##### Table of Contents



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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2001

Commission File Number 1-9026

COMPAQ COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)

|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 76-0011617
(I.R.S. Employer
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)

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 [   ]

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



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TABLE OF CONTENTS



|                              |                                                                                               |  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|Restated Segment Data        



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COMPAQ COMPUTER CORPORATION

FORM 10-Q
Three Months Ended March 31, 2001

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

|        |  |                                                                                       |  |    |  | 
|------- |  | ------------------------------------------------------------------------------------- |  | -- |  | 
|Item 1. |  | Financial Statements                                                                  |  | 3  |  | 
|       
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 12 |  | 
|       
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 20 |  | 

PART II. OTHER INFORMATION

|        |  |                   |  |    |  | 
|------- |  | ----------------- |  | -- |  | 
|Item 1. |  | Legal Proceedings |  | 22 |  | 
|
|       
|        |  | Signatures        |  | 23 |  | 

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Financial Statements

COMPAQ COMPUTER CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

|                                                    |                                                                                        |                                                                                                                 |                                            |        |             |        |              |        |        |        | 
|--------------------------------------------------- | -------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ----------- | ------ | ------------ | ------ | ------ | ------ | 
|                                                    |                                                                                        |                                                                                                                 |                                            |        | March 31,   |        | December 31,
|(In millions, except par value)                     |                                                                                        | 2001                                                                                                            |                                            | 2000  
|                                                   
|                                                    |                                                                                        |                                                                                                                 |                                            |        | (Unaudited)
|ASSETS                                             
|                                                   
|Current assets:                                    
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Cash and cash equivalents                                                              |                                                                                                                 | $                                          | 2,642  |             |        | $            | 2,569  |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Trade accounts receivable, net                                                         |                                                                                                                 |                                            | 5,873  |             |        |              | 6,715  |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Leases and other accounts receivable                                                   |                                                                                                                 |                                            | 1,913  |             |        |              | 1,677  |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Inventories                                                                            |                                                                                                                 |                                            | 2,023  |             |        |              | 2,161  |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Other assets                                                                           |                                                                                                                 |                                            | 2,034  |             |        |              | 1,989  |       
|                                                    |                                                                                        |                                                                                                                 |                                            |        |             |        |              |       
|                                                    |                                                                                        | Total current assets                                                                                            |                                            |        | 14,485      |        |              |        | 15,111 |       
|                                                   
|Property, plant and equipment, net                  |                                                                                        |                                                                                                                 | 3,453                                      |        |             |        | 3,431        |       
|                                                   
|                                                   
|                                                   
|                                                   
|Other assets, net                                   |                                                                                        |                                                                                                                 | 5,939                                      |        |             |        | 6,314        |       
|                                                    |                                                                                        |                                                                                                                 |                                            |        |             |        |              |       
|                                                    |                                                                                        |                                                                                                                 | Total assets                               |        | $           | 23,877 |              |        | $      | 24,856 | 
|                                                    |                                                                                        |                                                                                                                 |                                            |        |             |        |              |       
|                                                   
|LIABILITIES AND STOCKHOLDERS EQUITY               
|                                                   
|Current liabilities:                               
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Short-term borrowings                                                                  |                                                                                                                 | $                                          | 650    |             |        | $            | 711    |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Accounts payable                                                                       |                                                                                                                 |                                            | 3,845  |             |        |              | 4,233  |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Deferred income                                                                        |                                                                                                                 |                                            | 1,193  |             |        |              | 1,089  |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Other liabilities                                                                      |                                                                                                                 |                                            | 5,008  |             |        |              | 5,516  |       
|                                                    |                                                                                        |                                                                                                                 |                                            |        |             |        |              |       
|                                                    |                                                                                        | Total current liabilities                                                                                       |                                            |        | 10,696      |        |              |        | 11,549 |       
|                                                    |                                                                                        |                                                                                                                 |                                            |        |             |        |              |       
|Long-term debt                                      |                                                                                        |                                                                                                                 | 575                                        |        |             |        | 575          |       
|                                                    |                                                                                        |                                                                                                                 |                                            |        |             |        |              |       
|Postretirement and other postemployment benefits    |                                                                                        |                                                                                                                 | 647                                        |        |             |        | 652          |       
|                                                    |                                                                                        |                                                                                                                 |                                            |        |             |        |              |       
|Commitments and
contingencies
Stockholders equity:
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Preferred stock, $.01 par value                                                       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                        | Shares authorized: 10 million; shares issued: none                                                              |                                            |        |            |        |              |        |       |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Common stock and capital in excess of $.01 par value                                  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                        | Shares authorized:
3 billion
Shares issued: March 31, 2001  1,746 million
   December 31, 2000  1,742 million |                                            |        | 8,085       |        |              |        | 8,039  |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Retained earnings                                                                      |                                                                                                                 |                                            | 5,383  |             |        |              | 5,347  |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Accumulated other comprehensive income (loss)                                          |                                                                                                                 |                                            | (88    | )           |        |              | 27     |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Treasury stock (shares:
March 31, 2001  59 million
   December 31, 2000  53 million) |                                                                                                                 |                                            | (1,421 | )           |        |              | (1,333 | )     
|                                                    |                                                                                        |                                                                                                                 |                                            |        |             |        |              |       
|                                                    |                                                                                        | Total stockholders equity                                                                                      |                                            |        | 11,959      |        |              |        | 12,080 |       
|                                                    |                                                                                        |                                                                                                                 |                                            |        |             |        |              |       
|                                                    |                                                                                        |                                                                                                                 | Total liabilities and stockholders equity |        | $           | 23,877 |              |        | $      | 24,856 | 
|                                                    |                                                                                        |                                                                                                                 |                                            |        |             |        |              |       

See accompanying notes to interim condensed consolidated financial statements.

