<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>5
<FILENAME>dex991.txt
<DESCRIPTION>COMPAQ'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TEXT>
<PAGE>

                                                                    Exhibit 99.1
                                                                    ------------

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders of Compaq Computer Corporation

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

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

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

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

                                                 Ernst and Young LLP

Houston, Texas
January 16, 2002

<PAGE>


REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors
of Compaq Computer Corporation

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

PricewaterhouseCoopers LLP
Houston, Texas
January 25, 2000

<PAGE>


                           Compaq Computer Corporation
                           Consolidated Balance Sheet

<TABLE>
<CAPTION>
December 31 (In millions, except par value)                                               2001             2000
==================================================================================================================
ASSETS
Current assets:
<S>                                                                                  <C>                <C>
   Cash and cash equivalents                                                         $     3,874        $    2,569
   Trade accounts receivable, net                                                          4,623             6,715
   Leases and other accounts receivable                                                    1,881             1,677
   Inventories                                                                             1,402             2,161

   Other assets                                                                            1,498             1,989
                                                                                     -----------------------------
       Total current assets                                                               13,278            15,111
Property, plant and equipment, net                                                         3,199             3,431
Other assets, net                                                                          7,212             6,314
                                                                                     -----------------------------
           Total assets                                                              $    23,689        $   24,856
                                                                                     =============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Borrowings                                                                        $     1,692        $      711
   Accounts payable                                                                        3,881             4,233
   Deferred income                                                                         1,181             1,089
   Other liabilities                                                                       4,379             5,516
                                                                                     -----------------------------
       Total current liabilities                                                          11,133            11,549

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

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

<PAGE>

                           Compaq Computer Corporation
                        Consolidated Statement of Income

<TABLE>
<CAPTION>
Year ended December 31 (In millions, except per share amounts)            2001            2000           1999
====================================================================================================================
Revenue:
<S>                                                                      <C>            <C>             <C>
    Products                                                             $26,728        $35,506         $31,824
    Services                                                               6,826          6,716           6,623
                                                                     -----------------------------------------------
       Total revenue                                                      33,554         42,222          38,447
                                                                     -----------------------------------------------
Cost of sales:
    Products                                                              21,536         27,624          25,263
    Services                                                               4,906          4,793           4,535
                                                                     -----------------------------------------------
       Total cost of sales                                                26,442         32,417          29,798
                                                                     -----------------------------------------------
Selling, general and administrative                                        5,328          6,044           6,341
Research and development                                                   1,305          1,469           1,660
Restructuring and related activities                                         742            (86)            868
Merger-related costs                                                          44             --              --
Other (income) expense, net                                                  466          1,503          (1,154)
                                                                     -----------------------------------------------
                                                                           7,885          8,930           7,715
                                                                     -----------------------------------------------
Income (loss) before income taxes                                           (773)           875             934
Provision (benefit) for income taxes                                        (210)           280             365
                                                                     -----------------------------------------------
Income (loss) before cumulative effect of accounting change                 (563)           595             569
Cumulative effect of accounting change, net of tax                          (222)           (26)             --
                                                                     -----------------------------------------------
Net income (loss)                                                         $ (785)        $  569          $  569
                                                                     ===============================================
Earnings (loss) per common share:
Basic:
    Before cumulative effect of accounting change                        $ (0.34)        $ 0.35         $  0.35
    Cumulative effect of accounting change, net of tax                     (0.13)         (0.02)             --
                                                                     -----------------------------------------------
                                                                         $ (0.47)        $ 0.33         $  0.35
                                                                     ================================================
Diluted:
    Before cumulative effect of accounting change                        $ (0.34)         $0.34         $  0.34
    Cumulative effect of accounting change, net of tax                     (0.13)         (0.01)             --
                                                                     -----------------------------------------------
                                                                         $ (0.47)         $0.33         $  0.34
                                                                     ===============================================
Shares used in computing earnings (loss) per common share:
    Basic                                                                  1,688          1,702           1,693
                                                                     -----------------------------------------------
    Diluted                                                                1,688          1,742           1,735
                                                                     ===============================================
</TABLE>

