and office facilities and equipment
under noncancelable operating leases with terms from one to thirty years. Rent
expense for 2000, 1999 and 1998 was $347 million, $283 million and $205 million,
respectively.

      Compaq's minimum rental commitments under noncancelable operating leases
at December 31, 2000 were approximately $235 million in 2001, $184 million in
2002, $136 million in 2003, $98 million in 2004, $69 million in 2005 and $376
million thereafter.

                                       49
<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>
(In millions, except per share amounts)                                   1ST         2ND         3RD        4TH
                                                                       QUARTER(1)  QUARTER(1)   QUARTER(1)  QUARTER
                                                                       ----------  ----------   ----------  --------
<S>                                                                    <C>         <C>          <C>         <C>
2000
Revenue .............................................................  $    9,505  $   10,135   $   11,217  $ 11,526
Gross margin ........................................................       2,184       2,388        2,683     2,711
Income (loss) before cumulative effect of accounting change(2) ......         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) ...................................................         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)

1999
Revenue .............................................................  $    9,419  $    9,420   $    9,208  $ 10,478
Gross margin ........................................................       2,327       1,936        2,136     2,328
Net income (loss)(4) ................................................         281        (184)         140       332
Earnings (loss) per common share(3)
   Basic ............................................................  $     0.17  $    (0.10)  $     0.08  $   0.20
   Diluted ..........................................................  $     0.16  $    (0.10)  $     0.08  $   0.19
</TABLE>
------------

(1)   Effective January 1, 2000, Compaq adopted Staff Accounting Bulletin No.
      101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, as amended. Compaq has
      restated its results for the first three quarters of the year ended
      December 31, 2000.

(2)   Includes a $1.7 billion charge for impairment of investments in the fourth
      quarter of 2000.

(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 $1.2 billion gain on the sale of a business and an $868 million
      charge for restructuring and related charges to realign Compaq's
      organization, reduce infrastructure and overhead, and eliminate excess and
      duplicative facilities occurring in the third quarter of 1999.

                                       50
<PAGE>
PART III

ITEMS 10 TO 13 INCLUSIVE.

      These items have been omitted in accordance with the general instructions
to Form 10-K Annual Report. The Registrant will file with the Securities and
Exchange Commission (the "Commission") in March 2001, pursuant to Regulation
14A, a definitive proxy statement that will involve the election of directors.
The information required by these items will be included in such proxy statement
and are incorporated herein by reference.

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, 2000 and 1999
            Consolidated Statement of Income for each of the three years in the
                period ended December 31, 2000
            Consolidated Statement of Cash Flows for each of the three years in
                the period ended December 31, 2000
            Consolidated Statement of Stockholders' Equity for each of the three
                years in the period ended December 31, 2000
            Notes to Consolidated Financial Statements

            Financial Statement Schedule:
              Audit Reports
              For each of the three years in the period ended December 31, 2000
              Schedule II:  Valuation and Qualifying Accounts

            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.

     EXHIBIT
       NO.                            DESCRIPTION OF EXHIBITS
     -------                          -----------------------

       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).

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

       10.2       1985 Executive and Key Employees Stock Option Plan, as amended
                  (Exhibit 10.3 to 1989 Second Quarter Form 10-Q, Commission
                  File No. 1-09026).*

       10.3       1985 Nonqualified Stock Option Plan, as amended (Exhibit 10.4
                  to 1989 Second Quarter Form 10-Q, Commission File No.
                  1-09026).*

                                       51
<PAGE>
       10.4       Forms of Stock Option Agreements relating to Exhibits 10.1
                  through 10.3 (Exhibit 10.6 to Form 10-K for the year ended
                  December 31, 1987, Commission File No. 1-09026).*

       10.5       1989 Equity Incentive Plan, as amended (Exhibit 10.6 to 1997
                  Form 10-K).*

       10.6       Form of Stock Option Notice relating to Exhibit 10.5, as
                  amended (Exhibit 10.7 to 1996 Form 10-K).*

       10.7       1995 Equity Incentive Plan, as amended (Exhibit 10.8 to 1997
                  Form 10-K).*

       10.8       Form of Stock Option Notice relating to Exhibit 10.7, as
                  amended (Exhibit 10.9 to 1996 Form 10-K).*

       10.9       Bonus Incentive Plan (Exhibit 10.11 to Form 10-K for the year
                  ended December 31, 1995).*

       10.10      Stock Option Plan for Non-Employee Directors, as amended
                  (Exhibit 10.11 to 1997 Form 10-K).*