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COMPAQ COMPUTER CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)

|                                                     |                                                    |                     |       |                             |       |   |       |       |       | 
|---------------------------------------------------- | -------------------------------------------------- | ------------------- | ----- | --------------------------- | ----- | - | ----- | ----- | ----- | 
|                                                     |                                                    |                     |       | Three months endedMarch 31,
|                                                     |                                                    |                     |       |                            
|(In millions, except per share amounts)              |                                                    | 2001                |       | 2000                       
|                                                    
|Revenue:                                            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Products                                           |                     | $     | 7,496                       |       |   | $     | 7,812 |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Services                                           |                     |       | 1,701                       |       |   |       | 1,693 |      
|                                                     |                                                    |                     |       |                             |       |   |       |      
|                                                     |                                                    | Total revenue       |       |                             | 9,197 |   |       |       | 9,505 | 
|                                                     |                                                    |                     |       |                             |       |   |       |      
|Cost of sales:                                      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Products                                           |                     |       | 5,893                       |       |   |       | 6,108 |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Services                                           |                     |       | 1,212                       |       |   |       | 1,213 |      
|                                                     |                                                    |                     |       |                             |       |   |       |      
|                                                     |                                                    | Total cost of sales |       |                             | 7,105 |   |       |       | 7,321 | 
|                                                     |                                                    |                     |       |                             |       |   |       |      
|                                                    
|Selling, general and administrative                  |                                                    |                     | 1,438 |                             |       |   | 1,401 |      
|                                                    
|                                                    
|                                                    
|                                                    
|Research and development                             |                                                    |                     | 364   |                             |       |   | 356   |      
|                                                    
|                                                    
|                                                    
|                                                    
|Restructuring and related charges                    |                                                    |                     | 249   |                             |       |   |      |      
|                                                    
|                                                    
|                                                    
|                                                    
|Other (income) expense, net                          |                                                    |                     | (70   | )                           |       |   | (46   | )    
|                                                     |                                                    |                     |       |                             |       |   |       |      
|                                                     |                                                    |                     | 1,981 |                             |       |   | 1,711 |      
|                                                     |                                                    |                     |       |                             |       |   |       |      
|                                                    
|Income before income taxes                           |                                                    |                     | 111   |                             |       |   | 473   |      
|                                                    
|                                                    
|                                                    
|                                                    
|Provision for income taxes                           |                                                    |                     | 33    |                             |       |   | 151   |      
|                                                     |                                                    |                     |       |                             |       |   |       |      
|Income before cumulative effect of accounting change |                                                    |                     | 78    |                             |       |   | 322   |      
|                                                    
|                                                    
|                                                    
|                                                    
|Cumulative effect of accounting change, net of tax   |                                                    |                     |      |                             |       |   | (26   | )    
|                                                     |                                                    |                     |       |                             |       |   |       |      
|Net income                                           |                                                    | $                   | 78    |                             |       | $ | 296   |      
|                                                     |                                                    |                     |       |                             |       |   |       |      
|Earnings per common share:                          
|                                                    
|                                                    
|                                                    
|                                                    
|Basic:                                              
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Before cumulative effect of accounting change      |                     | $     | 0.05                        |       |   | $     | 0.19  |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cumulative effect of accounting change, net of tax |                     |       |                            |       |   |       | (0.02 | )    
|                                                     |                                                    |                     |       |                             |       |   |       |      
|                                                     |                                                    | $                   | 0.05  |                             |       | $ | 0.17  |      
|                                                     |                                                    |                     |       |                             |       |   |       |      
|Diluted:                                            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Before cumulative effect of accounting change      |                     | $     | 0.05                        |       |   | $     | 0.19  |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cumulative effect of accounting change, net of tax |                     |       |                            |       |   |       | (0.02 | )    
|                                                     |                                                    |                     |       |                             |       |   |       |      
|                                                     |                                                    | $                   | 0.05  |                             |       | $ | 0.17  |      
|                                                     |                                                    |                     |       |                             |       |   |       |      
|Shares used in computing earnings per common share: 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Basic                                              |                     |       | 1,685                       |       |   |       | 1,697 |      
|                                                     |                                                    |                     |       |                             |       |   |       |      
|                                                     | Diluted                                            |                     |       | 1,712                       |       |   |       | 1,740 |      
|                                                     |                                                    |                     |       |                             |       |   |       |      

See accompanying notes to interim condensed consolidated financial statements.

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COMPAQ COMPUTER CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