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

<PAGE>

                           Compaq Computer Corporation
                      Consolidated Statement of Cash Flows

<TABLE>
<CAPTION>
 Year ended December 31 (In millions)                                          2001              2000             1999
============================================================================================================================
 Cash flows from operating activities:
<S>                                                                          <C>               <C>               <C>
      Net income (loss)                                                      $ (785)           $ 569             $ 569
      Adjustments to reconcile net income (loss) to net cash
         provided by operating activities:
            Cumulative effect of accounting change, net of tax                  222               26                --
            Depreciation and amortization                                     1,377            1,407             1,402
            Gain on sale of investments                                        (194)            (278)             (126)
            Impairment charge for investments and related assets                613            1,756                --
            Gain on sale of businesses                                           --               --            (1,182)
            Restructuring and related activities                                742              (86)              868
            Deferred income taxes and other                                    (243)             252               147
            Changes in operating assets and liabilities, net of
               effects of acquired businesses:
                 Receivables                                                  1,297           (1,946)              185
                 Inventories                                                    645              (72)              (97)
                 Accounts payable                                              (319)            (228)              135
                 Other assets and liabilities                                (1,873)            (835)             (598)
                                                                        ----------------------------------------------------
                   Net cash provided by operating activities                  1,482              565             1,303
                                                                        ----------------------------------------------------
 Cash flows from investing activities:
      Capital expenditures, net                                                (927)          (1,133)           (1,185)
      Proceeds from sale of investments                                         370              292               149
      Purchases of investments                                                 (122)            (539)              (89)
      (Increase) decrease in short-term investments                               -              636              (636)
      Acquisitions of businesses, net of cash acquired                            -             (370)             (517)
      Other, net                                                               (276)            (117)             (191)
                                                                        ----------------------------------------------------
                   Net cash used in investing activities                       (955)          (1,231)           (2,469)
                                                                        ----------------------------------------------------
 Cash flows from financing activities:
      Increase in short-term borrowings, net                                    706              258               453
      Increase in long-term borrowings                                          300              575                 -
      Issuance of common stock for stock options                                245              308               183
      Treasury stock purchases                                                 (118)            (673)             (276)
      Dividends to stockholders                                                (169)            (170)             (136)
      Payment to retire Digital preferred stock                                  --               --              (400)
                                                                        ----------------------------------------------------
                   Net cash provided by (used in) financing activities          964              298              (176)
                                                                        ----------------------------------------------------
 Effect of exchange rate changes on cash and cash equivalents                  (186)             271               (83)
                                                                        ----------------------------------------------------
                   Net increase (decrease) in cash and cash equivalents       1,305              (97)           (1,425)
 Cash and cash equivalents at beginning of period                             2,569            2,666             4,091
                                                                        ----------------------------------------------------

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

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

<PAGE>

                           Compaq Computer Corporation
                Consolidated Statement of Cash Flows (Continued)

<TABLE>
<CAPTION>
Supplemental Cash Flow Information
Year ended December 31 (In millions)                                               2001          2000           1999
========================================================================================================================
<S>                                                                            <C>            <C>          <C>
Interest paid                                                                  $     141      $     127    $      74
Income taxes paid                                                              $     447      $     488    $     415
Acquisition of businesses
Fair value of:
     Assets acquired                                                           $   --         $    499      $    811
     Liabilities assumed                                                           --             (129)         (201)
     Options issued                                                                --               --           (60)
                                                                            --------------------------------------------
Cash paid                                                                          --              370           550
Less:   Cash acquired                                                              --               --           (33)
                                                                            --------------------------------------------
Net cash paid for acquisitions                                                 $   --         $    370      $    517
                                                                            --------------------------------------------
Sale of businesses
Fair value of:
     Equity proceeds                                                              $ --        $      --     $  1,597
     Note receivable                                                                --               --          204
     Cash received                                                                  --               --           70
                                                                            --------------------------------------------
                                                                                    --               --        1,871
Less:   Basis in net assets sold                                                    --               --         (689)
                                                                            --------------------------------------------
Gain on sale of businesses                                                        $ --        $      --     $  1,182
                                                                            --------------------------------------------
</TABLE>