       10.11      Forms of Stock Option Notice relating to Exhibit 10.10
                  (Exhibit 10.9 to 1996 Form 10-K).*

       10.12      Form of letter agreement between Compaq and its executive
                  officers (Exhibit 10.16 to 1991 Form 10-K, Commission File No.
                  1-09026).*

       10.13      Deferred Compensation and Supplemental Savings Plan (Exhibit
                  4.1 to Registration Statement No. 333-42375 on Form S-8).*

       10.14      First Amendment to Deferred Compensation and Supplemental
                  Savings Plan (Exhibit 4.2 to Registration Statement No.
                  333-42375 on Form S-8).*

       10.15      1998 Stock Option Plan (Exhibit 10.20 to Form 10-Q for the
                  quarter ended March 31, 1998).*

       10.16      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 1999 Form 10-K).*

       10.17      U.S. $1,000,000,000 Revolving Credit Agreement (364-Day) dated
                  as of October 1, 1999 among Compaq Computer Corporation, Bank
                  of America, N.A., as Sole Administrative Agent, The Chase
                  Manhattan Bank and Citibank, N.A., as Syndication Agents, and
                  The Banks party thereto, arranged by Bank of America
                  Securities LLC, as Sole Lead Arranger and Sole Book Manager
                  (Exhibit 10.18 to Form 10-Q for the quarter ended September
                  30, 1999).

       10.18      $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 1997
                  Form 10-K).

       10.19      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).

       10.20      $5,000,000 Promissory Note dated July 22, 1999, between
                  Michael D. Capellas and Compaq Computer Corporation (Exhibit
                  10.23 to 1999 Form 10-K).

       10.21      Asset Purchase Agreement dated as of January 4, 2000 between
                  Compaq Computer Corporation, ITY Corp. and InaCom Corp. with
                  Exhibits (Exhibit 10.25 to 1999 Form 10-K).

       10.22      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 1999
                  Form 10-K).

       10.23      Revolving Credit Facility Commitment Letter dated February 16,
                  2000 between Compaq Computer Corporation, ITY Corp. and InaCom
                  Corp. (Exhibit 10.27 to 1999 Form 10-K).

       10.24      Services, Supply and Sales Agreement dated February 16, 2000
                  between Compaq

                                       52
<PAGE>
                  Computer Corporation, ITY Corp. and InaCom Corp. (Exhibit
                  10.28 to 1999 Form 10-K).

       10.25      Service Level Agreement dated February 16, 2000 between Compaq
                  Computer Corporation, ITY Corp. and InaCom Corp. (Exhibit
                  10.29 to 1999 Form 10-K).

       10.26      Indenture dated May 2, 2000 between Compaq Computer
                  Corporation and the Bank of New York, as Trustee (incorporated
                  herein by reference to 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).

       10.27      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).

       10.28      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).

       10.29      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).

       10.30      $2,200,000,000 Revolving Credit Agreement (364-Day) dated as
                  of September 29, 2000, among Compaq Computer Corporation, The
                  Chase Manhattan Bank, as sole Administrative Agent, Bank of
                  America National Association, as Syndication Agent, CitiBank,
                  N.A., and Bank One, N.A., as Documentation Agents, and the
                  other banks party thereto. (Exhibit 10.1 to Form 10-Q for the
                  quarter ended September 30, 2000).

       10.31      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).*

       10.32      Employment Agreement effective as of October 20, 2000, between
                  Compaq Computer Corporation and Michael D. Capellas.*

       10.33      Form of Executive Officers Severance Agreement.*

       10.34      Form of Restricted Stock Grant Notice - 1989 Equity Incentive
                  Plan*

       21         Subsidiaries.

       23.1       Consent of Ernst & Young LLP, independent auditors

       23.2       Consent of PricewaterhouseCoopers LLP, independent accountants

*     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 25, 2000, containing Compaq's
                  news release dated October 24, 2000, announcing its earnings
                  release for the third quarter of 2000.

            (ii)  Report on Form 8-K dated December 4, 2000, containing Compaq's
                  news release dated December 1, 2000, announcing the Board of
                  Directors authorization of the company repurchasing up to $1
                  billion of Compaq common shares.

                                       53
<PAGE>
            (iii) Report on Form 8-K dated December 13, 2000, containing
                  Compaq's news release dated December 12, 2000, reporting that
                  revenue and earnings for its fourth quarter ending December
                  31, 2000, would be below market expectations.

            (iv)  Report on Form 8-K dated January 24, 2001, containing Compaq's
                  news release dated January 23, 2001, reporting revenue of
                  $11.5 billion for the fourth quarter ended December 31, 2000,
                  an increase of 10 percent year-over-year, or 19 percent in
                  constant currency.