|                                                             |                                                                                             |                                                                          |                                                     |      |                             |      |       |       |        |       |  
|------------------------------------------------------------ | ------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | --------------------------------------------------- | ---- | --------------------------- | ---- | ----- | ----- | ------ | ----- | -
|                                                             |                                                                                             |                                                                          |                                                     |      | Three months endedMarch 31,
|                                                             |                                                                                             |                                                                          |                                                     |      |                            
|(In millions)                                                |                                                                                             | 2001                                                                     |                                                     | 2000
|                                                            
|Cash flows from operating activities:                       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Net income                                                                                  |                                                                          | $                                                   | 78   |                             |      | $     | 296   |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                             | Depreciation and amortization                                            |                                                     |      | 388                         |      |       |       | 320    |      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                             | Restructuring and related charges                                        |                                                     |      | 249                         |      |       |       |       |      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                             | Deferred income taxes and other                                          |                                                     |      | (25                         | )    |       |       | (4     | )    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                             | Changes in assets and liabilities, net of effects of
acquired businesses |                                                     |      | (191                        | )    |       |       | (1,182 | )    
|                                                             |                                                                                             |                                                                          |                                                     |      |                             |      |       |      
|                                                             |                                                                                             |                                                                          | Net cash provided by (used in) operating activities |      |                             | 499  |       |       |        | (570  | )
|                                                             |                                                                                             |                                                                          |                                                     |      |                             |      |       |      
|Cash flows from investing activities:                       
|                                                             | Capital expenditures, net                                                                   |                                                                          |                                                     | (370 | )                           |      |       | (252  | )     
|                                                             | Proceeds from sale of investments                                                           |                                                                          |                                                     | 228  |                             |      |       | 101   |       
|                                                             | Decrease in short-term investments                                                          |                                                                          |                                                     |     |                             |      |       | 636   |       
|                                                             | Acquisitions of businesses, net of cash acquired                                            |                                                                          |                                                     |     |                             |      |       | (370  | )     
|                                                             | Other investing activities, net                                                             |                                                                          |                                                     | (116 | )                           |      |       | (156  | )     
|                                                             |                                                                                             |                                                                          |                                                     |      |                             |      |       |      
|                                                             |                                                                                             |                                                                          | Net cash used in investing activities               |      |                             | (258 | )     |       |        | (41   | )
|                                                             |                                                                                             |                                                                          |                                                     |      |                             |      |       |      
|Cash flows from financing activities:                       
|                                                             | Increase (decrease) in short-term borrowings                                                |                                                                          |                                                     | (61  | )                           |      |       | 1,099 |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Common stock transactions, net                                                              |                                                                          |                                                     | (55  | )                           |      |       | 6     |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Dividends to stockholders                                                                   |                                                                          |                                                     | (42  | )                           |      |       | (42   | )     
|                                                             |                                                                                             |                                                                          |                                                     |      |                             |      |       |      
|                                                             |                                                                                             |                                                                          | Net cash provided by (used in) financing activities |      |                             | (158 | )     |       |        | 1,063 |  
|                                                             |                                                                                             |                                                                          |                                                     |      |                             |      |       |      
|Effect of exchange rate changes on cash and cash equivalents |                                                                                             |                                                                          | (10                                                 | )    |                             |      | 57    |      
|                                                             |                                                                                             |                                                                          |                                                     |      |                             |      |       |      
|                                                             |                                                                                             |                                                                          | Net increase in cash and cash equivalents           |      |                             | 73   |       |       |        | 509   |  
|                                                            
|                                                            
|                                                            
|                                                            
|Cash and cash equivalents at beginning of period             |                                                                                             |                                                                          | 2,569                                               |      |                             |      | 2,666 |      
|                                                             |                                                                                             |                                                                          |                                                     |      |                             |      |       |      
|Cash and cash equivalents at end of period                   |                                                                                             | $                                                                        | 2,642                                               |      |                             | $    | 3,175 |      
|                                                             |                                                                                             |                                                                          |                                                     |      |                             |      |       |      
|                                                            
|Supplemental Cash Flow Information                          
|                                                            
|                                                             |                                                                                             |                                                                          |                                                     |      | Three months endedMarch 31,
|                                                             |                                                                                             |                                                                          |                                                     |      |                            
|                                                             |                                                                                             | 2001                                                                     |                                                     | 2000
|                                                            
|Acquisitions of businesses                                  
|Fair value of:                                              
|                                                             | Assets acquired                                                                             |                                                                          | $                                                   |     |                             |      | $     | 471   |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Liabilities assumed                                                                         |                                                                          |                                                     |     |                             |      |       | (95   | )     
|                                                             | Options issued                                                                              |                                                                          |                                                     |     |                             |      |       | (6    | )     
|Cash paid                                                    |                                                                                             | $                                                                        |                                                    |      |                             | $    | 370   |      
|                                                             |                                                                                             |                                                                          |                                                     |      |                             |     

See accompanying notes to interim condensed consolidated financial statements.

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COMPAQ COMPUTER CORPORATION

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Basis of Presentation

The accompanying interim condensed consolidated financial statements of
Compaq Computer Corporation (Compaq) as of March 31, 2001 and December 31,
2000 and for the three months ended March 31, 2001 and 2000 have been prepared
on substantially the same basis as Compaqs annual consolidated financial
statements and should be read in conjunction with Compaqs Annual Report on
Form 10-K for the year ended December 31, 2000. The interim condensed
consolidated financial statements reflect all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of the results
for those periods and the financial condition at those dates. The consolidated
results for interim periods are not necessarily indicative of results to be
expected for the full year.

Compaq purchased certain assets and liabilities of InaCom Corp. (Inacom)
in February 2000. This transaction was accounted for as a purchase. Compaqs
interim condensed consolidated financial statements include the results of
operations from the respective date of acquisition through March 31, 2001.

Note 2  Accounting Changes

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 accounting and
reporting standards for derivative instruments and hedging activities. Under
FAS 133, all derivatives must be recognized as assets or liabilities and
measured at fair value. If the derivative is designated as a cash flow hedge,
the effective portions of changes in the fair value of the derivative are
recorded in other comprehensive income (OCI) and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of
changes in the fair value of cash flow hedges are recognized in earnings. The
adoption of this statement did not have a significant impact on Compaqs
financial position or results of operations.

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 or quarterly earnings during 2000. Compaq has
restated its results for the three month period ended March 31, 2000.

Note 3  Acquisitions

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. The 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.

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##### Table of Contents



Note 4  Restructuring and Related Charges

In March 2001, Compaqs management approved a restructuring plan to
realign its organization and reduce operating costs. Compaq combined its
commercial and consumer personal computer operations into a single Access
business to capitalize on technical similarities between the two groups, derive
greater internal operating efficiencies and simplify product offerings. Compaq
is also implementing significant changes in supply chain operations designed to
lower order cycle time, reduce channel inventory and improve account and order
management. Accordingly, Compaq plans to reduce associated employee positions
by approximately 4,500 worldwide. Of the positions being eliminated,
approximately 2,500 will result from the closure of certain manufacturing
facilities and the consolidation of the commercial and consumer operations.
The balance will come largely from administrative functions.

Restructuring and related charges of $249 million were expensed during the
quarter ended March 31, 2001. These charges were comprised of $173 million
related to employee separations, $64 million of related asset impairment
charges and $12 million for other exit costs. Employee separation benefits
include severance, medical and other benefits. Compaq expects to substantially
complete the initiatives contemplated in its restructuring plan by December 31,
2001.

Note 5  Certain Balance Sheet Components

Raw materials, work in progress and finished goods were $520 million, $255
million and $1.2 billion, respectively, at March 31, 2001 and $540 million,
$298 million and $1.3 billion, respectively, at December 31, 2000.

Accumulated depreciation was $3.8 billion and $3.6 billion at March 31,
2001 and December 31, 2000, respectively.

At March 31, 2001 and December 31, 2000, Compaq held $594 million and $864
million of equity investments, respectively, included in other non-current
assets. As of March 31, 2001, the cost basis and fair value of Compaqs
available-for-sale securities were approximately $351 million and $260 million,
respectively. Gross unrealized gains and gross unrealized losses related to
these investments were $63 million and $154 million, respectively at March 31,
2001.