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

<PAGE>

                           Compaq Computer Corporation
                 Consolidated Statement of Stockholders' Equity

<TABLE>
<CAPTION>
                                                      Common Stock
                                                   -------------------
                                                           Par value                  Accumulated
                                                   Number  and capital                   other                    Total
                                                     of     in excess    Retained    comprehensive   Treasury  stockholders'
(In millions)                                      shares     of par     earnings    income (loss)     stock      equity
---------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>      <C>         <C>           <C>            <C>
Beginning balance, December 31, 1998                1,698     $ 7,270    $  4,501       $   (36)     $  (384)    $ 11,351
Comprehensive income:
   Net income                                                                 569                                     569
   Changes in unrealized gains and losses on
   investments, net of reclassifications                                                  2,978                     2,978
   Foreign currency translation adjustment                                                  (26)                      (26)
   Minimum pension liability adjustment                                                       3                         3
                                                                                                               -----------
Total comprehensive income                                                                                          3,524
                                                                                                               -----------
   Issuance pursuant to stock option plans             17         183                                                 183
   Issuance pursuant to acquisitions                               32                                                  32
   Stock option tax benefits                                      142                                                 142
   Gain on redemption of Digital preferred                                     22                                      22
   stock
   Cash dividends                                                            (144)                                   (144)
   Repurchase of treasury stock, at cost                                                                (276)        (276)
                                                --------------------------------------------------------------------------
Ending balance, December 31, 1999                   1,715       7,627       4,948         2,919         (660)      14,834
Comprehensive income:
   Net income                                                                 569                                     569
   Changes in unrealized gains and losses on
   investments, net of reclassifications                                                 (2,904)                   (2,904)
   Foreign currency translation adjustment                                                  (12)                      (12)
   Minimum pension liability adjustment                                                      24                        24
                                                                                                               -----------
Total comprehensive loss                                                                                           (2,323)
                                                                                                               -----------
   Issuance pursuant to stock plans                    27         308                                                 308
   Stock option tax benefits                                      104                                                 104
   Cash dividends                                                            (170)                                   (170)
   Repurchase of treasury stock, at cost                                                                (673)        (673)
                                                --------------------------------------------------------------------------
Ending balance, December 31, 2000                   1,742       8,039       5,347            27       (1,333)      12,080

Comprehensive income:
   Net loss                                                                  (785)                                   (785)
   Changes in unrealized gains and losses on
   investments, net of reclassifications                                                    (50)                      (50)
   Foreign currency translation adjustment                                                   (5)                       (5)
   Minimum pension liability adjustment                                                    (113)                     (113)
   Changes in gains and losses on derivative
      instruments, net of reclassifications                                                   9                         9
                                                                                                               -----------
Total comprehensive loss                                                                                             (944)
                                                                                                               -----------
   Issuance pursuant to stock plans                    24         245                                                 245
   Stock option tax benefits                                       23                                                  23
   Cash dividends                                                            (169)                                   (169)
   Repurchase of treasury stock, at cost                                                                (118)        (118)

                                                --------------------------------------------------------------------------
Ending Balance, December 31, 2001                   1,766     $ 8,307   $    4,393     $   (132)     $(1,451)    $ 11,117
                                                --------------------------------------------------------------------------
</TABLE>

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

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Description of Business and Summary of Significant Accounting Policies

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

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

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

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

<PAGE>

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

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

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

<PAGE>

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

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

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

<PAGE>

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

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

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

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

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

<PAGE>

Note 2. Accounting Changes

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

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

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

Note 3. Recent Developments, Acquisitions and Divestitures

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

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

<PAGE>

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

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

Note 4. Certain Balance Sheet Components

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

December 31 (In millions)                         2001               2000
================================================================================
Minimum lease payment receivable                 $ 2,501            $ 1,868
Unguaranteed residual values                         196                122
Initial direct costs                                  31                 21
Allowance                                            (53)               (27)
Unearned income                                     (274)              (217)
                                            ------------------------------------
                                                 $ 2,401            $ 1,767
                                            ------------------------------------

