COMPAQ COMPUTER CORP, 10-Q, 1999-05-14

COMPAQ COMPUTER CORP
10-Q, 1999-05-14
ELECTRONIC COMPUTERS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999

COMMISSION FILE NUMBER 1-9026

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

DELAWARE 76-0011617
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

20555 SH 249, HOUSTON, TEXAS 77070
(281) 370-0670
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [ X ] No [ ]

The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of March 31, 1999, was approximately 1.7 billion.

<PAGE>
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)

<S> <C> <C>
MARCH 31, DECEMBER 31,
(In millions, except par value). . . . . . . . . . . . . . . . . 1999 1998
- -------------------------------------------------------------------------------------------------
ASSETS

Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 3,609 $ 4,091
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . 6,989 6,998
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 2,149 2,005
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 1,556 1,602
Other current assets. . . . . . . . . . . . . . . . . . . . . . 483 471
------------ --------------

Total current assets. . . . . . . . . . . . . . . . . . . . . 14,786 15,167
----------- --------------
Property, plant and equipment, less accumulated depreciation . . 2,948 2,902
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . 1,640 1,341
Intangible and other assets. . . . . . . . . . . . . . . . . . . 3,626 3,641
------------ --------------
$ 23,000 $ 23,051
=========== ==============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . $ 4,106 $ 4,237
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . 469 282
Accrued restructuring costs . . . . . . . . . . . . . . . . . . 895 1,110
Other current liabilities . . . . . . . . . . . . . . . . . . . 4,908 5,104
------------ --------------
Total current liabilities . . . . . . . . . . . . . . . . . . 10,378 10,733
------------ --------------
Postretirement and other postemployment benefits . . . . . . . . 542 545
------------ --------------
Minority interest. . . . . . . . . . . . . . . . . . . . . . . . 422 422
------------ --------------
Stockholders' equity:
Preferred stock, $.01 par value
(authorized: 10 million shares; issued: none) . . . . . . . . - -
Common stock and capital in excess of $.01 par value
(authorized: 3 billion shares; issued and outstanding:
1,706 million and 1,691 million shares at March 31, 1999 and
1,698 million and 1,687 million shares, at December 31, 1998) 7,469 7,270
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 4,699 4,465
Treasury stock (at cost). . . . . . . . . . . . . . . . . . . . (510) (384)
------------ --------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . 11,658 11,351
------------ --------------
$ 23,000 $ 23,051
============ ==============
</TABLE>
See accompanying notes to consolidated financial data.

2
<PAGE>
<TABLE>
<CAPTION>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)

QUARTER ENDED
MARCH 31,
-----------------
(In millions, except per share amounts) 1999 1998
------- --------
<S> <C> <C>
Revenue:
Products. . . . . . . . . . . . . . . . $7,819 $ 5,574
Services. . . . . . . . . . . . . . . . 1,600 113
------- --------
Total revenue . . . . . . . . . . 9,419 5,687
------- --------

Cost of sales:
Products. . . . . . . . . . . . . . . . 6,007 4,601
Services. . . . . . . . . . . . . . . . 1,085 63
------- --------
Total cost of sales . . . . . . . 7,092 4,664
------- --------

Selling, general and administrative expense. 1,477 785
Research and development costs . . . . . . . 404 245
Other income and expense, net. . . . . . . . 34 (30)
------- --------
1,915 1,000
------- --------

Income before provision for income taxes . . 412 23
Provision for income taxes . . . . . . . . . 131 7
------- --------
Net income . . . . . . . . . . . . . . . . . $ 281 $ 16
======= ========

Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . $ 0.17 $ 0.01
====== =======
Diluted . . . . . . . . . . . . . . . . . . $ 0.16 $ 0.01
====== =======

Shares used in computing earnings per
common share:
Basic . . . . . . . . . . . . . . . . . . . 1,689 1,523
====== =======
Diluted . . . . . . . . . . . . . . . . . . 1,750 1,584
====== =======
</TABLE>

See accompanying notes to consolidated financial data.

3
<PAGE>
<TABLE>
<CAPTION>

COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)

QUARTER ENDED
MARCH 31,
------------------
(In millions) 1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 281 $ 16
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . 304 151
Deferred income taxes. . . . . . . . . . . . . . . . . . . (130) -
Changes in operating assets and liabilities, net of
effects of purchased business:
Accounts receivable. . . . . . . . . . . . . . . . . . . 85 119
Inventories. . . . . . . . . . . . . . . . . . . . . . . (144) 314
Other current assets . . . . . . . . . . . . . . . . . . (12) (9)
Accounts payable . . . . . . . . . . . . . . . . . . . . . (137) (23)
Income taxes payable . . . . . . . . . . . . . . . . . . . 187 62
Accrued restructuring costs. . . . . . . . . . . . . . . . (215) -
Other current liabilities. . . . . . . . . . . . . . . . . (141) (195)
-------- --------
Net cash provided by operating activities. . . . . . . . 78 435
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment, net. . . . . . . (216) (157)
Proceeds from sales of short-term investments. . . . . . . . - 344
Acquisition of business, net of cash acquired. . . . . . . . (219) -
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . 33 (27)
-------- --------
Net cash provided by investing activities . . . . . . . (402) 160
-------- --------
Cash flows from financing activities:
Purchase of treasury shares. . . . . . . . . . . . . . . . . (126) -
Issuance of common stock pursuant to stock option plans. . . 99 58
Tax benefit associated with stock options. . . . . . . . . . 68 -
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . (34) (23)
-------- --------
Net cash provided by financing activities. . . . . . . . 7 35
-------- --------
Effect of exchange rate changes on cash and cash equivalents. (165) 59
-------- --------
Net (decrease) increase in cash and cash equivalents . . (482) 689
Cash and cash equivalents at beginning of period. . . . . . . 4,091 6,418
-------- --------
Cash and cash equivalents at end of period. . . . . . . . . . $ 3,609 $ 7,107
======== ========
</TABLE>

See accompanying notes to consolidated financial data.

4
<PAGE>
COMPAQ COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL DATA

NOTE 1 - BASIS OF PRESENTATION
- -----------------------------------

The accompanying unaudited consolidated financial data for Compaq Computer
Corporation ("Compaq") as of March 31, 1999 and December 31, 1998 and for the
quarters ended March 31, 1999 and 1998 have been prepared on substantially the
same basis as Compaq's annual consolidated financial statements. In Compaq's
opinion, the data reflects all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for those periods
and the financial condition at those dates. The consolidated results for
interim periods are not necessarily indicative of results to be expected for the
full year. The accompanying unaudited consolidated financial data should be
read in conjunction with Compaq's 1998 Annual Report on Form 10-K for the year
ended December 31, 1998.

Compaq completed the acquisition of Digital Equipment Corporation in June
1998. This acquisition was accounted for under the purchase method of
accounting. Accordingly, the results of operations and the estimated fair
market value of the assets acquired and liabilities assumed were included in
Compaq's financial statements from the date of acquisition.

NOTE 2 - ACQUISITIONS
- ------------------------

In February 1999, Compaq completed a cash tender offer for Shopping.com, an
on-line retailer that offers Internet shoppers an array of consumer products.
The aggregate purchase price of $257 million consisted of $219 million in cash,
the issuance of employee stock options with a fair value of $32 million and
other acquisition costs. The transaction was accounted for under the purchase
method of accounting. Accordingly, the results of operations of the acquired
business and the estimated fair market values of the acquired assets and
liabilities were included in Compaq's financial statements from the date of
acquisition. The aggregate purchase price has been preliminarily allocated to
the assets and liabilities acquired, consisting primarily of goodwill that is
being amortized over a three year period. Pro forma statements of operations
reflecting the acquisition of Shopping.com are not shown as they would not
differ materially from reported results.

NOTE 3 - RESTRUCTURING ACTIONS
- ----------------------------------

In June 1998, management approved restructuring plans to integrate the
operations of Compaq and Digital. The accrued restructuring costs related to
these plans include the cost of involuntary employee separation benefits,
consolidation of duplicative facilities, the cost of terminating Digital
contractual obligations, and relocation costs of Digital employees. Employee
separation benefits include severance, medical and other benefits.
Restructuring costs related to Digital were recorded as a component of the
preliminary purchase price allocation and costs related to Compaq were charged
to operations.

The cost of employee separations associated with this restructuring
includes separation benefits estimated for approximately 12,400 Digital
employees and 5,000 Compaq employees. Employee separations affect the majority
of business functions, job classes and geographies, with most of the reductions
occurring in North America and Europe. The restructuring plans also included
costs associated with the closure of 13.2 million square feet of office,
distribution and manufacturing space, principally in North America and Europe.
Compaq expects that most of the restructuring actions will be completed by June
1999.

5
<PAGE>
The accrued restructuring costs and amounts charged against the provision as of
March 31, 1999, were as follows:

<TABLE>
<CAPTION>
DECEMBER 31, CASH MARCH 31,
1998 EXPENDITURES 1999
------------- -------------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Employee separations . . . . . . . $ 723 $ (187) $ 536
Facility closure costs . . . . . . 317 (20) 297
Relocation . . . . . . . . . . . . 43 (2) 41
Other exit costs . . . . . . . . . 27 (6) 21
------------- -------------- ----------
Total accrued restructuring costs. $ 1,110 $ (215) $ 895
============= ============== ==========
</TABLE>

The total accrued restructuring cost of $895 million includes amounts for
actions that have already been taken, but cash expenditures have not been made.
Approximately $200 million of the accrual at March 31, 1999 relates to future
cash payments to employees separated prior to March 31, 1999.

For the quarter ended March 31, 1999, employee separations due to
restructuring actions totaled 2,051. The net headcount reduction for the quarter
ended March 31, 1999 including attrition and restructuring, offset by hiring,
totaled approximately 1,400. Since the date of the Digital acquisition,
employee separations due to restructuring actions were 12,593. The net
headcount reduction since the date of the Digital acquisition, including
attrition and restructuring, offset by hiring, was approximately 14,200.

NOTE 4 - INVENTORIES
- -----------------------

Inventories consisted of the following:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- -------------
(IN MILLIONS)
<S> <C> <C>
Raw materials . . $ 441 $ 404
Work in progress. 388 403
Finished goods. . 1,320 1,198
---------- -------------
$ 2,149 $ 2,005
========== =============
</TABLE>

NOTE 5 - TREASURY STOCK
- ---------------------------

Compaq repurchased approximately three million shares in the quarter ended
March 31, 1999, for a cost of approximately $126 million under the systematic
stock repurchase program implemented in May 1998.

6
<PAGE>
NOTE 6 - OTHER INCOME AND EXPENSE
- ---------------------------------------

Other income and expense consisted of the following:

<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
-----------------------
1999 1998
------- -------
(IN MILLIONS)
<S> <C> <C>
Interest and dividend income. . . . . $ (52) $ (85)
Interest (income) expense associated. 1 (1)
with hedging
Other interest expense. . . . . . . . 40 40
Currency losses, net. . . . . . . . . 31 4
Minority interest dividend. . . . . . 9 -
Other, net. . . . . . . . . . . . . . 5 12
------- -------
$ 34 $ (30)
======= ========
</TABLE>

NOTE 7 - COMPREHENSIVE INCOME
- ---------------------------------

Comprehensive income is comprised of two components: net income and other
comprehensive income. Other comprehensive income refers to revenues, expenses,
gains and losses that under generally accepted accounting principles are
recorded as an element of stockholders' equity and are excluded from net income.
Compaq's other comprehensive income is comprised primarily of foreign currency
translation adjustments from international subsidiaries and adjustments made to
recognize additional minimum liabilities associated with the defined benefit
pension plans. Cumulative other comprehensive loss for the three months ended
March 31, 1999 was $49 million and for the three months ended March 31, 1998 was
$21 million. The components of comprehensive income are listed below:

<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
-----------------------
1999 1998
------- ------
(IN MILLIONS)
<S> <C> <C>
Net income. . . . . . . . . . . . $ 281 $ 16
Other comprehensive income (loss) (13) (3)
------- ------
Comprehensive income. . . . . . . $ 268 $ 13
======= ======
</TABLE>

NOTE 8 - EARNINGS PER COMMON SHARE
- ----------------------------------------

Basic earnings per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted earnings per
common share is computed using the combination of dilutive common share
equivalents and the weighted average number of common shares outstanding during
the period. Incremental shares of 61 million for the quarters ended March 31,
1999 and 1998 were used in the calculation of diluted earnings per common share.