In May 2000, Compaq filed a shelf registration statement for debt
securities with the Securities Exchange Commission to register $2.0 billion of
debt securities. In August 2000, Compaq placed under its effective
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 is payable on the Notes on February 1 and August 1 of each year. The
fair value of the Notes approximates carrying value. In February 2001, Compaq
established under the registration statement a $1.4 billion medium term notes
program for issuance of debt securities due nine months or more from date of
issue. Currently, no medium-term notes have been sold under this shelf registration
statement. The net proceeds from the sale of these debt securities will be
used for general corporate purposes (including investments in Compaq Financial
Services Corporation and other subsidiaries), capital expenditures and
repayment of outstanding indebtedness (including commercial paper issued for
working capital purposes).

On January 26, 2001, the Board of Directors of Compaq approved a cash
dividend of $0.025 per share of common stock, or approximately $42 million, to
stockholders of record as of March 31, 2001, payable on April 20, 2001. On
February 22, 2000, the Board of Directors of Compaq approved a cash

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dividend of $0.025 per share of common stock, or approximately $42 million, to
stockholders of record as of March 31, 2000, paid on April 20, 2000.

Note 6  Financial Instruments

Compaq manufactures and sells its products in a number of countries
throughout the world and, as a result, is exposed to movements in foreign
currency exchange rates. The primary purpose of Compaqs foreign currency
hedging activities is to manage the volatility associated with foreign currency
revenues and other assets and liabilities created in the normal course of
business. Principal currencies hedged include the Euro, Japanese yen and
British pound. Compaq primarily utilizes forward exchange contracts to protect
against exposure related to those assets and liabilities that impact the income
statement when remeasured according to accounting principles generally accepted
in the United States.

Compaq also utilizes purchased forward exchange contracts which qualify as
cash flow hedges. These are intended to offset the effect of exchange rate
fluctuations on forecasted sales. Gains and losses on these instruments are
recorded in OCI until the underlying transaction is recognized in earnings.
The favorable earnings impact of $84 million for the period ended March 31,
2001 is reported in net revenues to match the underlying transactions being
hedged. No cash flow hedges were discontinued during the quarter ended March
31, 2001.

Note 7  Comprehensive Income (Loss)

The components of comprehensive income (loss), net of tax, are listed
below:

|                                   |                                          |      |                             |      |   |   |     |    | 
|---------------------------------- | ---------------------------------------- | ---- | --------------------------- | ---- | - | - | --- | -- | 
|                                   |                                          |      | Three months endedMarch 31,
|                                   |                                          |      |                            
|(In millions)                      |                                          | 2001 |                             | 2000
|                                   |                                          |      |                             |     
|Net income                         |                                          | $    | 78                          |      |   | $ | 296 |   
|                                  
|                                  
|                                  
|                                  
|Other comprehensive income (loss):
|                                  
|                                  
|                                  
|                                  
|                                   | Foreign currency translations            |      |                             | 6    |   |   |     | 1  | 
|                                  
|                                  
|                                  
|                                  
|                                   | Unrealized gains on cash flow hedges     |      |                             | 14   |   |   |     |   | 
|                                  
|                                  
|                                  
|                                  
|                                   | Unrealized gains (losses) on investments |      |                             | (135 | ) |   |     | 55 | 
|                                   |                                          |      |                             |      |   |   |     |   
|Comprehensive income (loss)        |                                          | $    | (37                         | )    |   | $ | 352 |   
|                                   |                                          |      |                             |      |   |   |     |   

Note 8  Other Income and Expense

Other (income) and expense consisted of the following:

|                             |  |                             |      |      |  |   |     |  
|---------------------------- |  | --------------------------- | ---- | ---- |  | - | --- | -
|                             |  | Three months endedMarch 31,
|                             |  |                            
|(In millions)                |  | 2001                        |      | 2000
|                             |  |                             |      |     
|Interest and dividend income |  | $                           | (110 | )    |  | $ | (46 | )
|                            
|                            
|                            
|                            
|Investment income, net       |  |                             | (75  | )    |  |   | (68 | )
|                            
|                            
|                            
|                            
|Interest expense             |  |                             | 62   |      |  |   | 57  |  
|                            
|                            
|                            
|                            
|Currency losses, net         |  |                             | 41   |      |  |   | 6   |  
|                            
|                            
|                            
|                            
|Other expense, net           |  |                             | 12   |      |  |   | 5   |  
|                             |  |                             |      |      |  |   |     |  
|                             |  | $                           | (70  | )    |  | $ | (46 | )
|                             |  |                             |      |      |  |   |     |  

Other income and expense included investment income of $75 million, net of
unrelated investment impairment charges, and interest income of $61 million
resulting primarily from the sale of an investment in a limited liability
corporation.

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Note 9  Earnings per Common Share

Basic earnings 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. Stock options to purchase 175 million and 44 million shares of
common stock for the three month periods ended March 31, 2001 and 2000,
respectively, were outstanding but not included in the computation of diluted
earnings per common share because the option exercise price was greater than
the average market price of the common shares.

Note 10  Segment Data

First quarter 2001 segment results reflected changes made in the
organization of Compaqs business segments and its expense allocation
methodology. Compaq has combined commercial personal computing with consumer
to form the Access business. In addition, the results of Compaqs financing
business, which were previously reflected in the Other segment category, were
included in the Compaq Global Services segment in the first quarter of 2001.
Further, Compaq allocated certain shared expenses, such as information
management, facilities and marketing costs, to the segments during the first
quarter of 2001. Financial data for prior periods has been restated to conform
to the current presentation. Exhibit 99 includes additional prior period
restated segment data.