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

Inventories consisted of the following:

December 31 (In millions)                          2001               2000
================================================================================
Raw material                                      $   298           $   540
Work-in-progress                                      172               298
Finished goods                                        932             1,323
                                             -----------------------------------
                                                  $ 1,402           $ 2,161
                                             -----------------------------------

<PAGE>

     Property, plant and equipment consisted of the following:

December 31 (In millions)                            2001            2000
================================================================================
Land                                                 $   356         $   342
Buildings and leasehold improvements                   1,594           1,493
Machinery and equipment                                3,667           3,786
Equipment leased to third parties                      1,215           1,166
Construction-in-process                                  266             261
                                               ---------------------------------
                                                       7,098           7,048
Less:   Accumulated depreciation                      (3,899)         (3,617)
                                               ---------------------------------
                                                     $ 3,199         $ 3,431
                                               ---------------------------------

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

     Other non-current assets consisted of the following:

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

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

     Other current liabilities consisted of the following:

December 31 (In millions)                            2001            2000
================================================================================
Salaries, wages and related items                    $   591         $   922
Income taxes payable                                     473             769
Accrued warranties                                       861             938
Other accrued liabilities                              2,454           2,887
                                               ---------------------------------
                                                     $ 4,379         $ 5,516
                                               ---------------------------------

<PAGE>

Note 5.  Borrowings

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

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

<TABLE>
<CAPTION>
          Date              Amount          Interest Rate           Interest Payable              Maturity Date
     ----------------    --------------     --------------    -----------------------------    ---------------------
<S>                      <C>                    <C>             <C>                               <C>
       August 2000       $300 million           7.65%           February 1 and August 1           August 1, 2005
       August 2000       $275 million           7.45%           February 1 and August 1           August 1, 2002

</TABLE>

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

<TABLE>
<CAPTION>
          Date              Amount          Interest Rate           Interest Payable              Maturity Date
     ----------------   ---------------     --------------    -----------------------------    ---------------------
<S>                      <C>                    <C>              <C>                               <C>
        May 2001         $300 million           6.2%             May 15 and November 15            May 15, 2003
</TABLE>

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

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

<PAGE>

Note 6. Other Income and Expense

         Other (income) expense consisted of the following:

Year ended December 31 (In millions)     2001          2000           1999
================================================================================
Investment (income) loss, net        $    438      $  1,568       $    (67)
Interest and dividend income             (232)         (276)          (196)
Interest expense                          113           112            133
Other expense, net                        147            99            158
Gain on sale of businesses                 --            --         (1,182)
                                    --------------------------------------------
                                     $    466      $  1,503       $ (1,154)
                                    --------------------------------------------

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

Note 7.  Provision for Income Taxes

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

<TABLE>
<CAPTION>
Year ended December 31 (In millions)                 2001          2000           1999
===========================================================================================
<S>                                                 <C>           <C>            <C>
United States                                       $ (887)       $ 200          $  94
Foreign                                                114          675            840
                                              ---------------------------------------------
     Income (loss) before income taxes              $ (773)       $ 875          $ 934
                                              ---------------------------------------------
</TABLE>

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

<TABLE>
<CAPTION>
Year ended December 31 (In millions)                2001            2000             1999
===============================================================================================
Current tax expense (benefit)
<S>                                                <C>              <C>              <C>
   United States Federal                           $ (148)         $ (91)           $   1
   State and local                                     20              5               11
   Foreign                                            323            353              460
                                              -------------------------------------------------
      Total current                                   195            267              472
                                              -------------------------------------------------