Stock options to purchase 36 million shares of common stock for the quarter
ended March 31, 1999, and 9 million shares of common stock for the quarter ended
March 31, 1998, were outstanding but not included in the computation of diluted
earnings per common share because the option exercise price was greater than the
average market price of the common shares.

7
<PAGE>
NOTE 9 - SEGMENT DATA
- -------------------------

Compaq manages its business segments primarily on a geographic basis.
Compaq's reportable segments are comprised of North America and Europe, Middle
East and Africa (EMEA). Other segments include Japan, Greater China, Asia
Pacific and Latin America.

Compaq evaluates the performance of its segments based on segment profit.
Segment profit for each segment includes sales and marketing expenses and other
overhead charges directly attributable to the segment and excludes expenses that
are managed outside the business segments. Costs excluded from segment profit
primarily consist of corporate expenses and income taxes. Corporate expenses
include research and development costs, certain costs related to the Digital
integration, corporate marketing costs and other general and administrative
expenses. Compaq does not include intercompany transfers between segments for
management reporting purposes. Services revenue is presented on a management
reporting basis and includes $140 million of products revenue that consists
primarily of spare parts and third-party product sales.

Summary information by segment is as follows:

<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
---------------
(IN MILLIONS) 1999 1998
------ -------
<S> <C> <C>
NORTH AMERICA:
Revenue:
Products . . . $3,700 $ 2,744
Services . . . 602 45
Gross margin:
Products . . . 916 210
Services . . . 249 25
Segment profit (loss) 710 (68)
- -----------------------------------------
EMEA:
Revenue:
Products . . . $2,953 $ 2,144
Services . . . 815 33
Gross margin:
Products . . . 736 519
Services . . . 252 22
Segment profit. . . . 602 352
- -----------------------------------------
OTHER SEGMENTS:
Revenue:
Products . . . $1,026 $ 686
Services . . . 323 35
Gross margin:
Products. . . 235 147
Services. . . 112 8
Segment profit. . . . 127 28
- -----------------------------------------
</TABLE>

8
<PAGE>
A reconciliation of Compaq's segment gross margin and segment profit to the
corresponding consolidated amounts is as follows:

<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
------------------------
(IN MILLIONS) 1999 1998
----------- --------
<S> <C> <C>
Segment gross margin . . . . . . . . . . . . . $ 2,500 $ 931
Non-segment gross margin . . . . . . . . . . . (173)(1) 92(1)
----------- --------
Total gross margin. . . . . . . . . . . . $ 2,327 $ 1,023
----------- --------

Segment profit . . . . . . . . . . . . . . . . $ 1,439 $ 312
Corporate expenses, net. . . . . . . . . . . . (1,027) (289)
----------- --------
Income before provision for income taxes. $ 412 $ 23
----------- --------
<FN>
(1)Non-segment gross margin primarily relates to manufacturing and services
amounts not allocated to the geographic segments on a management reporting
basis.
</TABLE>

NOTE 10 - LITIGATION
- -----------------------

General Litigation
- -------------------

Compaq is subject to legal proceedings and claims that arise in the
ordinary course of business. Management 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.

Class Action Litigation
- -------------------------

Compaq is subject to a number of shareholder class action claims. Five
purported class action lawsuits of all persons who purchased Compaq common stock
from July 10, 1997 through March 6, 1998, have been consolidated in the United
States District Court for the Southern District of Texas, Houston Division. The
named defendants for these actions include Compaq and some of its current and
former officers and directors. The complaints allege that the defendants
violated federal securities laws by withholding information and making
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 a number of individual defendants sold Compaq common stock at these
inflated prices. Lead counsel for the plaintiff has been appointed. Plaintiffs
filed a consolidated amended complaint on March 16, 1999.

A number of purported class actions were filed in March and April 1999
against Compaq in the United States District Court for the Southern District of
Texas, Houston Division. These actions name Compaq and a number of its current
and former executive officers as defendants and are purported to be on behalf of
persons who purchased Compaq stock from January 27, 1999 through February 25,
1999, or from January 27, 1999 through April 9, 1999. The actions assert claims
under federal securities laws. The complaints allege that defendants inflated
the price of Compaq stock by making false and misleading statements about
Compaq's revenue and further allege that a number of current and former Compaq
officers sold Compaq stock at these inflated prices. The plaintiffs in the
above actions seek monetary damages, interest, costs and expenses.

9
<PAGE>
three cases, which were pending before the United States District Court for the
district of Massachusetts. On August 8, 1995, the Massachusetts federal court
granted the defendants' motion to dismiss all three cases in their entirety. On
May 7, 1996, the United States Court of Appeals for the First Circuit affirmed
in part and reversed in part the dismissal of two of the cases, and remanded for
further proceedings. The parties are proceeding with discovery.

Compaq believes these suits are without merit and intends to defend these
suits vigorously.

NOTE 11 - SUBSEQUENT EVENTS
- -------------------------------

In April 1999, Compaq completed the acquisition of Zip2 Corporation, a
provider of Internet platform solutions for media companies and local e-commerce
merchants. Total consideration for the acquisition was approximately $307
million in cash, the issuance of employee stock options and other acquisition
costs. The transaction will be accounted for under the purchase method of
accounting.

In April 1999, Digital redeemed its 16 million outstanding depositary
shares of Series A 8-7/8% Cumulative Preferred Stock, each representing a
one-fourth interest in a share of the Series A 8-7/8% Cumulative Preferred
Stock, par value $1.00 per share. The redemption price was $400 million, plus
accrued and unpaid dividends of $9 million. The minority interest of $422
million on Compaq's March 31, 1999 Consolidated Balance Sheet represents the
fair value of Digital's Series A Preferred Stock as of the date of the Digital
acquisition.

In April 1999, the shareholders approved the Compaq Computer Corporation
Employee Stock Purchase Plan (the Plan). Once the Plan is fully implemented,
generally all employees will be eligible to participate, although Compaq may
impose an eligibility period of up to two years of employment or other
eligibility requirements. Compaq plans to begin implementation of the Plan in
the first quarter of 2000. Employees who choose to participate will be granted
an option to purchase common stock at 85% of market value on the first or last
day of the purchase period, whichever is lower. The purchase period may be
three months, six months, or other periods as determined by the Plan Committee.
The Plan 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.

10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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

RESULTS OF OPERATIONS

The following table presents, as a percentage of revenue, selected
consolidated financial data:

<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
-----------------------
1999 1998
------- -------
<S> <C> <C>
Revenue:
Products. . . . . . . . . . . . . . . . . . 83.0% 98.0%
Services. . . . . . . . . . . . . . . . . . 17.0 2.0
------- -------
Total revenue. . . . . . . . . . . . . . . . 100.0 100.0

Cost of sales:
Products. . . . . . . . . . . . . . . . . . 76.8 82.5
Services. . . . . . . . . . . . . . . . . . 67.8 55.8
Total cost of sales. . . . . . . . . . 75.3 82.0

Gross margin:
Products. . . . . . . . . . . . . . . . . . 23.2 17.5
Services. . . . . . . . . . . . . . . . . . 32.2 44.2
Total gross margin . . . . . . . . . . 24.7 18.0

Selling, general and administrative expenses 15.7 13.8
Research and development costs . . . . . . . 4.3 4.3
Other income and expense, net. . . . . . . . 0.3 (0.5)
------- -------
20.3 17.6
------- -------
Income before provision for income taxes . . 4.4% 0.4%
======= =======
</TABLE>

OVERVIEW

Compaq's recent acquisitions have resulted in an expanded and enhanced
business model, focused on open industry-standard products, leadership
enterprise technology and solutions and a full line of global service offerings.
Compaq delivers customer value through standards-based, partner-leveraged
computing that features services, support and market-segment focused solutions,
particularly in communications, manufacturing and finance. Compaq is a
strategic information technology partner to customers of all sizes, providing
product offerings that range from handheld devices to powerful failsafe
computers.

The first quarter of 1999 reflects significant growth primarily as a result
of the acquisition of Digital. The acquisition was accounted for under the
purchase method of accounting. Accordingly, the results of operations and the
estimated fair market value of the assets acquired and liabilities assumed were
included in Compaq's financial statements from the date of acquisition. The
growth in the first quarter of 1999 was lower than expected due to a number of
factors as discussed in "Revenue" and "Gross Margin" below. Comparatively, the
first quarter of 1998 was negatively impacted by significant price reductions
and promotional activities in the North America market place related to
commercial products due to lower than expected sales out of the channel and
significant competitive pricing conditions.

11
<PAGE>
REVENUE

Revenue for the first quarter of 1999 increased $3.7 billion or 65.6% over
the comparable period in 1998, driven by the acquisition of Digital as well as
by growth in previously existing business areas.

Products revenue for the first quarter of 1999 increased approximately $2.2
billion or 40.3% over the first quarter of 1998. Products revenue in 1999
reflected a growth in worldwide unit sales of 25.5% over the first quarter of
1998. Growth in options revenue was 44.2% in 1999 compared to the first quarter
of 1998. The increase in products revenue was primarily due to the acquisition
of Digital as well as unit growth achieved in previously existing business
areas, offset by increased competitive pricing. Revenue related to the
commercial PC business was below internal expectations due to increased
competitive pricing. Additionally, revenue in the higher-end enterprise systems
was lower than internally expected.

Products revenue for North America grew $1.0 billion or 34.8% for the first
quarter of 1999 over 1998. Products revenue in North America represented 48.2%
of total products revenue in the first quarter of 1999 and 49.2% of total
products revenue in the first quarter of 1998. Products revenue growth in 1999
primarily related to the acquisition of Digital and growth in industry standard
servers, storage and consumer products.

Products revenue for Europe, Middle East and Africa (EMEA) in the first
quarter of 1999 grew $809 million or 37.7% over the first quarter of 1998.
Products revenue in EMEA represented 38.5% of total products revenue in the
first quarter of 1999 and 38.5% of total products revenue in the first quarter
of 1998. Products revenue growth in 1999 was due primarily to the acquisition
of Digital and growth in commercial desktops and industry standard servers.

Services revenue for the first quarter of 1999 increased approximately $1.5
billion over the comparable quarter of 1998 primarily due to the acquisition of
Digital. Services revenue for the first quarter of 1998 related primarily to
professional services provided by Tandem. On a normalized basis, total services
revenue for the quarter ended March 31, 1999 grew by approximately 7%
year-over-year. Both customer services and professional services grew for the
quarter ended March 31, 1999.

Services revenue for North America for the first quarter of 1999 grew $557
million over the first quarter of 1998. Services revenue in North America
represented 34.6% of total services revenue in the first quarter of 1999 and
39.8% of total services revenue in the first quarter of 1998. Services revenue
for EMEA for the first quarter of 1999 grew $782 million over the first quarter
of 1998. Services revenue in EMEA represented 46.8% of total services revenue
in the first quarter of 1999 and 29.2% of total services revenue in the first
quarter of 1998.

GROSS MARGIN

Gross margin as a percentage of revenue was 24.7% in the first quarter of
1999, up from 18.0% in the first quarter of 1998. Products gross margin as a
percentage of products revenue was 23.2% for the first quarter of 1999 and 17.5%
for the first quarter of 1998. The increase in gross margin for the first
quarter of 1999 compared to 1998 was due to the 1998 price reductions and
additional promotional activities on commercial products taken in North America
due to lower than expected sales out of the channel and to respond to
competitive pricing conditions. Gross margins in the first quarter of 1999 were
below both internal expectations, and the fourth quarter 1998 performance of
26.4%, due to the product revenue shortfall as described in "Revenue" above,
increased price competition, and a less favorable mix of higher margin products
and options.