Summary financial data by business segment follows:

|                               |                         |      |                             |       |   |  |   |       |  
|------------------------------ | ----------------------- | ---- | --------------------------- | ----- | - |  | - | ----- | -
|                               |                         |      | Three monthsended March 31,
|                               |                         |      |                            
|(In millions)                  |                         | 2001 |                             | 2000 
|                               |                         |      |                             |      
|Enterprise Computing          
|                              
|                              
|                              
|                              
|                               | Revenue                 |      | $                           | 2,908 |   |  | $ | 2,953 |  
|                              
|                              
|                              
|                              
|                               | Operating income        |      |                             | 132   |   |  |   | 262   |  
|                              
|                              
|                              
|                              
|Access                        
|                              
|                              
|                              
|                              
|                               | Revenue                 |      |                             | 4,374 |   |  |   | 4,704 |  
|                              
|                              
|                              
|                              
|                               | Operating income (loss) |      |                             | (82   | ) |  |   | 15    |  
|                              
|                              
|                              
|                              
|Compaq Global Services        
|                              
|                              
|                              
|                              
|                               | Revenue                 |      |                             | 1,935 |   |  |   | 1,863 |  
|                              
|                              
|                              
|                              
|                               | Operating income        |      |                             | 254   |   |  |   | 212   |  
|                              
|                              
|                              
|                              
|Segment Eliminations and Other
|                              
|                              
|                              
|                              
|                               | Revenue                 |      |                             | (20   | ) |  |   | (15   | )
|                              
|                              
|                              
|                              
|                               | Operating income        |      |                             | 20    |   |  |   | 3     |  
|                              
|                              
|                              
|                              
|Consolidated Segment Totals   
|                              
|                              
|                              
|                              
|                               | Revenue                 |      | $                           | 9,197 |   |  | $ | 9,505 |  
|                              
|                              
|                              
|                              
|                               | Operating income        |      | $                           | 324   |   |  | $ | 492   |  

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A reconciliation of Compaqs consolidated segment operating income to
consolidated income before income taxes follows:

|                                      |  |                            |      |      |  |   |     |  
|------------------------------------- |  | -------------------------- | ---- | ---- |  | - | --- | -
|                                      |  | Three monthsendedMarch 31,
|                                      |  |                           
|(In millions)                         |  | 2001                       |      | 2000
|                                      |  |                            |      |     
|Consolidated segment operating income |  | $                          | 324  |      |  | $ | 492 |  
|                                     
|                                     
|                                     
|                                     
|Unallocated corporate expenses        |  |                            | (34  | )    |  |   | (65 | )
|                                     
|                                     
|                                     
|                                     
|Restructuring and related charges     |  |                            | (249 | )    |  |   |    |  
|                                     
|                                     
|                                     
|                                     
|Other income (expense), net           |  |                            | 70   |      |  |   | 46  |  
|                                      |  |                            |      |      |  |   |     |  
|Income before income taxes            |  | $                          | 111  |      |  | $ | 473 |  
|                                      |  |                            |      |      |  |   |     |  

Note 11  Commitments and Contingencies

Litigation

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

Compaq and certain of its current and former officers and directors are
named in two consolidated class action lawsuits pending in the United States
District Court for the Southern District of Texas, Houston Division (USDC 
Houston). One lawsuit was filed in 1998 and the other in 1999. The 1998
litigation consolidates five class action lawsuits, brought by persons who
purchased Compaq common stock from July 10, 1997 through March 6, 1998. It
asserts claims under Section 10(b) of the 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
USDC  Houston entered an order granting class certification
on July 18, 2000. Compaq
has appealed class certification and the United States Court of Appeals for the
Fifth Circuit (Fifth Circuit Appellate Court) will hear arguments in June
2001. Discovery has been stayed by order of the Fifth Circuit Appellate Court
pending their decision on the class certification appeal. On December 12,
2000, the USDC  Houston 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. Compaq moved to dismiss the second amended
complaint on March 6, 2001 and is awaiting a ruling from the
USDC  Houston.
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

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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 (USDC  Massachusetts). On August 8, 1995, the
USDC  Massachusetts 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. Compaq recently agreed to settle
the two remaining class actions for approximately $5 million. This settlement
has been preliminarily approved by the USDC  Massachusetts. Final approval is
subject to a fairness hearing, which will be held on June 18, 2001.

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 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 the United States District Court for the Eastern
District of Texas in Beaumont, Texas; LaPray in the District Court of Jefferson
County, Texas, 60th Judicial District in Beaumont; Sprung in the United States
District Court for the District of Colorado (USDC  Colorado). On March 2,
2001, the judge in Thurmond granted summary judgment in Compaqs favor on
plaintiffs Federal claims, holding that plaintiffs had failed to prove the
requisite amount of damages. The judge also refused to exercise jurisdiction
over plaintiffs remaining state law claims, which plaintiffs are now pursuing
in the LaPray action, where a class certification hearing will be held in June
2001. The Sprung case has been stayed while the USDC  Colorado considers
Compaqs motion to dismiss. Compaq continues to provide information to the
Federal government and state attorneys general in California and Illinois in
response to inquiries regarding floppy disk controllers in computers sold to
government entities.

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##### Table of Contents






Item 2. 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, communication 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 interim
condensed consolidated financial statements presented in Item 1.

Results of Operations

Compaq purchased certain assets and liabilities of InaCom Corp. (Inacom)
in February 2000. This transaction was accounted for as a purchase.
Accordingly, Compaqs interim condensed consolidated financial statements
include the results of operations from the date of acquisition through March
31, 2001.

First quarter 2001 segment results reflected changes made in the
organization of Compaqs business segments and its expense allocation
methodology. Compaq has combined commercial personal computing with consumer
to form the Access business. In addition, the results of Compaqs financing
business, which were previously reflected in the Other segment category, were
included in the Compaq Global Services segment in the first quarter of 2001.
Further, Compaq allocated certain shared expenses, such as information
management, facilities and marketing costs, to the segments during the first
quarter of 2001. Financial data for prior periods has been restated to conform
to the current presentation. Exhibit 99 includes additional prior period
restated segment data.