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

<PAGE>

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

<TABLE>
<CAPTION>
Year ended December 31 (In millions)                                      2001            2000            1999
====================================================================================================================
<S>                                                                     <C>              <C>             <C>
Tax expense (benefit) at United States statutory rate                   $ (270)          $ 306           $ 327
Foreign tax effect, net                                                    (76)             --             (31)
Valuation allowance on investment write-down                               130              --              --
Disposition of businesses                                                   --              --              77
Recovery of operating subsidiary stock basis                                --              (61)            --
Other, net                                                                   6              35              (8)
                                                                   -------------------------------------------------
       Total provision                                                  $ (210)          $ 280           $ 365
                                                                   -------------------------------------------------
</TABLE>

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

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

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

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

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

<PAGE>

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

     Deferred tax assets (liabilities) were as follows:

  December 31 (In millions)                            2001           2000
  ------------------------------------------------------------------------------
  Loss carryforwards                                 $  774         $  379
  Credit carryforwards                                  773          1,109
  Accrued liabilities                                   767            748
  Tax versus financial reporting year-end                --            446
  Capitalized research and development costs            684            349
  Receivable allowances                                 134            278
  Inventory adjustments                                 459            347
  Equity investments                                    575             --
  Other                                                 712            514
                                                 -------------------------------
      Gross deferred tax assets                       4,878          4,170
                                                 -------------------------------
  Equity investments                                     --            (46)
  Intangible assets                                    (241)          (333)
  Other                                                (234)           (87)
                                                 -------------------------------
      Gross deferred tax liabilities                   (475)          (466)
                                                 -------------------------------
  Deferred tax asset valuation allowance               (510)          (434)
                                                 -------------------------------
     Total deferred tax asset                       $ 3,893        $ 3,270
                                                 -------------------------------

Note 8. Employee Stock Plans

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

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

<PAGE>

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

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

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

<TABLE>
<CAPTION>
                                                             Shares                                 Weighted Average
                                                           In Millions         Price Per Share      Price Per Share
  ------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>       <C>                     <C>
  Options outstanding, December 31, 1998                          157                               $    16.37
     Options granted                                              118       $  3.36   -  $ 47.63         31.42
     Options lapsed or canceled                                   (24)                                   28.18
     Options exercised                                            (17)      $  1.30   -  $ 39.23          9.66
                                                       --------------------                      -------------------
  Options outstanding, December 31, 1999                          234                                    23.37
     Options granted                                              119       $ 15.04   -  $ 34.08         22.74
     Options lapsed or canceled                                   (30)                                   29.99
     Options exercised                                            (23)      $  1.58   -  $ 31.25         10.40
                                                       --------------------                      -------------------
  Options outstanding, December 31, 2000                          300                                    23.45
     Options granted                                               68       $  8.31   -  $ 23.71         10.33
     Options lapsed or canceled                                   (31)                                   26.47
     Options exercised                                            (11)      $  1.58   -  $ 23.81          6.49
                                                       --------------------                      -------------------
  Options outstanding, December 31, 2001                          326                               $    21.02
                                                       --------------------                      -------------------
</TABLE>

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

<TABLE>
<CAPTION>
                                          Options Outstanding                           Options Exercisable
                             ----------------------------------------------     ------------------------------------
                                               Weighted        Weighted                              Weighted
                                                Average        Average                               Average
         Ranges of               Shares        Remaining       Exercise             Shares           Exercise
      Exercise Prices         In Millions    Life in Years      Price            In Millions          Price
--------------------------------------------------------------------------------------------------------------------
<S>                                  <C>           <C>         <C>                      <C>          <C>
          under $5.00                9             1.3         $   3.92                 9            $   3.52
        5.01 to 10.00               80             8.4             9.57                17                8.81
       10.01 to 15.00                7             4.9            12.32                 6               12.53
       15.01 to 20.00               71             8.0            17.66                28               17.11
       20.01 to 25.00               19             6.7            23.21                12               23.24
       25.01 to 30.00              107             7.6            26.53                34               26.36
          over $30.00               33             6.6            42.96                23               42.30
                             ----------------------------------------------     ------------------------------------
                                   326             7.5         $  21.02               129            $  22.24
                             ----------------------------------------------     ------------------------------------
</TABLE>