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<PAGE>
Products gross margin as a percentage of products revenue in North America
was 24.8% for the first quarter of 1999 and 7.7% for the first quarter of 1998.
Products gross margin as a percentage of products revenue in EMEA was 24.9% for
the first quarter of 1999 and 24.2% for the first quarter of 1998.

Services gross margin as a percentage of services revenue was 32.2% for the
first quarter of 1999 and 44.2% for the first quarter of 1998. Services gross
margin as a percentage of services revenue in North America was 41.4% for the
first quarter of 1999 and 55.6% for the first quarter of 1998. Services
gross margin as a percentage of services revenue in EMEA was 30.9% for the first
quarter of 1999 and 66.7% for the first quarter of 1998. Services gross margin
in 1999 is not comparable to services gross margin in 1998 as a result of the
acquisition of Digital.

OPERATING EXPENSES

Research and development costs increased $159 million or 64.9% in the first
quarter of 1999 as compared to 1998, primarily due to the acquisition of
Digital. Research and development costs as a percentage of revenue were 4.3%
for both the quarter ended March 31, 1999 and March 31, 1998. Compaq is
committed to maintaining a significant level of research and development
investment in support of its activities as a full-service enterprise computing
company, offering leadership technologies and products for the future.

Compaq's selling, general and administrative expense increased $692 million
or 88.2% in the first quarter of 1999 as compared to 1998. As a percentage of
revenue, selling, general and administrative expense was 15.7% in the first
quarter of 1999 and 13.8% in the first quarter of 1998. The increase as a
percentage of revenue in the first quarter of 1999 over 1998 was primarily due
to the acquisition of Digital, which historically maintained higher selling,
general and administrative expense as a percentage of revenue, and lower than
expected total revenue. In the first quarter of 1999, operating expenses in
absolute dollars declined due to the continued implementation of the
restructuring plans and realization of synergies for the combined companies.

PURCHASED IN-PROCESS TECHNOLOGY

Upon consummation of the Digital acquisition in June 1998, Compaq expensed
approximately $3.2 billion representing purchased in-process technology that had
not yet reached technological feasibility and had no alternative future use.
The value was determined by estimating the costs to develop the purchased
in-process technology into commercially viable products, estimating the
resulting net cash flows from such projects, and discounting the net cash flows
back to their present values. The discount rate includes a factor that takes
into account the uncertainty surrounding the successful development of the
purchased in-process technology.

If these projects are not successfully developed, Compaq's revenue and
profitability may be adversely affected in future periods. Additionally, the
value of other intangible assets acquired may become impaired. Compaq began to
benefit from the purchased in-process technology in late 1998 and is
continuously monitoring its development projects. The development efforts
related to the majority of the purchased in-process technology projects are
progressing in accordance with the assumptions underlying the appraisal. As
expected in the normal course of product development, certain projects have
experienced delays and other projects are being evaluated due to changes in
strategic direction and market conditions, however, these factors are not
expected to have a material adverse affect on results of operations and
financial condition of future periods.

13
<PAGE>
RESTRUCTURING ACTIONS

The cost of employee separations associated with this restructuring
includes separation benefits estimated for approximately 12,400 Digital
employees and 5,000 Compaq employees. Employee separations affect the majority
of business functions, job classes and geographies, with most of the reductions
occurring in North America and Europe. The restructuring plans also included
costs associated with the closure of 13.2 million square feet of office,
distribution and manufacturing space, principally in North America and
Europe. Compaq expects that most of the restructuring actions will be
completed by June 1999.

The accrued restructuring costs and amounts charged against the provision
as of March 31, 1999, were as follows:

OTHER ITEMS

Compaq had other expense, net, of $34 million in the first quarter of 1999
and other income, net, of $30 million in the first quarter of 1998. Other
expense, net, for the first quarter of 1999 relates to currency losses
recognized during the period, particularly Brazil currency devaluations, as well
as the inclusion of the minority interest dividend paid to Digital preferred
shareholders, and lower interest income.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (FAS 133). FAS 133 is effective January 1, 2000 for
Compaq. FAS 133 requires that all derivative instruments be recorded on the
balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,

14
<PAGE>
depending on whether a derivative is designated as part of a hedge transaction
and the type of hedge transaction. The ineffective portion of all hedges will
be recognized in current-period earnings. Compaq is in the process of
determining the impact that the adoption of FAS 133 will have on its earnings or
statement of financial position.

LIQUIDITY AND CAPITAL RESOURCES

Compaq's cash and cash equivalents decreased to $3.6 billion at March 31,
1999, from $4.1 billion at December 31, 1998. The decrease in cash and cash
equivalents in the first quarter of 1999 was primarily due to cash spent for
restructuring activities of $215 million; the closing of the Shopping.com
acquisition for approximately $219 million; $126 million in stock repurchases;
and cash used for the purchase of property, plant and equipment of $216 million.

Operating activities provided $78 million in cash in the first quarter of
1999, compared to $435 million provided in the first quarter of 1998. The
decrease in cash generated by operating activities in the first quarter 1999
compared to 1998 was primarily due to the increase in inventories, cash payments
for accounts payable and cash payments for restructuring activities.

Accounts receivable were $7.0 billion at December 31, 1998 and March 31,
1999. Days sales outstanding for the quarter increased to 64 days versus 56
days in the prior quarter. The increase in days sales outstanding was largely
driven by late quarter sales, with March representing a large percentage of the
first quarter 1999 revenues. Inventory levels increased to $2.1 billion at
March 31, 1999, compared to $2.0 billion at December 31, 1998, due to lower than
internally expected revenue for the quarter ended March 31, 1999. Inventory
turns for the first quarter of 1999 decreased to 13.1 versus 15.9 for the fourth
quarter of 1998.

Compaq plans to use available liquidity to develop the purchased in-process
technology related to the Digital acquisition into commercially viable products.
This primarily consists of planning, designing, prototyping, high-volume
manufacturing verification and testing activities that are necessary to
establish that a product can be produced to meet its design specifications,
including functions, features and technical performance requirements. Bringing
the purchased in-process technology to market also includes developing firmware,
diagnostic software, device drives, and testing the technology for compatibility
and interoperability with commercially viable products. At March 31, 1999, the
estimated costs to be incurred to develop the purchased in-process technology
into commercially viable products totaled $3.0 billion in the aggregate through
the year 2005 ($270 million in 1999, $570 million in 2000, $610 million in 2001,
$590 million in 2002, $540 million in 2003, $320 million in 2004 and $140
million in 2005).

In April 1999, Compaq used $409 million in cash to redeem the 16 million
outstanding depository shares of the Digital Series A 8-7/8% Cumulative
Preferred Stock, plus accrued dividends, and $307 million to complete the
acquisition of Zip2 Corporation.

Future uses of cash during the remainder of 1999 includes cash expenditures
for the majority of the planned restructuring activities as discussed above and
capital expenditures for land, buildings and equipment, which are estimated to
be $700 million.

Compaq additionally anticipates future spending to support and expand
AltaVista Company, a wholly owned subsidiary established to become a leading
Internet site for search capabilities, localized information, e-commerce and
e-services. Compaq plans to contribute the AltaVista search site and the
associated intellectual property, Shopping.com, and Zip2 Corporation to
AltaVista Company in addition to cash and other assets.

15
<PAGE>
Compaq currently expects to fund expenditures for capital requirements as
well as liquidity needs from a combination of available cash balances,
internally generated funds and financing arrangements. Compaq from time to time
may borrow funds for actual or anticipated funding needs. Compaq has a $1
billion revolving credit facility that expires in October 1999 and a $3 billion
revolving credit facility that expires in 2002. Both of these facilities were
unused at March 31, 1999. Compaq has also established a $750 million commercial
paper program, supported by the $3 billion credit facility, which was unused at
March 31, 1999. Additionally, Compaq maintains various uncommitted lines of
credit, which totaled approximately $450 million at March 31, 1999. There were
no outstanding borrowings against these lines at March 31, 1999. Compaq
believes that these sources of credit provide sufficient financial flexibility
to meet future funding requirements. Compaq continually evaluates the need to
establish other sources of working capital and will pursue those it considers
appropriate based upon its needs and market conditions.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

Competitive environment places pressure on revenue and gross margins.
Competition remains intense in the information technology industry with a large
number of competitors vying for market share. Competition creates an aggressive
pricing environment, which continues to put pressure on revenue and gross
margins. Some competitors will accept lower margins on personal computers to
gain high-end sales, services business, and financing revenues. Compaq
experienced competitive pressures in the first quarter of 1999, which affected
its sales and led to sequential reductions in its gross margins. This pressure
may continue in the future.

Transition to direct sales could negatively affect financial results. In
recent years the direct sales market for personal computers has grown faster
than the indirect market. Compaq sells directly to end users in its enterprise
and services businesses and primarily sells through third party resellers in its
personal computer business. Direct sales present a more efficient business
model particularly when customer contact can be utilized to encourage sales of
higher margin products that are in stock. Compaq does not currently have in
place processes for order entry, production of individualized units, and direct
distribution that can operate efficiently to manage a large portion of its
current personal computer sales. Compaq has established a variety of programs
designed to achieve these capabilities. The failure to successfully complete
these programs in a timely manner could have a material adverse impact on its
business. In addition, a transition from indirect sales to greater reliance on
direct sales could create a short-term decline in revenues if resellers favor
other brands before Compaq achieves full capacity to compete in the direct
sector.

Delays in new systems implementation could hamper operational efficiency.
Compaq continues to focus on making business and information management
processes more efficient to increase the availability of information to operate
its business, increase customer satisfaction, and improve productivity and lower
costs. In connection with these efforts, Compaq is moving many of its systems
from a legacy environment of proprietary systems to client-server architectures
as well as integrating systems from newly acquired businesses. Integrating the
systems at Digital and Tandem complicates this process, as does the need to
ensure Year 2000 compliance for its systems. (See "Year 2000 compliance
requires significant effort" below.) This year is critical to this effort
because delays in the transition to new systems could hamper Compaq's efforts to
increase its operational efficiency. Further delays in implementing
improvements could adversely affect inventory levels, cash and related
profitability.

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<PAGE>
Market growth estimates depend upon evaluation of Year 2000 impact. Compaq
expects the personal computer market to expand in 1999 in line with third-party
research organizations' forecasts of revenue growth of 5%. Based on third-party
research enterprise market revenue is expected to expand at a growth rate of 8%
and the high technology service sector revenue is expected to expand at the rate
of 13%. The growth of each of these markets in 1999 will depend in part on
customers' response to the Year 2000 transition. Some commentators believe that
concerns about Year 2000 will expand demand in the last half of the year,
particularly in the small and medium business arena where customers may have
delayed implementation of necessary changes. Others believe that concerns about
implementing new systems in the face of Year 2000 concerns will slow demand,
particularly in fourth quarter sales of high end products to major global
customers.

Integrating recently acquired businesses diverts focus from core
businesses. Compaq believes that the acquisition of Digital and other companies
will enhance its operating results, but Compaq confronts challenges in
synchronizing diverse product roadmaps and business processes and integrating
logistics, marketing, product development, services and manufacturing operations
to achieve efficiencies. Timing of these decisions is a critical element in
Compaq's success. Taking the necessary steps may lead to gaps in short-term
performance; delaying action will reduce Compaq's ability to compete effectively
because resources and people will be too dispersed to achieve acceptable rates
of return. Compaq's high-end business in particular has been affected by
integration issues involving customer perception, overlapping product lines and
the need to implement appropriate sales force training and incentive plans.
Compaq has also made estimates in connection with the value of purchased
in-process technology. If these projects are not successfully developed,
Compaq's future revenue and profitability may be adversely affected and the
value of other intangibles could be reduced. This risk is more fully discussed
under "Purchased In-Process Technology."