Summary financial data by business segment follows:

|                               |                         |      |                             |       |   |  |   |       |  
|------------------------------ | ----------------------- | ---- | --------------------------- | ----- | - |  | - | ----- | -
|                               |                         |      | Three months endedMarch 31,
|                               |                         |      |                            
|(In millions)                  |                         | 2001 |                             | 2000 
|                               |                         |      |                             |      
|Enterprise Computing          
|                               | Revenue                 |      | $                           | 2,908 |   |  | $ | 2,953 |  
|                              
|                              
|                              
|                              
|                               | Operating income        |      |                             | 132   |   |  |   | 262   |  
|                              
|                              
|                              
|                              
|Access                        
|                               | Revenue                 |      |                             | 4,374 |   |  |   | 4,704 |  
|                              
|                              
|                              
|                              
|                               | Operating income (loss) |      |                             | (82   | ) |  |   | 15    |  
|                              
|                              
|                              
|                              
|Compaq Global Services        
|                               | Revenue                 |      |                             | 1,935 |   |  |   | 1,863 |  
|                              
|                              
|                              
|                              
|                               | Operating income        |      |                             | 254   |   |  |   | 212   |  
|                              
|                              
|                              
|                              
|Segment Eliminations and Other
|                               | Revenue                 |      |                             | (20   | ) |  |   | (15   | )
|                              
|                              
|                              
|                              
|                               | Operating income        |      |                             | 20    |   |  |   | 3     |  
|                              
|                              
|                              
|                              
|Consolidated Segment Totals   
|                               | Revenue                 |      | $                           | 9,197 |   |  | $ | 9,505 |  
|                              
|                              
|                              
|                              
|                               | Operating income        |      | $                           | 324   |   |  | $ | 492   |  

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A reconciliation of Compaqs consolidated segment operating income to
consolidated income before income taxes follows:

|                                      |  |                             |      |      |  |   |     |  
|------------------------------------- |  | --------------------------- | ---- | ---- |  | - | --- | -
|                                      |  | Three months endedMarch 31,
|                                      |  |                            
|(In millions)                         |  | 2001                        |      | 2000
|                                      |  |                             |      |     
|Consolidated segment operating income |  | $                           | 324  |      |  | $ | 492 |  
|                                     
|                                     
|                                     
|                                     
|Unallocated corporate expenses        |  |                             | (34  | )    |  |   | (65 | )
|                                     
|                                     
|                                     
|                                     
|Restructuring and related charges     |  |                             | (249 | )    |  |   |    |  
|                                     
|                                     
|                                     
|                                     
|Other income (expense), net           |  |                             | 70   |      |  |   | 46  |  
|                                      |  |                             |      |      |  |   |     |  
|Income before income taxes            |  | $                           | 111  |      |  | $ | 473 |  
|                                      |  |                             |      |      |  |   |     |  

Overview

Compaq reported first quarter consolidated revenue of $9.2 billion, a
decrease of 3 percent compared with the first quarter of 2000, or an increase
of 1 percent adjusted for the effects of currency. Lower revenue in Access and
Enterprise Computing was partially offset by higher revenue in Compaq Global
Services. The decline in consolidated revenue resulted primarily from a
slowing economy in the United States. Revenue outside the United States
accounted for 61 percent of revenue during the quarter and grew 17 percent
adjusted for the effects of currency.

Consolidated gross margin of $2.1 billion declined 0.2 percentage points
to 22.7 percent of revenue for the quarter ended March 31, 2001 compared with
the first quarter of 2000. Higher margins in Compaq Global Services were
offset by lower margins in Access and Enterprise Computing.

Consolidated operating expense was relatively unchanged at $1.8 billion
for the first quarter of 2000 and 2001. Compared with the fourth quarter of
2000, operating expense (excluding special items) declined $169 million, or 9
percent, as Compaq began substantial actions to reduce structural costs in
response to a declining market in the United States.

For the first quarter of 2001, Compaqs net income (excluding special
items) was $200 million, or $0.12 per diluted common share, compared with $252
million, or $0.14 per diluted common share in the prior year quarter. On a
reported basis, Compaqs consolidated net income was $78 million, or $0.05 per
diluted common share, for the first quarter of 2001, compared with $296
million, or $0.17 per diluted common share, in the prior year quarter.

Special items in the first quarter of 2001 included a restructuring charge
of $249 million, net investment income of $75 million and related tax effects,
while special items in the first quarter of 2000 included net investment income
of $68 million and related tax effect.

Enterprise Computing

Enterprise Computing designs, develops, manufactures and markets advanced
computing and telecommunication products, including business-critical servers,
industry-standard servers and storage products.

Revenue

Enterprise Computing revenue decreased $45 million, or 2 percent, compared
with the first quarter of 2000 and represented 32 percent of consolidated
revenue during the quarter. Revenue benefited from strong growth in external
storage and enterprise software sales resulting from continued

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customer acceptance of Storage Area Networks. Total storage capacity
shipped was approximately 18,000 terabytes during the quarter, an increase of
38 percent over the prior year quarter. Such growth was offset primarily by
lower revenue from industry standard servers as the economic slowdown in the
United States led to lower technology spending and a competitive pricing
environment. In international markets, Enterprise Computing revenue grew 29
percent adjusted for the effects of currency compared with the prior year
quarter.

Operating Income

Enterprise Computing operating income decreased $130 million, or 50
percent, in the first quarter of 2001 as compared with the corresponding period
in 2000. A favorable shift in mix to higher margin enterprise storage products
was more than offset by an aggressive pricing environment for industry standard
servers in the United States. Operating expense increased due to technology
investments and higher market development costs.

Access

The Access business delivers products and solutions targeting the
convergence of business and home-user computing for the Internet-connected
world.

Revenue

Access revenue decreased $330 million, or 7 percent, compared with the
first quarter of 2000 and represented 48 percent of consolidated revenue during
the quarter. While revenue grew modestly in commercial products, consumer
products revenue declined significantly due to weakness in the United States
market and a shift in spending toward PC related devices. Access revenue
outside the United States grew 15 percent adjusted for the effects of currency
compared with the prior year quarter.

Operating Income

The Access business incurred an operating loss of $82 million during the
quarter compared with operating income of $15 million in the first quarter of
2000. The operating loss was primarily driven by an aggressive pricing
environment and weakness in the United States market as noted above. While
these factors contributed to a loss in the consumer business, the commercial
business generated an operating profit, continuing to benefit from its improved
business model.

Compaq Global Services

Compaq Global Services delivers worldwide infrastructure and solution
design implementation, management and support services, as well as leasing and
asset management services.

Revenue

Compaq Global Services revenue increased $72 million, or 4 percent,
compared with the first quarter of 2000 and represented 21 percent of
consolidated revenue. Adjusted for the effects of currency, revenue increased
9 percent compared with the first quarter of 2000. Compaq Global Services
revenue benefited from growth in Windows 2000 and Exchange 2000 deployment
businesses. Growth in Compaqs FutureSourcing practice also
contributed to higher revenue as more companies outsource to reduce costs
during the current economic downturn in the United States. In addition,
revenue benefited from increased service attach rates, driven by strong Compaq
ProLiant server and storage product attachment, and strong growth in
leasing revenue.