<PAGE>

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

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

<TABLE>
<CAPTION>
                                                      Stock Options                                  ESPP
                                        -------------------------------------------       ---------------------------
  Year ended December 31                    2001          2000           1999                 2001          2000
=====================================================================================================================
<S>                                          <C>             <C>          <C>                  <C>            <C>
  Expected life (in years)                   7               6            5                    0.5            0.5
  Risk-free interest rate                     5.3%         5.0%          5.5%                  1.8%           6.3%
  Volatility                                 55.2%        49.7%         39.8%                 65.0%          55.9%
  Dividend yield                              1.0%         0.4%          0.3%                  1.0%           0.4%
</TABLE>

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

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

<PAGE>

Note 9. Stockholders' Equity

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

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

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

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

Note 10. Pension and Other Benefit Programs

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

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

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

<PAGE>

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

<TABLE>
<CAPTION>
                                                  Year Ended December 31, 2001         Year Ended December 31, 2000
                                                  ----------------------------         ----------------------------
                                               Defined Benefit Pension   OPEB Plans    Defined Benefit       OPEB Plans
                                               -----------------------   ----------    ---------------       ----------
                                                        Plans                            Pension Plans
                                                        -----                            -------------
(In millions, except assumptions)                   U.S.     Foreign       (1)         U.S.      Foreign       (1)
---------------------------------------------- ------------ ----------- ----------- ----------- ----------- -----------
Change in benefit obligation
<S>                                                <C>        <C>        <C>           <C>       <C>         <C>
  Benefit obligation at beginning of year          $1,941     $1,767     $  338        $2,085    $ 1,728     $  344
  Service cost                                         36         62          4            40         66          6
  Interest cost                                       148         96         26           147         94         25
  Plan amendments                                      --        (62)       (25)           --          3         --
  Actuarial (gain) loss                               (69)        88         64          (127)       144        (11)
  Curtailment gain                                     --         (6)        --            --         (7)        --
  Benefits paid                                      (103)       (63)       (33)         (204)       (70)       (30)
  Currency loss                                        --        (75)        --            --       (172)        (1)
  Other                                                --         13          6            --        (19)         5
                                               ------------ ----------- ----------- ----------- ----------- -----------
    Projected benefit obligation at end of
     year                                           1,953      1,820        380         1,941      1,767        338
                                               ------------ ----------- ----------- ----------- ----------- -----------
Change in plan assets
  Fair value of plan assets at beginning of
   year                                             2,344      1,834         --         2,371      1,827         --
  Actual return on plan assets                       (286)      (266)        --           174        233         --
  Employer contributions                                3         49         27             3         28         25
  Benefits paid                                      (103)       (63)       (33)         (204)       (70)       (30)
  Currency loss                                        --        (69)        --            --       (161)        --
  Other                                                --         10          6            --        (23)         5
                                               ------------ ----------- ----------- ----------- ----------- -----------
    Fair value of plan assets at end of year        1,958      1,495         --         2,344      1,834         --
                                               ------------ ----------- ----------- ----------- ----------- -----------
Funded status                                          5        (325)      (380)          403         67       (338)
Unrecognized net actuarial (gain) loss                238        547         48          (179)        82        (22)
Unrecognized prior service cost                        --        (21)       (22)           --         50          3
                                               ------------ ----------- ----------- ----------- ----------- -----------
  Prepaid (accrued) benefit cost                      243        201       (354)          224        199       (357)
  Contributions after measurement date                 --          8         --            --          8         --
                                               ------------ ----------- ----------- ----------- ----------- -----------
    Prepaid (accrued) benefit cost                 $  243     $  209     $ (354)       $  224    $   207     $ (357)
                                               ------------ ----------- ----------- ----------- ----------- -----------
Amounts included in the Consolidated Balance
 Sheet are composed of:
  Prepaid benefit cost                             $  249     $  305     $    -        $  230    $   344     $   --
  Accrued benefit liability                            (6)      (308)      (354)           (6)      (170)      (357)
  Other assets                                         --         21         --            --         16         --
  Accumulated other comprehensive loss                 --        191         --            --         17         --
                                               ------------ ----------- ----------- ----------- ----------- -----------
    Net amount recognized                          $  243     $  209     $ (354)       $  224    $   207     $ (357)
                                               ------------ ----------- ----------- ----------- ----------- -----------
Weighted average assumptions as of October 31
  Discount rate                                      7.50%      5.55%      7.50%         8.00%      5.75%      8.00%
  Expected return on plan assets                     9.00%      7.30%       N/A          9.00%      7.35%       N/A
  Rate of compensation increase                      4.50%      3.50%       N/A          4.50%      3.60%       N/A
  Healthcare cost trend rate, current year            N/A        N/A      10.00%          N/A        N/A       5.50%
  Healthcare cost trend rate, ultimate year           N/A        N/A       5.00%          N/A        N/A       5.00%
  Trend rate decreases to the ultimate rate
   in the year                                        N/A        N/A       2006           N/A        N/A       2001
Components of net periodic benefit cost
  Service cost                                        $36     $   62     $    4        $   40    $    66     $    6
  Interest cost                                       148         96         26           147         94         25
  Expected return on plan assets                     (201)      (123)        --          (199)      (125)        --
  Settlement/curtailment gain                          --         --         --           (17)        (3)        --
  Other                                                --          6          1            --          9          1
                                               ------------ ----------- ----------- ----------- ----------- -----------
    Net periodic pension cost                      $  (17)    $   41     $   31        $  (29)   $    41     $   32
                                               ------------ ----------- ----------- ----------- ----------- -----------
</TABLE>