            (v)   Report on Form 8-K dated January 24, 2001, stating that on
                  January 23, 2001, Compaq posted to its website its "Business
                  Outlook and Discussion of Financial Results, Fourth Quarter
                  2000," to supplement the information in the release of its
                  financial results for the quarter ended December 31, 2000.

            (vi)  Report on Form 8-K dated January 26, 2001, announcing the
                  appointment of Sanford M. Litvack to its Board of Directors.

Compaq, the Compaq logo, Aero, AlphaServer, Deskpro, NonStop, Himalaya,
Presario, ProLiant, and StorageWorks Registered in U.S. Patent and Trademark
Office. Alpha, iPAQ, OpenVMS, SANworks, TaskSmart, and Tru64 are trademarks of
Compaq Information Technologies Group, L.P. in the U.S. and other countries.
Microsoft, Outlook, Windows, Windows NT are trademarks of Microsoft Corporation
in the U.S. and other countries. Intel, Celeron, Pentium, SpeedStep, and Itanium
are trademarks of Intel Corporation in the U.S. and other countries. UNIX is a
trademark of The Open Group in the U.S. and other countries. All other product
names mentioned herein may be trademarks or registered trademarks of their
respective companies.

                                       54
<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 9th day of
February, 2001.

                                          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.

           SIGNATURE                      TITLE                    DATE

                                 Chairman and                   February 9, 2001
/S/ MICHAEL D. CAPELLAS          Chief Executive Officer
   (Michael D. Capellas)        (principal executive officer)

                                 Senior Vice President,         February 9, 2001
/S/ JESSE J. GREENE, JR.         Finance and Administration,
   (Jesse J. Greene, Jr.)        and Chief Financial Officer
                                (principal financial officer and
                                 principal accounting officer)

/S/ LAWRENCE T. BABBIO, JR.      Director                       February 9, 2001
   (Lawrence T. Babbio, Jr.)

/S/ JUDITH L. CRAVEN             Director                       February 9, 2001
   (Judith L. Craven)

/S/ ROBERT TED ENLOE III         Director                       February 9, 2001
   (Robert Ted Enloe, III)

/S/ GEORGE H. HEILMEIER          Director                       February 9, 2001
   (George H. Heilmeier)

/S/ PETER N. LARSON              Director                       February 9, 2001
   (Peter N. Larson)

/S/ KENNETH L. LAY               Director                       February 9, 2001
   (Kenneth L. Lay)

                                       55
<PAGE>
/S/ SANFORD M. LITVACK           Director                       February 9, 2001
   (Sanford M. Litvack)

/S/ THOMAS J. PERKINS            Director                       February 9, 2001
   (Thomas J. Perkins)

/S/ KENNETH ROMAN                Director                       February 9, 2001
   (Kenneth Roman)

/S/ LUCILLE S. SALHANY           Director                       February 9, 2001
   (Lucille S. Salhany)

                                       56
<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, 2000 and for the year then ended and have issued
our report thereon dated January 23, 2001 (included elsewhere in this Annual
Report on Form 10-K). Our audit also included the financial statement schedule
as of December 31, 2000 and for the year then ended 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 audit.

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.


                                                      /s/ Ernst & Young LLP

Houston, Texas
January 23, 2001

                                       57
<PAGE>
                     REPORT OF INDEPENDENT ACCOUNTANTS ON
                         FINANCIAL STATEMENT SCHEDULE

To the Stockholders and Board of Directors
of Compaq Computer Corporation

Our audits 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 as of December 31, 1999 and 1998 and for
each of the two years in the period ended December 31, 1999. In our opinion, the
financial statement schedule as of December 31, 1999 and 1998 and for each of
the two years in the period 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.



/s/ PricewaterhouseCoopers LLP
Houston, Texas
January 25, 2000

                                       58
<PAGE>
                                                                    SCHEDULE II

                           COMPAQ COMPUTER CORPORATION
                        VALUATION AND QUALIFYING ACCOUNTS

Year ended December 31 (In millions)                    2000     1999     1998
                                                       ------   ------   ------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance, beginning of period ........................  $  222   $  318   $  243
Additions due to acquisition ........................    --       --        114
Additions charged to expense ........................      82       43       61
Deductions (Accounts receivable write-offs) .........     (93)    (139)    (100)
                                                       ------   ------   ------
Balance, end of period ..............................  $  211   $  222   $  318
                                                       ======   ======   ======

                                       59