14



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##### Table of Contents



Operating Income

Compaq Global Services operating income increased $42 million, or 20
percent, during the quarter compared with the first quarter of 2000. Operating
income in this segment remained strong at 13 percent of revenue compared with
11 percent in the prior year quarter. Improved results from Compaqs
professional services organization drove higher profitability in this segment
due to higher revenue chargeability and managements continued focus on
improving results in this business. Intense efforts to reduce operating costs
also contributed to higher operating income.

Unallocated Corporate Expenses

The results of the business segments exclude separately managed
unallocated corporate expenses, which are comprised primarily of general and
administrative costs as well as other items not controlled by the business
segments. Unallocated corporate expenses decreased from $65 million in the
first quarter of 2000 to $34 million in the first quarter of 2001.

Restructuring and Related Charges

In March 2001, Compaqs management approved a restructuring plan to
realign its organization and reduce operating costs. Compaq combined its
commercial and consumer personal computer operations into a single Access
business to capitalize on technical similarities between the two groups, derive
greater internal operating efficiencies and simplify product offerings. Compaq
is also implementing significant changes in supply chain operations designed to
lower order cycle time, reduce channel inventory and improve account and order
management. Accordingly, Compaq plans to reduce associated employee positions
by approximately 4,500 worldwide. Of the positions being eliminated,
approximately 2,500 will result from the closure of certain manufacturing
facilities and the consolidation of the commercial and consumer operations.
The balance will come largely from administrative functions.

Restructuring and related charges of $249 million were expensed during the
quarter ended March 31, 2001. These charges were comprised of $173 million
related to employee separations, $64 million of related asset impairment
charges and $12 million for other exit costs. Employee separation benefits
include severance, medical and other benefits.

Compaq expects to substantially complete the initiatives contemplated in
its restructuring plan by December 31, 2001. Upon conclusion of its
restructuring initiatives, Compaq expects to achieve annualized savings of
approximately $500 million in cost of sales and operating expenses. However,
there can be no assurance that such cost reductions can be sustained or that
the estimated costs of such actions will not change.

Liquidity and Capital Resources

Compaqs cash and cash equivalents increased $73 million to $2.6 billion
at March 31, 2001. The increase resulted primarily from $499 million provided
by operating activities, offset in part by $258 million used in investing
activities and $158 million used in financing activities.

Net cash of $499 million provided by operating activities consisted
primarily of net income adjusted for non-cash items of $690 million, offset by
$191 million used in working capital and other activities. Net cash used in
working capital and other activities resulted primarily from a decrease in
current liabilities, partially offset by a decrease in receivables. Days sales
outstanding were 59 days in the current quarter compared with 53 days in the
fourth quarter of 2000. Inventory turns were 13.9 in the first quarter of 2001
compared with 16.3 in the fourth quarter of 2000.

15



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##### Table of Contents



Net cash of $258 million used in investing activities consisted of $370
million used for net capital expenditures and $116 million used in other
investing activities, partially offset by proceeds received from the sale of
investments of $228 million.

Cash used in financing activities of $158 million consisted primarily of a
decrease in short-term borrowings of $61 million, net common stock transactions
of $55 million and dividends paid to stockholders of $42 million.

Estimated future uses of cash in 2001 include capital expenditures for
land, buildings and equipment of approximately $700 million, purchases of
equipment to be leased to third parties of approximately $400 million. Compaq
has approximately $550 million remaining under the $1.0 billion program for the
repurchase of Compaq common shares authorized by the Board of Directors in
December 2000.

Compaq also plans to use available liquidity to develop the purchased
in-process technology related to the Digital acquisition into commercially
viable products. At March 31, 2001, 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 ($350
million in 2001, $460 million in 2002, $370 million in 2003 and $230 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 March 31, 2001. Compaq
also operates two short-term commercial paper programs: a $3.7 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 and $2.2 billion credit facilities. Outstanding
commercial paper reduces available borrowings under these credit facilities.
At March 31, 2001, Compaq had $303 million and $277 million in commercial paper
outstanding under the Compaq and CFS programs, respectively, with a weighted
average interest rate of 6.4 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 $550 million at March 31, 2001. There were no
outstanding borrowings against these lines at March 31, 2001. 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.

In May 2000, Compaq filed a shelf registration statement for debt
securities with the Securities Exchange Commission to register $2.0 billion of
debt securities. In August 2000, Compaq placed under its effective 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 is payable on the Notes on February 1 and August 1 of each year. The
fair value of the Notes approximates carrying value. In February 2001, Compaq
established under the registration statement a $1.4 billion medium-term notes
program for issuance of debt securities due nine months or more from date of
issue. Currently, no medium-term notes have been sold under this shelf registration
statement. The net proceeds from the sale of these debt securities will be
used 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).

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Factors That May Affect Financial Condition and Future Results

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

Deteriorating market conditions could impact revenues and growth rate.
During the first quarter of 2001 the United States information technology
market weakened, particularly in the consumer sector. Continued softness in
the United States market and the likelihood that it will have some impact on
demand in other regions could impact the purchasing decisions of
Compaq's potential and existing customer base, resulting in lower demand for products and
services. It is possible that Compaq's revenues in the United States
could be negatively impacted by these weakening market
conditions.

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.
 These competitive factors could spur more
aggressive pricing tactics due to the recent softness in the information
technology industry, which continues to put pressure on revenue, gross margins
and market share. In the second quarter of 2001, Compaq intends to be more
aggressive with pricing and programs to drive demand generation in core
markets and to reduce reseller inventories. While Compaq anticipates that its
profitability will rebound strongly in the second half, its ability to restore
gross margin to the levels achieved in the first quarter of 2001 is subject to
general market conditions and the other risks described in this report.

Restructuring activity and expense
constraints could impede operations and
divert focus.Compaq undertook a number of restructuring activities to realign
its organization and reduce operating costs. Compaq is focused on bringing its
operational expense to appropriate levels for each of its businesses while
simultaneously restructuring its commercial personal computing and consumer
business businesses and implementing extensive new company-wide programs. The
significant risks associated with these actions include the unanticipated
consequences of reductions in personnel devoted to ongoing programs, delays in
implementation of anticipated reductions in work force in highly regulated locations
in a number of countries in Europe, customer confusion about Compaqs future
products and services, adverse impact on employee morale and retention and the
failure to meet operating expense targets by not matching commitments in new
programs to reductions in ongoing programs.