CEO search could create uncertainty and employee retention concerns.
Compaq is currently searching for a new chief executive officer and the
operational role of a chief executive officer is being filled by three
non-employee directors serving in a newly created Office of the Chief Executive.
While the Office of the Chief Executive is moving quickly to make operational
decisions, the absence of a chief executive officer, particularly in combination
with the business issues now confronting Compaq, could lead to delays in
strategic decision-making as well as employee retention issues that could
complicate the timely implementation of operational decisions.

Quarterly sales cycle makes planning and operational efficiencies
difficult. Compaq, like other computer companies, generally sells more products
in the third month of each quarter than in the first and second months. This
sales pattern places pressure on manufacturing and logistics systems based on
internal forecasts and may adversely affect Compaq's ability to predict its
financial results accurately. In addition, to rationalize manufacturing
utilization, Compaq may build products early in the quarter in anticipation of
demand late in the quarter. Developments late in a quarter, such as
lower-than-anticipated product demand, a systems failure, or component pricing
movements, can adversely impact inventory levels, cash, and related
profitability, which is disproportionate to the number of days in the quarter
that are affected.

Government focus on supplier activities could reduce competitive advantage.
Participants in the computer industry generally rely on the creation and
implementation of technology standards to win the broadest market acceptance for
their products. Compaq must successfully manage and participate in the
development of standards while continuing to differentiate its products and
services in a manner valued by customers. When intellectual property owned by
competitors or suppliers becomes accepted as an industry standard, Compaq must
obtain a license, purchase components utilizing such technology from the owners
of such technology or their licensees, or otherwise acquire rights to use such
technology, which could result in increased costs. Compaq believes that it has

17
<PAGE>
been successful in obtaining competitive pricing in these efforts and has
entered into license agreements with key industry participants, including
Microsoft and Texas Instruments. Recently the U.S. government has increased its
efforts to ensure that the holders of intellectual property do not utilize their
rights in a manner that violates antitrust laws. There can be no assurance that
action by the federal government will not impede Compaq's ability to negotiate
terms that give it a competitive market advantage in component purchases and
under the license agreements that are necessary to operate its business in the
future.

New distribution model in U.S. increases credit risks. Compaq's primary
means of distribution is through third-party distributors and resellers. Compaq
continually monitors and manages the credit it extends to resellers and attempts
to limit credit risks by utilizing risk transfer arrangements and obtaining
security interests. Recently resellers have been consolidating in response to
changes in the profitability of their businesses. Compaq's business could be
adversely affected in the event that the financial condition of third-party
computer resellers erodes. Upon the financial failure of a major reseller,
Compaq could experience disruptions in distribution as well as a loss associated
with the unsecured portion of any outstanding accounts receivable. In May 1999,
Compaq began to improve its execution and simplify its business processes by
implementing a plan to reduce the number of its U.S. distributors. This
reduction concentrates the credit and business risks.

Doing business in certain locations creates additional risks. Geographic
expansion, particularly manufacturing operations in developing countries, such
as Brazil and China, and the expansion of sales into economically volatile areas
such as Asia Pacific, Latin America and other emerging markets, subject Compaq
to a number of economic and other risks, such as financial instability among
resellers in these regions. Compaq generally has experienced longer accounts
receivable cycles in emerging markets, in particular Asia Pacific and Latin
America, when compared to U.S. and European markets. Geographic expansion also
subjects Compaq to any political and financial instability in the countries into
which it expands, including currency devaluation and interest rate fluctuations.
Compaq continues to monitor its business operations in these regions and takes
various measures to limit risks in these areas.

Year 2000 compliance requires significant effort. The following disclosure
is a Year 2000 readiness disclosure statement under the Year 2000 Readiness and
Disclosure Act.

Compaq's Year 2000 program is designed to minimize the possibility of
serious Year 2000 interruptions. Possible Year 2000 worst case scenarios
include the interruption of significant parts of Compaq's business as a result
of critical information systems failure or the failure of suppliers,
distributors or customers. Any such interruption may have a material adverse
impact on future results. Since their possibility cannot be eliminated, Compaq
is incorporating Year 2000 concerns into its contingency plans for dealing with
catastrophic events. In addition, Compaq is monitoring the need to develop
contingency plans to remediate information systems scheduled to be replaced by
systems renewal efforts in case delays in the installation schedule for the new
systems make remediation of the older systems necessary.

In 1997, Compaq established a task force to address its personal computer
product and customer concerns, and a separate task force to address its internal
information systems, including technology infrastructure and embedded technology
systems, and the compliance of its suppliers and distributors. In 1998, Compaq
integrated the Tandem and Digital task forces with those of its own so that the
task force now addresses the product and information systems and supplier and
distributor concerns for the entire company.

With respect to product readiness, the compliance definitions of Compaq,
Tandem and Digital remain in effect for most of the respective follow-on
products of each company. The readiness status of Compaq, Tandem and Digital
products is available on the Compaq Year 2000 Web site at
www.compaq.com/year2000. In addition to selling tested products, Compaq also
- -----------------------
offers a range of Year 2000 readiness services. Because there is no uniform
definition of Year 2000 "compliance" and because all customer situations cannot
be anticipated, particularly those involving other vendors' products, Compaq may

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<PAGE>
see a change in demand or an increase in warranty and other claims as a result
of the Year 2000 transition. Such events, should they occur, could have a
material adverse impact on future results.

In 1998, substantially all internal information systems and other
infrastructure areas including communication systems, building security systems
and embedded technologies in areas such as manufacturing processes were
identified, assessed, and categorized for Year 2000 readiness as Priority 1, 2
and 3, with 1 being critical, 2 being intermediate and 3 being non-critical with
no impact on business operations. Compaq is on schedule for meeting full
compliance and expects to be substantially complete with its remediation of
Priority 1 and Priority 2 items (with some approved exceptions for both
priorities) by June 30, 1999. Compaq expects to be Year 2000 ready worldwide by
September 30, 1999. Through the first quarter of 1999, Compaq continued its
program, remediating approximately 70% of the total Priority 1 items.

Compaq is conducting a review of its internal production equipment,
procurement suppliers, and key channel partners regarding Year 2000 readiness.
Substantially all internal production equipment has been tested and upgraded to
achieve a Year 2000 readiness state. Substantially all production suppliers,
including strategic OEM's, have been reviewed and risk assessments have now been
completed. Reviews of general procurement suppliers will be complete by June
30, 1999. Substantially all suppliers are expected to be Year 2000 ready by
June 30, 1999. Compaq will develop supplier contingency plans in the second
quarter of 1999 where it believes significant risk exists. Implementation will
occur in the third quarter of 1999. Reviews of key channel partners are also
expected to be complete by June 30, 1999.

Compaq is also carrying out major planned enterprise-wide internal system
renewal efforts. These planned major enterprise-wide system renewals have been
incorporated into the Year 2000 readiness effort. Installations are scheduled
through the end of 1999. Based on Compaq's ongoing evaluation of internal
information and other systems, and system renewal roll-out schedules, Compaq
does not anticipate significant business interruption. However, should business
interruption occur, there could be a material adverse impact on future results.
With respect to suppliers and distributors, because Compaq's readiness depends
upon their cooperation in identifying, disclosing and remediating problems,
failures on the part of suppliers and distributors remain a possibility and
could have a material adverse impact on future results.

The costs of the readiness program for products are primarily costs of
existing internal resources largely absorbed within existing engineering
spending levels. These costs were incurred primarily in 1997 and earlier years
and were not broken out from other product engineering costs. No future material
product readiness costs are anticipated. The costs of the readiness program for
internal information and other systems and suppliers and distributors are a
combination of incremental external spending and use of existing internal
resources and expertise. Over the life of the internal readiness effort, these
costs are estimated to be $120 million, of which approximately 60% has been
incurred through March 1999. The costs of implementing enterprise-wide system
renewal efforts are not included in this estimate. Milestones and
implementation dates and the costs of Compaq's Year 2000 readiness program are
subject to change based on new circumstances that may arise or new information
becoming available that may change underlying assumptions or requirements.

Euro conversion implemented. Effective January 1, 1999, 11 of the 15
member countries of the European Union adopted the euro as their common legal
currency. Compaq achieved euro product readiness and enabled its internal
information systems to conduct electronic transactions in the euro in the first
quarter of 1999. We do not believe the costs of euro compliance will be
material.

Tax rate depends upon manufacturing in Singapore. Compaq anticipates a 34%
effective tax rate for 1999, with the increase from 1998 due partially to the
impact of non-deductible goodwill amortization generated by acquisitions that
closed in mid-February and April 1999. Compaq benefits from a tax holiday in
Singapore that expires in 2001, with a potential extension to August 2004 if
cumulative investment levels and other conditions are maintained. Compaq's tax
rate is heavily dependent upon the proportion of earnings that is derived from

19
<PAGE>
its Singaporean manufacturing subsidiary and its ability to reinvest those
earnings permanently outside the U.S. If the earnings of this subsidiary as a
percentage of Compaq's total were to decline significantly from current levels,
or should Compaq's ability to reinvest those earnings be reduced, Compaq's
effective tax rate would increase. In addition, should Compaq's intercompany
transfer pricing with respect to its Singaporean manufacturing subsidiary
require significant adjustment due to audits or regulatory changes, Compaq's
overall tax rate could increase.

Currency Fluctuations. Compaq's risks associated with currency
fluctuations are discussed in Item 3 below.

Because of the foregoing factors, as well as other variables affecting
Compaq's operating results, past financial performance should not be considered
a reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods.

ITEM 3. MARKET RISKS

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

Compaq uses market valuations and value-at-risk valuation methods to
preliminarily assess market risk of its financial instruments and derivative
portfolios. It uses software by RiskMetrics to estimate the value-at-risk of
its financial instruments and derivative portfolios based on estimates of
volatility and correlation of market factors drawn from RiskMetrics data sets
for the dates calculated. RiskMetrics defines loss as a reduction in the value
of a portfolio in the event of adverse market conditions, using a predetermined
confidence interval, over a specified period of time. Compaq included all fixed
income investments and foreign exchange contracts in the value-at-risk
calculation. The holding period for these instruments varies from two days to
nine months. The measured value-at-risk from holding derivative and other
financial instruments, using a 95% confidence level and assuming normal market
conditions during the period ended March 31, 1999 was immaterial.

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

20
<PAGE>
U.S. dollar sustains a strengthening position against currencies in which Compaq
sells products and services or a weakening exchange rate against currencies in
which Compaq incurs costs, Compaq's revenues or costs are adversely affected.

21
<PAGE>
PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

General Litigation
- -------------------

Class Action Litigation
- -------------------------

A number of purported class actions were filed in March and April 1999
against Compaq in the United States District Court for the Southern District of
Texas, Houston Division. These actions name Compaq and a number of its current
and former executive officers as defendants and are purported to be on behalf of
persons who purchased Compaq stock from January 27, 1999 through February 25,
1999, or from January 27, 1999 through April 9, 1999. The actions assert claims
under federal securities laws. The complaints allege that defendants inflated
the price of Compaq stock by making false and misleading statements about
Compaq's sales and further allege that a number of current and former Compaq
officers sold Compaq stock at these inflated prices. The plaintiffs in the
above actions seek monetary damages, interest, costs and expenses.

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 sale of Series A
8-7/8% Cumulative Preferred Stock and Digital's financial results for the
quarter ended April 2, 1994. During 1995, the lawsuits were consolidated into
three cases, which were pending before the United States District Court for the
district of Massachusetts. On August 8, 1995, the Massachusetts federal court
granted the defendants' motion to dismiss all three cases in their entirety. On
May 7, 1996, the United States Court of Appeals for the First Circuit affirmed
in part and reversed in part the dismissal of two of the cases, and remanded for
further proceedings. The parties are proceeding with discovery.