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

<PAGE>

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

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

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

Note 11. Segment Data

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

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

<PAGE>

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

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

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

<PAGE>

         Summary financial data by business segment follows:
<TABLE>
<CAPTION>
(In millions)                                                                2001          2000           1999
--------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>           <C>            <C>
Enterprise Computing
        Revenue                                                             $10,699      $  14,253      $  12,947
        Operating income                                                        163          1,656            674
Access
        Revenue                                                              15,193         20,624         18,128
        Operating income (loss)                                                (587)           145           (437)
Compaq Global Services
        Revenue                                                               7,789          7,483          7,413
        Operating income                                                      1,062            884            998
Segment Eliminations and Other
        Revenue                                                                (127)          (138)           (41)
        Operating income (loss)                                                   1            (43)          (289)
Consolidated Segment Totals
        Revenue                                                             $33,554      $  42,222      $  38,447
        Operating income                                                    $   639      $   2,642      $     946
</TABLE>

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

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

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

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

<PAGE>

Note 12. Restructuring and Related Activities

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

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

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

<TABLE>
<CAPTION>

                                                                           Adjustments
                                                             Beginning         and         December 31,
 (In millions)                                                Accrual      Expenditures      2001
-------------------------------------------------------------------------------------------------------
<S>                                                        <C>              <C>           <C>
 Employee separations                                        $  476           $  245        $  231
 Facility closure costs                                          40               15            25
 Other exit costs                                                24               16             8
                                                           --------------------------------------------
                                                             $  540           $  276        $  264
                                                           --------------------------------------------
</TABLE>


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

<PAGE>

Note 13. Derivative Financial Instruments, Concentrations, and Commitments,
Contingencies and Litigation

Derivative Financial Instruments

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

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

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

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

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

<PAGE>

Concentrations of risk

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

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

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

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

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

<PAGE>

Lease commitments

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

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

Contingencies

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

Litigation

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

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

<PAGE>

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

     Several purported class action lawsuits were filed against Digital during
1994 alleging violations of Federal securities laws arising from alleged
misrepresentations and omissions in connection with Digital's issuance and sale
of Series A 8 7/8 percent Cumulative Preferred Stock and Digital's financial
results for the quarter ended April 2, 1994. During 1995, the lawsuits were
consolidated into three cases, which were pending before the United States
District Court for the District of Massachusetts. Compaq settled all remaining
class action lawsuits relating to this matter for approximately $5 million on
July 11, 2001.