Delays in implementation of changes in various delivery models could
negatively affect financial results.Compaq uses a variety of delivery models
to sell its broad array of products and services. Compaq sells directly to end
users in all market sectors, but the largest proportion of direct sales is in
large enterprise accounts. Computing products are sold to the
commercial market primarily through third-party resellers while consumer
personal computing products are sold principally through retail outlets.
Compaq has established a variety of programs designed to
achieve improved operational capabilities for all of its delivery models by
simplifying its product-set and pricing model, re-engineering the channel
delivery model and more rapidly expanding e-commerce capabilities for large,
medium and small businesses. Should Compaq not be successful in
implementing the most advantageous delivery model for its products and services,
profitability could be adversely affected.

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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.

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. 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.

Quarterly sales cycle makes planning and operational efficiencies
difficult.Compaq, like other technology 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 earnings.Compaq holds
minority interests in companies having operations or technology in areas within
Compaqs strategic focus. Certain investments are in publicly traded companies
whose share prices are highly volatile. The market value of certain of these
investments at the end of the first quarter of 2001 was less than the carrying
value of such investments. The continuation of these valuations, further adverse
changes in market conditions or poor operating results of underlying
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

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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 United States and European markets. Compaq
generally has experienced longer accounts receivable cycles in emerging
markets, in particular Asia-Pacific and Latin America, when compared with
United States and European markets. Compaq is also subject to any political
and financial instability in the countries in which it operates, including
inflation, recession, 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.

New form factors introduce uncertainty into the market.The increasing
reliance on the Internet is creating new dynamics in the technology 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
compete for customer acceptance and market share against those of
other 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.

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

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.

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 plans to improve inventory levels,
cash and related profitability.

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 requires significant adjustment due to audits or regulatory changes,
Compaqs overall tax rate could increase.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

Foreign Currency Risk

The value of the U.S. dollar affects Compaqs financial results. Changes
in exchange rates may positively or negatively affect Compaqs revenues, gross
margins, operating expenses and retained earnings as expressed in U.S. dollars.
Compaq engages in hedging programs aimed at limiting in part the impact of
currency fluctuations. Principal currencies hedged include the Euro, Japanese
yen and British pound. 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
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.

Based on Compaqs foreign currency exchange instruments outstanding at
March 31, 2001, Compaq estimates a maximum potential one-day loss in fair value
of approximately $38 million. Compaq included all foreign exchange contracts
in the value-at-risk calculation. The holding period for these instruments
varies from one day to nine months, with the exception of instruments held by
CFS which have holding periods up to four years.

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Interest Rate Risk

Changes in interest rates affect interest income earned on Compaqs cash
equivalents and short-term investments, interest expense on short-term
borrowings, and the fair value of Compaqs debt and investment portfolios.
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.

Based on Compaqs debt and investment portfolios outstanding at March 31,
2001, Compaq estimates a maximum potential one-day loss in fair value of $1
million. Compaq included all fixed income investments, interest rate swaps,
commercial paper and long-term debt obligations in the value-at-risk
calculation in the value-at-risk calculation. The holding period for these
instruments varies from one day to five years.

Equity Price Risk

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 March 31, 2001, the fair value of Compaqs
available-for-sale securities was $260 million. A 20 percent adverse change in
equity prices would result in an approximate $52 million decrease in the fair
value of Compaqs available-for-sale securities as of March 31, 2001.

Because of the foregoing factors (Factors That May Affect Financial
Condition and Future Results and Market Risk), 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.

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PART II. OTHER INFORMATION




Item 1. Legal Proceedings

See Note 11 to unaudited interim condensed consolidated financial statements.




Item 6. Exhibits and Reports on Form 8-K

|    |  |                |  |                                  
|--- |  | -------------- |  | ---------------------------------
|(a) |  | Exhibit No.
99 |  | Description
Restated Segment Data

(b) Reports on Form 8-K

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)   |  | Report on Form 8-K dated February 15, 2001, announcing Compaqs
filing with the Securities and Exchange Commission of a Prospectus
Supplement, dated February 14, 2001, to the Prospectus, dated June 16,
2000, in connection with the offering on a continuing basis for up to
an aggregate of $1.425 million in principal amount of medium-term
notes.                                                                                                                                                                                                                                                                                                                   
|     
|(ii)  |  | Report on Form 8-K dated March 16, 2001, containing two Compaq news
releases, each dated March 15, 2001, announcing (a) the merging of its
commercial personal computing and consumer operations into a new Access
business group, workforce reductions, anticipated restructuring charges
and lowering its earnings outlook for its first quarter ending March
31, 2001 and (b) the appointments of Jeff Clarke, as Senior Vice
President and Chief Financial Officer, Jesse J. Greene, Jr., as Senior
Vice President of Strategic Planning, and Mike Larson, as Senior Vice
President of the Access business, as executives of Compaq Computer
Corporation, respectively.
|     
|(iii) |  | Report on Form 8-K dated April 24, 2001,
announcing its earnings release for the
first quarter of 2001, certain initiatives to be taken in the second
quarter, including additional reductions in structural costs, permanent
inventory reductions and aggressive pricing and reporting that revenue
and earnings for its second quarter will be below market expectations.                                                                                                                                                                                                                                                                                                

All other items specified by Part II of this report are inapplicable and
accordingly have been omitted.

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SIGNATURES

Pursuant to the requirements 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.

|                                                                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------------------------------
|COMPAQ COMPUTER CORPORATION                                                                                                                        
|                                                                                                                                                   
|/s/ JEFF CLARKE                                                                                                                                    
|                                                                                                                                                   
|Jeff ClarkeSenior Vice President, Finance and
Administration and Chief Financial Officer
(as authorized officer and as
principal financial officer)

April 25, 2001

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EXHIBIT INDEX



|EXHIBIT NUMBER
99 |  | DESCRIPTION
Restated Segment Data
|----------------- |  | ---------------------------------