Compaq believes these suits are without merit and intends to defend these
suits vigorously.

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

There were no matters submitted to a vote of security holders during the
first quarter of 1999. At the annual meeting of stockholders of Compaq on April
22, 1999, the stockholders voted on two proposals. The first was a proposal to
elect Benjamin M. Rosen, Lawrence T. Babbio, Jr., Judith L. Craven, Frank P.
Doyle, Robert Ted Enloe, III, George H. Heilmeier, Peter N. Larson, Kenneth L.
Lay, Thomas J. Perkins, Kenneth Roman and Lucille S. Salhany as directors of
Compaq. The following table sets forth the votes in such election:

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<PAGE>
<TABLE>
<CAPTION>
Director Votes For Votes Against or Withheld
- ----------------------- ------------- -------------------------
<S> <C> <C>
Benjamin M. Rosen . . . 1,432,191,244 12,103,130

Lawrence T. Babbio, Jr. 1,432,653,750 11,640,624

Judith L. Craven. . . . 1,431,148,436 13,145,938

Frank P. Doyle. . . . . 1,432,108,981 12,185,393

Robert Ted Enloe, III . 1,432,284,036 12,010,338

George H. Heilmeier . . 1,432,534,382 11,759,992

Peter N. Larson . . . . 1,432,529,838 11,764,536

Kenneth L. Lay. . . . . 1,432,431,330 11,863,044

Thomas J. Perkins . . . 1,432,301,567 11,992,807

Kenneth Roman . . . . . 1,432,182,559 12,111,815

Lucille S. Salhany. . . 1,432,411,416 11,882,958
</TABLE>

The shareholders also voted on a proposal to approve the Compaq Employee
Stock Purchase Plan. The following table sets forth the votes in such election:

<TABLE>
<CAPTION>
<S> <C>
Number of Shares:. . 1,444,294,374

Voted For. . . . 1,372,605,527

Withheld . . . . 66,209,770

Abstentions. . . 5,477,677

Broker Non-Votes 1,400
</TABLE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibit No. Description

3.2 Bylaws

27 EDGAR financial data schedule

10.21 Employee Stock Purchase Plan

(b) Reports on Form 8-K

(i) Report on Form 8-K dated January 11, 1999, containing Compaq's news
release dated January 11, 1999, announcing Compaq's agreement to
acquire Shopping.com, an on-line retailer
(ii) Report on Form 8-K dated January 21, 1999, containing Compaq's news
release dated January 21, 1999, announcing an amendment of Compaq's
offer price for shares of Shopping.com
(iii) Report on Form 8-K dated January 26, 1999, containing Compaq's news
release dated January 26, 1999, announcing the creation of AltaVista
Company
(iv) Report on Form 8-K dated January 27, 1999, containing Compaq's news
release dated January 27, 1999, with respect to its earnings release
for the fourth quarter of 1998
(v) Report on Form 8-K dated February 16, 1999, containing Compaq's news
release dated February 16, 1999, announcing Compaq's agreement to
acquire Zip2 Corporation, a provider of Internet platform solutions
for media companies and local e-commerce merchants and containing
Compaq's news release dated February 16, 1999, announcing that
approximately 95.91 percent of the outstanding shares of common stock
of Shopping.com had been tendered in response to Compaq's tender offer
that closed on February 12, 1999
(vi) Report on Form 8-K dated March 9, 1999, containing Compaq's news
release dated March 9, 1999, announcing the acquisition of
Shopping.com
(vii) Report on Form 8-K dated April 5, 1999, containing Compaq's news
release dated April 5, 1999, announcing the completion of the
acquisition of Zip2 Corporation

23
<PAGE>
(viii) Report on Form 8-K dated April 9, 1999, containing Compaq's news
release dated April 9, 1999, announcing that based upon a $9.4 billion
revenue estimate and a less than favorable sales mix, Compaq expected
to report a profit of approximately $.15 per share for the quarter
ended March 31, 1999
(ix) Report on Form 8-K dated April 18, 1999, containing Compaq's news
release dated April 18, 1999, announcing the resignations of Chief
Executive Officer, Eckhard Pfeiffer and Chief Financial Officer,
Earl Mason and the formation of an Office of the Chief Executive to
oversee the day-to-day running of Compaq's operations
(x) Report on Form 8-K dated April 21, 1999, containing Compaq's news
release dated April 21, 1999, with respect to its earnings release for
first quarter 1999
(xi) Report on Form 8-K dated May 11, 1999, containing Compaq's news
release dated May 11, 1999 announcing the resignation of an executive
officer

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

24
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

May 14, 1999 COMPAQ COMPUTER CORPORATION

/s/ Ben K. Wells
---------------------------------------------
Ben K. Wells, Acting Chief Financial Officer
and Vice President, Corporate Treasurer
(as authorized officer and as acting principal
financial officer)

<PAGE>

AMENDED AND
RESTATED
APRIL 18, 1999

BYLAWS
OF
COMPAQ COMPUTER CORPORATION

ARTICLE I - OFFICES

SECTION 1.1. Registered Office. The registered office of the Corporation
-----------------
in the State of Delaware shall be in the City of Wilmington, County of New
Castle, and the name of its registered agent shall be The Corporation Trust
Company.

SECTION 1.2. Other Offices. The Corporation may also have offices at
--------------
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation may
require.

ARTICLE II - MEETINGS OF STOCKHOLDERS

SECTION 2.1. Place of Meeting. All meetings of stockholders shall be
------------------
held at such place, either within or without the State of Delaware, as shall be
designated from time to time by the Board of Directors.

SECTION 2.2. Annual Meeting. The annual meeting of stockholders for the
--------------
election of directors shall be held at such date and time as shall be designated
from time to time by the Board of Directors.

SECTION 2.3. Special Meeting. Special meetings of the stockholders, for
----------------
any purpose or purposes, unless otherwise prescribed by the General Corporate
Law of the State of Delaware as the same may be amended from time to time
("Delaware Law") or the certificate of incorporation of the Corporation (the
"Certificate of Incorporation"), may be called by the Board of Directors. The
Board of Directors shall fix the time and place, either within or without the
State of Delaware, for such meeting and shall state the purpose of such meeting.

SECTION 2.4. Notice of Meeting. Unless otherwise provided by Delaware
-------------------
Law, written notice of any meeting of stockholders, stating the time, place and
purpose, shall be given to each stockholder entitled to vote at the meeting not
less than 10 nor more than 60 days before the meeting.

<PAGE>
SECTION 2.5. Quorum. The holders of a majority of the shares of capital
------
stock entitled to vote at the meeting, present in person or represented by
proxy, shall constitute a quorum at any meeting of stockholders except as
otherwise provided by Delaware Law. The holders of a majority of the shares of
capital stock present in person or represented by proxy and entitled to vote,
whether or not a quorum is present, shall have power to adjourn the meeting from
time to time.

SECTION 2.6. Voting. Directors shall be elected by a plurality of the
------
votes of the shares present in person or represented by proxy at a meeting of
stockholders and entitled to vote on the election of directors. When a quorum
is present at any meeting of stockholders, the vote of the holders of a majority
of the shares of capital stock entitled to vote at the meeting, present in
person or represented by proxy, shall decide any other question brought before
such meeting, unless the question is one upon which, by express provision of
Delaware Law, a different vote is required, in which case such express provision
shall govern such question.

SECTION 2.7. Consent of Stockholders. Any action required to be taken at
-----------------------
any annual or special meeting of stockholders, or any action which may be taken
at any annual or special meeting of stockholders, may be taken without a
meeting, without prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding capital stock having not less than the minimum number of votes that
would be necessary to authorize or take such action at a meeting at which all
shares entitled to vote were present and voted and shall be delivered to the
Corporation as required by Delaware Law. The record date for a consent in
writing shall be established in accordance with Section 2.8 of these bylaws.
Prompt notice of the taking of any corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have not
consented in writing.

SECTION 2.8. Fixing Record Date for Action By Consent of Stockholders.
----------------------------------------------------------
In order that the Corporation may determine the stockholders entitled to consent
to corporate action in writing without a meeting, the Board of Directors shall
fix a record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which date shall not be more than 10 days after the date upon which the
resolution fixing the record date is adopted by the Board of Directors. Any
stockholder of record seeking to have the stockholders authorize or take
corporate action by written consent shall, by written notice to the Secretary,
request the Board of Directors to fix a record date. The Board of Directors
shall promptly, but in all events within 10 days after the date on which such a
request is received, adopt a resolution fixing the record date. If the Board of
Directors shall fail to establish a record date in a timely manner and prior
action by the Board of Directors is not required by Delaware Law, the record
date for determining stockholders entitled to consent to corporate action in
writing without a meeting shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the Corporation as required by Delaware Law. If no record date has been fixed
by the Board of Directors and prior action by the Board of Directors is required
by Delaware Law, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting shall be at the close
of business on the day on which the Board of Directors adopts the resolution
taking such prior action.

<PAGE>
SECTION 2.9. Nomination of Directors. Only persons who are nominated in
------------------------
accordance with the procedures set forth in this Section shall be eligible to
serve as directors. Nominations of persons for election to the Board of
Directors of the Corporation may be made at a meeting of stockholders (a) by or
at the direction of the Board of Directors or (b) by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice
provided for in this Section, who shall be entitled to vote for the election of
directors at the meeting and who complies with the notice procedures set forth
in this Section. For any nomination to be properly brought before a stockholder
meeting by a stockholder, the stockholder must have given timely notice of the
nomination in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not less than 90 days prior to
the anniversary date of the immediately preceding annual meeting of stockholders
(or, if the date of the meeting is more than 30 days before or after such
anniversary date, not less than 90 days prior to the date of such meeting;
provided, however, that in the event that public disclosure of the date of the
meeting is made less than 100 days before the date of the meeting, notice by the
stockholder must be received not later than the close of business on the 10th
day following such public disclosure. Such stockholder's notice shall set forth
(a) as to each person whom the stockholder proposes to nominate for election as
a director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934 (including such person's written consent to serving as a director if
elected); and (b) as to the stockholder giving the notice (i) the name and
address, as they appear on the Corporation's books of such stockholder, (ii) the
class and number of shares of the Corporation which are beneficially owned by
such stockholder and (iii) a description of all arrangements or understandings
between each such stockholder and any nominee or any other person or persons
(naming such person or persons) in connection with or relating to the making of
the nomination or nominations to serve on the Board of Directors if elected. At
the request of the Board of Directors, any person nominated by the Board of
Directors for election as a director shall furnish to the Secretary of the
Corporation the information required to be set forth in a stockholder's notice
of nomination which pertains to the nominee. Notwithstanding anything in these
bylaws to the contrary, no person shall be eligible to serve as a director of
the Corporation unless nominated in accordance with the procedures set forth in
this Section. If the Chairman of the meeting shall determine, based on the
facts, that a nomination was not made in accordance with the procedures
prescribed by this Section, he shall so declare to the meeting and the defective
nomination shall be disregarded. Notwithstanding the foregoing provisions of
this Section, a stockholder shall also comply with all applicable requirements
of the Securities Exchange Act of 1934, and the rules and regulations
thereunder, with respect to the matters set forth in this Section.