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

<PAGE>

Selected Quarterly Financial Data (Unaudited):

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

<TABLE>
<CAPTION>

(In millions, except per share amounts)                                    1st          2nd          3rd         4th
                                                                         quarter      quarter      quarter     quarter
-----------------------------------------------------------------------------------------------------------------------
2001(1)

<S>                                                                   <C>          <C>          <C>          <C>
Revenue                                                                $   9,181    $   8,481    $  7,436    $    8,456
Gross margin                                                               2,076        1,846       1,445         1,745

Income (loss) before cumulative effect of accounting change(2)                91         (239)       (507)           92
  Basic earnings (loss) per common share(3)                               $ 0.05    $   (0.14)    $ (0.30)    $    0.05
  Diluted earnings (loss) per common share(3)                             $ 0.05    $   (0.14)    $ (0.30)    $    0.05
Net income (loss) (4)                                                       (131)        (239)       (507)           92
  Basic earnings (loss) per common share(3)                              $ (0.08)   $   (0.14)    $ (0.30)    $    0.05
  Diluted earnings (loss) per common share(3)                            $ (0.08)   $   (0.14)    $ (0.30)    $    0.05

2000(1)

Revenue                                                                $   9,475    $  10,098    $  11,171    $  11,478
Gross margin                                                               2,154        2,351        2,637        2,663
Income (loss) before cumulative effect of accounting change(5)               322          388          557         (672)
      Basic earnings (loss) per common share(3)                        $    0.19    $    0.23    $    0.32      $ (0.39)
      Diluted earnings (loss) per common share(3)                      $    0.19    $    0.22    $    0.31      $ (0.39)
Net income (loss) (4)                                                        296          388          557         (672)
      Basic earnings (loss) per common share(3)                        $    0.17    $    0.23    $    0.32      $ (0.39)
      Diluted earnings (loss) per common share(3)                      $    0.17    $    0.22    $    0.31      $ (0.39)
</TABLE>

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

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

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

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

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

<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders of Compaq Computer Corporation

We have audited the consolidated financial statements of Compaq Computer
Corporation as of December 31, 2001 and 2000 and for each of the two years in
the period ended December 31, 2001 and have issued our report thereon dated
January 16, 2002 (included elsewhere in this Current Report on Form 8-K). Our
audits also included the financial statement schedule as of December 31, 2001
and 2000 and for each of the two years in the period ended December 31, 2001
listed in Item 7 of this Current Report on Form 8-K. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.

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

                                                 Ernst & Young LLP

Houston, Texas
January 16, 2002

<PAGE>

                      Report of Independent Accountants on
                          Financial Statement Schedule

To the Stockholders and Board of Directors
of Compaq Computer Corporation

Our audit of the consolidated financial statements of Compaq Computer
Corporation referred to in our report dated January 25, 2000 appearing in this
Current Report on Form 8-K of Hewlett-Packard Company also included an audit of
the financial statement schedule of Compaq Computer Corporation listed in Item 7
of this Form 8-K for the year ended December 31, 1999. In our opinion, the
financial statement schedule of Compaq Computer Corporation for the year ended
December 31, 1999 presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related Compaq Computer
Corporation consolidated financial statements. We have not audited the
consolidated financial statements or financial statement schedule of Compaq
Computer Corporation for any period subsequent to December 31, 1999.

PricewaterhouseCoopers LLP
Houston, Texas
January 25, 2000





<PAGE>

                                                                     SCHEDULE II

                           Compaq Computer Corporation
                        Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
Year ended December 31 (In millions)                                    2001              2000            1999
--------------------------------------------------------------------------------------------------------------------

Allowance for Doubtful Accounts
<S>                                                                  <C>               <C>                 <C>
Balance, beginning of period                                         $     211         $     222           $  318
Additions charged to expense                                                98                82               43
Deductions (Accounts receivable write-offs)                                (79)              (93)            (139)
                                                                  --------------------------------------------------
Balance, end of period                                               $     230         $     211           $  222
                                                                  --------------------------------------------------
</TABLE>


</TEXT>
</DOCUMENT>