SECTION 2.10. Notice of Business. At any meeting of the stockholders,
--------------------
only such business shall be conducted as shall have been brought before the

<PAGE>
meeting (a) by or at the direction of the Board of Directors or (b) by any
stockholder of the Corporation who is a stockholder of record at the time of
giving of the notice provided for in this Section, who shall be entitled to vote
at such meeting and who complies with the notice procedures set forth in this
Section. For business to be properly brought before a stockholder meeting by a
stockholder, the stockholder must have given timely notice of the business in
writing to the Secretary of the Corporation. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal executive
offices of the Corporation not less than 90 days prior to the anniversary date
of the immediately preceding annual meeting of stockholders (or if the date of
the meeting is more than 30 days before or after such anniversary date, not less
than 90 days prior to the date of such meeting; provided, however, that in the
event that public disclosure of the date of the meeting is made less than 100
days before the date of the meeting, notice by the stockholder must be received
not later than the close of business on the 10th day following such public
disclosure). Such stockholder's notice shall set forth as to each matter the
stockholder proposes to bring before the meeting (a) a brief description of the
business desired to be brought before the meeting and the reasons for conducting
such business at the meeting, (b) the name and address, as they appear on the
Corporation's books of the stockholder proposing such business, (c) the class
and number of shares of the Corporation which are beneficially owned by the
stockholder and (d) any material interest of the stockholder in such business.
Notwithstanding anything in these bylaws to the contrary, no business shall be
conducted at a stockholder meeting except in accordance with the procedures set
forth in this Section. If the Chairman of the meeting shall determine, based on
the facts, that business was not properly brought before the meeting in
accordance with the provisions of this Section, he shall so declare to the
meeting and any such business not properly brought before the meeting shall not
be transacted. Notwithstanding the foregoing provisions of this Section, a
stockholder shall also comply with all applicable requirements of the Securities
Exchange Act of 1934, and the rules and regulations thereunder, with respect to
the matters set forth in this Section.

ARTICLE III - BOARD OF DIRECTORS

SECTION 3.1. Powers. The business and affairs of the Corporation shall
------
be managed by or under the direction of its Board of Directors except as
otherwise provided by Delaware Law or the Certificate of Incorporation.

SECTION 3.2. Number, Election, and Term. The number of directors that
----------------------------
shall constitute the whole Board of Directors shall be not less than seven and
not more than twelve. Such number of directors shall from time to time be fixed
by resolution of the Board of Directors. The directors shall be elected at the
annual meeting of stockholders, except as provided in Section 3.3, and each
director elected shall hold office until his successor shall be elected and
shall qualify or his earlier death, resignation or removal. Directors need not
be residents of Delaware or stockholders of the Corporation.

SECTION 3.3. Vacancies, Additional Directors, Removal From Office. If
------------------------------------------------------
any vacancy occurs on the Board of Directors caused by death, resignation or
removal from office of any director or otherwise, or if any new directorship is

<PAGE>
created by an increase in the authorized number of directors, a majority of the
directors then in office or the sole remaining director may choose a successor
or fill the newly created directorship; and a director so chosen shall hold
office until the next annual election and until his successor shall be elected
and shall qualify or his earlier death, resignation or removal.

SECTION 3.4. Chairman of the Board. The Board of Directors may, by
------------------------
resolution passed by a majority of the whole Board of Directors, appoint one of
its members to serve as Chairman of the Board and one or more of its members to
serve as a Vice Chairman. The Chairman of the Board shall preside at all
meetings of the Board of Directors of the Corporation. The Chairman shall
formulate and submit to the Board of Directors matters of general policy for
the Corporation and shall perform such other duties as may be prescribed by the
Board of Directors. In the absence of the Chairman of the Board, or in the
event of his inability or refusal to act, any Vice Chairman designated by the
Board of Directors shall perform the duties and exercise the powers of the
Chairman of the Board and in the absence of a Vice Chairman, the President shall
perform such duties and exercise such powers.

SECTION 3.5. Regular Meeting. A regular meeting of the Board of
----------------
Directors shall be held each year, without notice other than these bylaws, at
the place of, and immediately following, the annual meeting of stockholders, and
other regular meetings of the Board of Directors shall be held at such time and
place as the Board of Directors may provide, by resolution, either within or
without the State of Delaware, without other notice than such resolution.

SECTION 3.6. Special Meeting. A special meeting of the Board of
----------------
Directors may be called by the Chairman of the Board or by the President and
shall be called by the Secretary on the written request of any two directors.
The Chairman or President so calling, or the two directors so requesting, any
such meeting shall fix the time and place, either within or without the State of
Delaware, for such meeting.

SECTION 3.7. Notice of Special Meeting. Written notice of special
----------------------------
meetings of the Board of Directors shall be given to each director at least 48
hours prior to the time of such meeting. Any director may waive notice of any
meeting. The attendance of a director at any meeting shall constitute a waiver
of notice of such meeting, except where a director attends a meeting for the
purpose of objecting to the transaction of any business because the meeting is
not lawfully called or convened. Neither the business to be transacted at, nor
the purpose of, any special meeting of the Board of Directors need be specified
in the notice or waiver of notice of such meeting.

SECTION 3.8. Quorum. A majority of the Board of Directors then in office
------
shall constitute a quorum for the transaction of business at any meeting of the
Board of Directors, and the act of a majority of the directors present at any
meeting at which there is a quorum shall be the act of the Board of Directors,
except as may be otherwise specifically provided by Delaware Law or the
Certificate of Incorporation. The directors present at any meeting of the Board

<PAGE>
of Directors, whether or not a quorum is present, may adjourn the meeting from
time to time, without notice other than announcement at the meeting. At the
adjourned meeting, the Board of Directors may transact any business which might
have been transacted at the original meeting.

SECTION 3.9. Action Without Meeting. Any action required or permitted to
----------------------
be taken at any meeting of the Board of Directors, or of any committee of the
Board of Directors, may be taken without a meeting, if all members of the Board
of Directors or of such committee, as the case may be, consent to the action in
writing and such written consent is filed with the minutes of proceedings of the
Board of Directors or committee.

SECTION 3.10. Telephonic Meetings. Members of the Board of Directors, or
-------------------
any committee of the Board of Directors, may participate in a meeting of the
Board of Directors, or such committee, as the case may be, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
in a meeting shall constitute presence in person at the meeting.

SECTION 3.11. Compensation. The Board of Directors shall have authority
------------
to fix the compensation of directors, including fees and reimbursement of
expenses.

SECTION 3.12. Committees of Directors. There shall be an Audit Committee
-----------------------
and a Human Resources Committee, each of which shall consist of not less than
three independent directors of the Corporation. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
additional committees, including, if they shall so determine, an Executive
Committee, each such committee to consist of one or more directors of the
Corporation. To the extent provided in the resolution and subject to
limitations under Delaware Law, any such committee shall have and may exercise
such of the powers and authority of the Board of Directors in the management of
the business and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers which may require it. The Board of
Directors may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
such committee. Each committee of directors shall keep regular minutes of its
proceedings and report the same to the Board of Directors when required.

<PAGE>
ARTICLE IV - OFFICERS

SECTION 4.1. Principal Officers. The principal officers of the
-------------------
Corporation shall be a President and one or more Vice Presidents (any one or
more of whom may be designated Executive Vice President or Senior Vice
President). The Board of Directors may establish an Office of the Chief
Executive, composed of such persons as named by the Board, to hold the power and
authority of the President. The Corporation may also have such other principal
officers, which may include a Chief Financial Officer, as the Board of Directors
may in its discretion elect. Any two or more offices may be held by the same
person. None of the officers need be a director, and none of the officers need
be a stockholder of the Corporation.

SECTION 4.2. Election and Term of Office. The principal officers of the
---------------------------
Corporation shall be elected annually by the Board of Directors at its first
regular meeting held after the annual meeting of stockholders or as soon
thereafter as conveniently possible. Each such principal officer shall hold
office until his successor shall have been chosen and shall have qualified or
until his earlier death, resignation or removal.

SECTION 4.3. Other Officers. In addition to the principal officers
---------------
enumerated in Section 4.1, the Corporation may have one or more other officers,
which may include staff or division officers, as the Board of Directors may
elect or the President shall in his discretion appoint. Each such other officer
shall hold office for such period and have such title and responsibilities as
the Board of Directors or the President shall determine and may be removed in
accordance with Section 4.4.

SECTION 4.4. Removal and Resignation. Any officer elected by the Board
------------------------
of Directors or appointed by the President may be removed at any time with or
without cause by the Board of Directors. Any officer appointed by the President
may be removed at any time with or without cause by the President. Any officer
may resign at any time by giving written notice to the Board of Directors or to
the Secretary of the Corporation.

SECTION 4.5. Vacancies. Any vacancy occurring in any principal office of
---------
the Corporation by death, resignation, removal or otherwise, may be filled by
the Board of Directors for the unexpired portion of the term.

SECTION 4.6. Salaries. The salaries of all principal officers of the
--------
Corporation shall be fixed by the Board of Directors or pursuant to its
direction and the salaries of all other officers shall be fixed by the President
or pursuant to his direction and reviewed by the Board of Directors or a
committee of the Board of Directors. No officer shall be prevented from
receiving such salary by reason of his also being a director.

SECTION 4.7. President. The President shall be the chief executive
---------
officer of the Corporation and, subject to the control of the Board of
Directors, shall in general supervise and control the business and affairs of
the Corporation. The President shall preside at all meetings of the

<PAGE>
stockholders and, in the absence of the Chairman of the Board or any Vice
Chairman, shall preside at all meetings of the Board of Directors. He may also
preside at any such meeting attended by the Chairman of the Board (or a Vice
Chairman) if he is so designated by the Chairman (or a Vice Chairman). He or
any officer designated by him may attend, vote at and grant proxies to be used
at any meeting of stockholders of any other corporation in which this
Corporation may hold stock. In general he shall perform all other duties
normally incident to the office of President and such other duties as may be
prescribed by the Board of Directors from time to time.

SECTION 4.8. Vice Presidents. In the absence of the President, or in the
---------------
event of his inability or refusal to act, any Vice President designated by the
Board of Directors shall perform the duties and exercise the powers of the
President. The Vice Presidents shall perform such other duties as from time to
time may be assigned to them by the President or the Board of Directors.

SECTION 4.9. Secretary. The Secretary shall (a) keep the minutes of the
---------
meetings of the stockholders, the Board of Directors and committees of the Board
of Directors; (b) see that all notices are duly given in accordance with the
provisions of these bylaws and as required by law; (c) be custodian of the
corporate records and of the seal of the Corporation; (d) have general charge of
the stock transfer books of the Corporation; and (e) in general, perform all
duties normally incident to the office of Secretary and such other duties as
from time to time may be assigned to him by the President or the Board of
Directors.

ARTICLE V - DIVIDENDS

SECTION 5.1. Declaration. Subject to limitations contained in Delaware
-----------
Law and the Certificate of Incorporation, the Board of Directors may declare and
pay dividends upon the shares of capital stock of the Corporation, which
dividends may be paid either in cash, securities of the Corporation or other
property.

ARTICLE VI - INDEMNIFICATION

SECTION 6.1. Third Party Actions. The Corporation shall indemnify any
---------------------
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he is or was a director,
nominee for director nominated by the Board of Directors (a "nominee"), officer
or employee of the corporation, or is or was serving at the request of the
Corporation as a director, officer or employee of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement

<PAGE>
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement or conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.

SECTION 6.2. Actions by or in the Right of the Corporation. The
-----------------------------------------------------
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, nominee, officer or employee of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer or employee of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.

SECTION 6.3. Determination of Conduct. The determination that a
--------------------------
director, nominee or officer met the applicable standard of conduct set forth in
Sections 6.1 and 6.2 (unless indemnification is ordered by a court) shall be
made (1) by a majority vote of the directors who are not parties to such action,
suit or proceeding (the "Disinterested Directors"), even though less than a
quorum, or (2) by a committee of Disinterested Directors designated by majority
vote of the Disinterested Directors, even though less than a quorum, or (3) if
there are no Disinterested Directors, or if the Disinterested Directors so
direct, by independent legal counsel in a written opinion, or (4) by the
stockholders. The determination that an employee met the applicable standard of
conduct set forth in Sections 6.1 and 6.2 (unless indemnification is ordered by
a court) shall be made by the President, or any other officer or employee
designated by the Board of Directors, or any of the persons identified in
clauses (1) - (4) of the preceding sentence.

SECTION 6.4. Payment of Expenses in Advance. Expenses (including
----------------------------------
attorneys' fees) incurred in defending any civil, criminal or investigative
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of the director, nominee, officer or employee to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the Corporation as authorized in this Article.

<PAGE>
SECTION 6.5. Definition. For purposes of this Article, references to
----------
"the Corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, nominees, officers, and
employees, so that any person who is or was a director, officer or employee of
such constituent corporation, or is or was serving at the request of such
constituent corporation as director, officer or employee of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under the provisions of this Article, with respect to the resulting or
surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.

SECTION 6.6. Indemnity Not Exclusive. The indemnification or advancement
-----------------------
of expenses provided under this Article shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any other bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office. Notwithstanding
anything in this Article to the contrary, the Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal or investigative by reason of the fact that he is or was a director,
nominee, officer or employee of the Corporation, or was serving at the request
of the Corporation as a director, officer or employee of another corporation,
partnership, joint venture, trust or other enterprise, to the fullest extent
permitted by applicable law.

SECTION 6.7. Continuation. The indemnification and advancement of
------------
expenses provided by, or granted pursuant to, this Article for acts occurring at
the time such director, nominee, officer or employee was a director, nominee,
officer or employee of the Corporation shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
nominee, officer or employee and shall inure to the benefit of the heirs,
executors and administrators of such a person.

ARTICLE VII - MISCELLANEOUS

SECTION 7.1. Seal. The corporate seal shall have inscribed on it the
----
name of the Corporation, and the words "Corporate Seal, Delaware." The seal may
be used by causing it or a facsimile of the seal to be impressed or affixed or
otherwise reproduced.

SECTION 7.2. Books. The books of the Corporation may be kept (subject to
-----
any provision contained in Delaware Law) outside the State of Delaware at the
offices of the Corporation at Houston, Texas, or at such other place or
places as may be designated from time to time by the Board of Directors.

SECTION 7.3. Shareholder Rights Plans. A shareholder rights plan adopted
-------------------------
by the Board of Directors of the Corporation shall be submitted to the
stockholders for approval at the next stockholders' annual meeting occurring
more than 75 days after such adoption. Any plan adopted shall be effective
immediately upon adoption but shall be terminated if not approved by the holders
of a majority of the shares voting on such matter. If this bylaw is amended or
rescinded by the Board of Directors, then notwithstanding anything in these
bylaws to the contrary, holders of 10% of the outstanding shares of common stock
of the Corporation may by notice to the Secretary of the Corporation require the
Secretary to call a special meeting of stockholders to be held on a date not
less than 90 days nor more than 120 days after the receipt of such notice by the
Secretary, for the sole purpose of voting on a proposal to repeal such action
taken by the Board of Directors. Such notice shall be deemed to meet the
requirements of Section 2.10 of these bylaws.

ARTICLE VIII - AMENDMENT

These bylaws may be amended or repealed, or new bylaws may be adopted, by
the stockholders entitled to vote on the matter at any annual or special meeting
or by the Board of Directors.

<PAGE>

COMPAQ COMPUTER CORPORATION
EMPLOYEE STOCK PURCHASE PLAN

1. PURPOSE.
-------
The purpose of this Plan is to provide an opportunity for Employees of
Compaq Computer Corporation and its Designated Subsidiaries, to purchase Common
Stock of Compaq and thereby to have an additional incentive to contribute to the
prosperity of Compaq. It is the intention of Compaq that the Plan qualify as an
"Employee Stock Purchase Plan" under section 423 of the Internal Revenue Code of
1986, as amended (the "Code"), although Compaq makes no undertaking nor
representation to maintain such qualification. In addition, this Plan
authorizes the grant of options and issuance of Common Stock which do not
qualify under section 423 of the Code pursuant to sub-plans adopted by the
Committee designed to achieve desired tax or other objectives in particular
locations outside the United States.

2. DEFINITIONS.
-----------
(a) "BOARD" shall mean the Board of Directors of Compaq.
-----
(b) "CODE" shall mean the Internal Revenue Code of 1986, of the U.S.A.,
----
as amended.

(d) "COMMON STOCK" shall mean the common stock of Compaq, par value
-------------
$.01, or any stock into which such Common Stock may be converted.

(e) "COMPAQ" shall mean Compaq Computer Corporation, a Delaware
------
corporation.

(f) "DESIGNATED SUBSIDIARY" shall mean any Subsidiary which has been
----------------------
designated by the Committee as eligible to participate in the Plan with respect
to its Employees.

(g) "EMPLOYEE" shall mean an individual classified as an employee by
--------
Compaq or a Designated Subsidiary on the payroll records of Compaq or the
Designated Subsidiary during the relevant participation period.

(h) "OFFERING DATE" shall mean the first business day of each Purchase
--------------
Period.

(i) "FAIR MARKET VALUE" shall mean the value of one share of Common
-------------------
Stock on the relevant date, determined as follows:

(1) If the shares are traded on an exchange (including the NASDAQ
National Market System), the reported "closing price" on the relevant date
(e.g., the Offering Date or Purchase Date) assuming it is a trading day;
otherwise on the next trading day;

(2) If the shares are traded over-the-counter with no reported
closing price, the mean between the lowest bid and the highest asked prices on
said System on the relevant date assuming it is a trading day; otherwise on the
next trading day; and

(3) If neither (1) nor (2) applies, the fair market value as
determined by the Committee in good faith. Such determination shall be
conclusive and binding on all persons.

(j) "PARTICIPANT" shall mean a participant in the Plan as described in
-----------
Section 4 of the Plan.

(k) "PAY" shall mean an Employee's base cash pay (excluding variable
---
cash payments unless otherwise determined by the Committee) paid on account of
personal services rendered by the Employee to Compaq or a Designated Subsidiary,
plus pre-tax contributions of the Employee which are part of deferred pay or
benefit plans maintained by Compaq or a Designated Subsidiary, with any
modifications determined by the Committee. The Committee shall have the
authority to determine and approve all forms of pay (such as commissions) to be
included in the definition of Pay and may change the definition on a prospective
basis.

(l) "PLAN" shall mean this Compaq Computer Corporation Employee Stock
----
Purchase Plan.

<PAGE>
(m) "PURCHASE DATE" shall mean the last business day of each Purchase
--------------
Period.

(n) "PURCHASE PERIOD" shall mean a three-month, six-month or other
----------------
period as determined by the Committee; provided, however, that in no event shall
the Purchase Period be for a period of longer than twenty-seven (27) months.
The first period shall commence on the Plan's first Offering Date, which shall
be as soon as administratively practicable after the Effective Date, and end on
the Purchase Date.

(o) "SHAREHOLDER" shall mean a record holder of shares entitled to vote
-----------
shares of Common Stock under Compaq's bylaws.

(p) "SUBSIDIARY" shall mean any subsidiary corporation (other than
----------
Compaq) in an unbroken chain of corporations beginning with Compaq, as described
in Code section 424(f).

3. ELIGIBILITY.
-----------
Any Employee regularly employed on a full-time or part-time basis by Compaq
or by any Designated Subsidiary on an Offering Date shall be eligible to
participate in the Plan with respect to the Purchase Period commencing on such
Offering Date, provided that the Committee may establish administrative rules
requiring that employment commence some minimum period (e.g., one month's
employment) prior to an Offering Date for the Employee to be eligible to
participate with respect to the Purchase Period beginning on that Offering Date
and provided further that (1) the Committee may exclude part-time Employees from
participation pursuant to criteria and procedures established by the Committee
and (2) the Committee may impose an eligibility period on participation of up to
two years employment with Compaq and/or a Designated Subsidiary with respect to
participation on any prospective Offering Date. The Board also may determine
that a designated group of highly compensated Employees are ineligible to
participate in the Plan so long as the excluded category fits within the
definition of "highly compensated employee" in Code section 414(q). An Employee
shall be considered employed on a full-time basis unless his or her customary
employment is less than 20 hours per week or five months per year. No Employee
may participate in the Plan if immediately after an option is granted the
Employee owns or is considered to own (within the meaning of Code section
424(d)), shares of capital stock, including stock which the Employee may
purchase by conversion of convertible securities or under outstanding options
granted by Compaq, possessing five percent (5%) or more of the total combined
voting power or value of all classes of stock of Compaq or of any of its
Subsidiaries. All Employees who participate in the Plan shall have the same
rights and privileges under the Plan except for differences which may be
mandated by local law and which are consistent with Code section 423(b)(5);
provided, however, that Employees participating in a sub-plan adopted pursuant
to Section 13 which is not designed to qualify under Code section 423 need not
have the same rights and privileges as Employees participating in the Code
section 423 Plan. The Committee may impose restrictions on eligibility and
participation of Employees who are officers and directors to facilitate
compliance with federal or state securities laws or foreign laws.

4. PARTICIPATION AND WITHDRAWAL.
------------------------------
4.1 An Employee who is eligible to participate in the Plan in
accordance with Section 3 may become a Participant by filing, on a date
prescribed by the Committee prior to an applicable Offering Date, a completed
payroll deduction authorization and Plan enrollment form provided by Compaq or
by following an electronic or other enrollment process as prescribed by the
Committee. An eligible Employee may authorize payroll deductions at the rate of
any whole percentage of the Employee's Pay, not to exceed ten percent (10%) of
the Employee's Pay, or such greater percentage, as specified by the Committee,
as apply to a Purchase Period. The Committee may provide for a separate
election (of a different percentage) for a specified item or items of Pay,
including profit sharing payments, if any. All payroll deductions may be held
by Compaq and commingled with its other corporate funds. No interest shall be
paid or credited to the Participant with respect to such payroll deductions
except where required by local law as determined by the Committee. A separate
bookkeeping account for each Participant shall be maintained by Compaq under the
Plan and the amount of each Participant's payroll deductions shall be credited
to such account. A Participant may not make any additional payments into such
account. Unless otherwise specified by the Committee, payroll deductions made
with respect to employees paid in currencies other than U.S. dollars shall be
accumulated in local (non-U.S.) currency and converted to U.S. dollars as of the
Purchase Date.

4.2 Unless otherwise determined by the Committee, a Participant may
decrease his or her rate of payroll deductions at any time in accordance with
procedures prescribed by the Committee. A Participant may increase his or her
rate of payroll deductions only effective on the first payroll date following
the next Purchase Date by filing a new payroll deduction authorization and Plan

<PAGE>
enrollment form or by following electronic or other procedures prescribed by the
Committee. If a Participant has not followed such procedures to change the rate
of payroll deductions, the rate of payroll deductions shall continue at the
originally elected rate throughout the Purchase Period and future Purchase
Periods (or any lower maximum rate then in effect).

4.3 (a) Under procedures established by the Committee, a
Participant may discontinue participation in the Plan at any time during a
Purchase Period by completing and filing a new payroll deduction authorization
and Plan enrollment form with Compaq or by following electronic or other
procedures prescribed by the Committee. If a Participant has not followed such
procedures to discontinue the payroll deductions, the rate of payroll deductions
shall continue at the originally elected rate throughout the Purchase Period and
future Purchase Periods (or any lower maximum rate then in effect).

(b) If a Participant discontinues participation during a Purchase
Period, his or her accumulated payroll deductions will remain in the Plan for
purchase of shares as specified in Section 6 on the following Purchase Date, but
the Participant will not again participate until he or she re-enrolls in the
Plan. Alternatively, participants may request a cash distribution of monies
accumulated but not yet distributed by following such procedures, electronic or
otherwise, as specified by the Committee. The Committee may establish rules
limiting the frequency with which Participants may discontinue and resume
payroll deductions under the Plan and may impose a waiting period on
Participants wishing to resume payroll deductions following discontinuance. The
Committee also may change the rules regarding discontinuance of participation or
changes in participation in the Plan.

(c) In the event any Participant terminates employment with Compaq
or any Subsidiary for any reason (including death) prior to the expiration of a
Purchase Period, the Participant's participation in the Plan shall terminate and
all accumulated payroll deductions credited to the Participant's account shall
be paid to the Participant or the Participant's estate without interest (except
where required by local law). Whether a termination of employment has occurred
shall be determined by the Committee. The Committee also may establish rules
regarding when leaves of absence or change of employment status will be
considered to be a termination of employment, and the Committee may establish
termination of employment procedures for this Plan which are independent of
similar rules established under other benefit plans of Compaq and its
Subsidiaries. In the event of a Participant's death, any accumulated payroll
deductions will be paid, without interest, to the estate or legal representative
of the Participant.

5. OFFERING.
--------
5.1 The maximum number of shares of Common Stock which may be issued
pursuant to the Plan shall be 25,000,000 shares.

5.2 Each Purchase Period shall be determined by the Committee. Unless
otherwise determined by the Committee, the Plan will operate with successive
semi-annual Purchase Periods commencing as soon as administratively practicable
after the Effective Date, although the Committee may pilot the program with a
shorter initial Purchase Period. The Committee shall have the power to change
the duration of future Purchase Periods, without shareholder approval, and
without regard to the expectations of any Participants.

5.3 With respect to each Purchase Period, each eligible Employee who
has elected to participate as provided in Section 4.1 shall be granted an option
to purchase the number of shares of Common Stock which may be purchased with the
payroll deductions accumulated in an account maintained on behalf of such
Employee during each Purchase Period at the purchase price specified in Section
5.4 below, subject to the limitation contained in this Section 5.3.
Notwithstanding any other provision of the Plan to the contrary, no Employee
participating in the Code section 423 Plan shall be granted an option to
purchase Common Stock under the Plan and all employee stock purchase plans of
Compaq and its Subsidiaries at a rate which exceeds $25,000 of the Fair Market
Value of such Common Stock (determined at the time such option is granted) for
each calendar year in which such option is outstanding at any time. The
foregoing sentence shall be interpreted so as to comply with Code section
423(b)(8).

5.4 The option price under each option shall be the lower of: (i) a
percentage (not less than eighty-five percent (85%)) established by the
Committee ("Designated Percentage") of the Fair Market Value of the Common Stock
on the Offering Date on which an option is granted, or (ii) the Designated
Percentage of the Fair Market Value of the Common Stock on the Purchase Date.
The Committee may change the Designated Percentage with respect to any future
Purchase Period, but not below eighty-five percent (85%), and the Committee may
determine with respect to any prospective Purchase Period that the option price
shall be the Designated Percentage of the Fair Market Value of the Common Stock
on the Purchase Date.

<PAGE>
6. PURCHASE OF STOCK.
-------------------
Upon the expiration of each Purchase Period, a Participant's option shall
be exercised automatically for the purchase of that number of full and
fractional shares of Common Stock which the accumulated payroll deductions
credited to the Participant's account at that time shall purchase at the
applicable price specified in Section 5.4, subject to Section 5.3.

7. PAYMENT AND DELIVERY.
----------------------
Upon the exercise of an option on each Purchase Date, Compaq shall deliver
(by electronic or other means) to the Participant a record of the Common Stock
purchased, except as specified below. The Committee may permit or require that
shares be deposited directly with a broker designated by the Committee (or a
broker selected by the Committee) or to a designated agent of the Company, and
the Committee may utilize electronic or automated methods of share transfer.
The Committee may require that shares be retained with such broker or agent for
a designated period of time (and may restrict dispositions during that period)
and/or may establish other procedures to permit tracking of disqualifying
dispositions of such shares or to restrict transfer of such shares. The
Committee may require that shares purchased under the Plan shall automatically
participate in a dividend reinvestment plan or program maintained by Compaq.
Compaq shall retain the amount of payroll deductions used to purchase Common
Stock as full payment for the Common Stock and the Common Stock shall then be
fully paid and non-assessable. No Participant shall have any voting, dividend,
or other shareholder rights with respect to shares subject to any option granted
under the Plan until the shares subject to the option have been purchased and
delivered to the Participant as provided in Section 7.

8. RECAPITALIZATION.
----------------
8.1 If after the grant of an option, but prior to the purchase of
Common Stock under the option, there is any increase or decrease in the number
of outstanding shares of Common Stock because of a stock split, stock dividend,
combination or recapitalization of shares subject to options, the number of
shares to be purchased pursuant to an option, the share limit of Section 5.3 and
the maximum number of shares specified in Section 5.1 shall be proportionately
increased or decreased, the terms relating to the purchase price with respect to
the option shall be appropriately adjusted by the Board, and the Board shall
take any further actions which, in the exercise of its discretion, may be
necessary or appropriate under the circumstances.

8.2 The Board, if it so determines in the exercise of its sole
discretion, also may adjust the number of shares specified in Section 5.1, as
well as the price per share of Common Stock covered by each outstanding option
and the maximum number of shares subject to any individual option, in the event
Compaq effects one or more reorganizations, recapitalizations, spin-offs,
split-ups, rights offerings or reductions of shares of its outstanding Common
Stock.

8.3 The Board's determinations under this Section 8 shall be conclusive
and binding on all parties.

9. MERGER, LIQUIDATION, OTHER CORPORATION TRANSACTIONS.
-------------------------------------------------------
9.1 In the event of the proposed liquidation or dissolution of Compaq,
the Purchase Period then in progress will terminate immediately prior to the
consummation of such proposed liquidation or dissolution, unless otherwise
provided by the Board in its sole discretion, and all outstanding options shall
automatically terminate and the amounts of all payroll deductions will be
refunded without interest to the Participants.

9.2 In the event of a proposed sale of all or substantially all of the
assets of Compaq, or the merger or consolidation of Compaq with or into another
corporation, then in the sole discretion of the Board, (1) each option shall be
assumed or an equivalent option shall be substituted by the successor
corporation or parent or subsidiary of such successor corporation, (2) a date
established by the Board on or before the date of consummation of such merger,
consolidation or sale shall be treated as an Exercise Date, and all outstanding
options shall be deemed exercisable on such date or (3) all outstanding options
shall terminate and the accumulated payroll deductions shall be returned to the
Participants, without interest.

<PAGE>
10. TRANSFERABILITY.
---------------
Options granted to Participants may not be voluntarily or involuntarily
assigned, transferred, pledged, or otherwise disposed of in any way other than
by will or the laws of descent and distribution, and any other attempted
assignment, transfer, pledge, or other disposition shall be null and void and
without effect. If a Participant in any manner attempts to transfer, assign or
otherwise encumber his or her rights or interest under the Plan, other than as
permitted by the Code, such act shall be treated as an election by the
Participant to discontinue participation in the Plan pursuant to Section 4.3.

11. AMENDMENT OR TERMINATION OF THE PLAN.
-----------------------------------------
11.1 The Plan shall continue until April 21, 2009, unless previously
terminated in accordance with Section 11.2.

11.2 The Board or the Committee may, in its sole discretion, insofar as
permitted by law, terminate or suspend the Plan, or revise or amend it in any
respect whatsoever, except that, without approval of the shareholders, no such
revision or amendment shall:

(a) materially increase the number of shares subject to the Plan,
other than an adjustment under Section 8 of the Plan;

(b) materially modify the requirements as to eligibility for
participation in the Plan, except as otherwise specified in this Plan;

(d) extend the term of the Plan beyond the date specified in
Section 11.1;

(e) extend the maximum length of a Purchase Period beyond
twenty-seven (27) months; or

(f) amend this Section 11.2 to defeat its purpose.

12. ADMINISTRATION.
--------------
The Board shall appoint a Committee consisting of at least two members who
will serve for such period of time as the Board may specify and who may be
removed by the Board at any time. The Committee will have the authority and
responsibility for the day-to-day administration of the Plan, the authority and
responsibility specifically provided in this Plan and any additional duties,
responsibility and authority delegated to the Committee by the Board, which may
include any of the functions assigned to the Board in this Plan. The Committee
may delegate to one or more individuals the day-to-day administration of the
Plan. The Committee shall have full power and authority to promulgate any rules
and regulations which it deems necessary for the proper administration of the
Plan, to interpret the provisions and supervise the administration of the Plan,
to make factual determinations relevant to Plan entitlements, to adopt sub-plans
applicable to specified Subsidiaries or locations and to take all action in
connection with administration of the Plan as it deems necessary or advisable,
consistent with the delegation from the Board. Decisions of the Board and the
Committee shall be final and binding upon all participants. Any decision
reduced to writing and signed by a majority of the members of the Committee
shall be fully effective as if it had been made at a meeting of the Committee
duly held. Compaq shall pay all expenses incurred in the administration of the
Plan. No Board or Committee member shall be liable for any action or
determination made in good faith with respect to the Plan or any option granted
thereunder.

13. COMMITTEE RULES FOR FOREIGN JURISDICTIONS.
---------------------------------------------

13.1 The Committee may adopt rules or procedures relating to the
operation and administration of the Plan to accommodate the specific
requirements of local laws and procedures. Without limiting the generality of
the foregoing, the Committee is specifically authorized to adopt rules and
procedures regarding handling of payroll deductions, payment of interest,
conversion of local currency, payroll tax, withholding procedures and handling
of stock certificates which vary with local requirements.

13.2 The Committee may also adopt sub-plans applicable to particular
Subsidiaries or locations, which sub-plans may be designed to be outside the
scope of Code section 423. The rules of such sub-plans may take precedence over
other provisions of this Plan, with the exception of Section 5.1, but unless
otherwise superseded by the terms of such sub-plan, the provisions of this Plan
shall govern the operation of such sub-plan.

14. SECURITIES LAWS REQUIREMENTS.
------------------------------
Compaq shall not be under any obligation to issue Common Stock upon the
exercise of any option unless and until Compaq has determined that: (i) it and
the Participant have taken all actions required to register the Common Stock
under the Securities Act of 1933, or to perfect an exemption from the
registration requirements thereof; (ii) any applicable listing requirement of
any stock exchange on which the Common Stock is listed has been satisfied; and
(iii) all other applicable provisions of state, federal and applicable foreign
law have been satisfied.

<PAGE>
15. GOVERNMENTAL REGULATIONS.
-------------------------
This Plan and Compaq's obligation to sell and deliver shares of its stock
under the Plan shall be subject to the approval of any governmental authority
required in connection with the Plan or the authorization, issuance, sale, or
delivery of stock hereunder.

16. NO ENLARGEMENT OF EMPLOYEE RIGHTS.
-------------------------------------
Nothing contained in this Plan shall be deemed to give any Employee the
right to be retained in the employ of Compaq or any Designated Subsidiary or to
interfere with the right of Compaq or Designated Subsidiary to discharge any
Employee at any time.

17. GOVERNING LAW.
--------------
This Plan shall be governed by Texas law.

18. EFFECTIVE DATE.
---------------
This Plan shall be effective April 22, 1999, subject to approval of the
shareholders of Compaq within 12 months of its adoption by the Board of
Directors.

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COMPAQ
COMPUTER CORPORATION'S CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF
INCOME FOR THE PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3609
<SECURITIES> 0
<RECEIVABLES> 6989
<ALLOWANCES> 0
<INVENTORY> 2149
<CURRENT-ASSETS> 14786
<PP&E> 2948
<DEPRECIATION> 0
<TOTAL-ASSETS> 23000
<CURRENT-LIABILITIES> 10378
<BONDS> 0
<COMMON> 7469
0
0
<OTHER-SE> 4189
<TOTAL-LIABILITY-AND-EQUITY> 23000
<SALES> 7819
<TOTAL-REVENUES> 9419
<CGS> 6007
<TOTAL-COSTS> 7092
<OTHER-EXPENSES> 404
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41
<INCOME-PRETAX> 412
<INCOME-TAX> 131
<INCOME-CONTINUING> 281
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 281
<EPS-PRIMARY> .17
<EPS-DILUTED> .16

</TABLE>