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 September 30, 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
incorporation or organization) | (I.R.S. Employer
Identification No.)





20555 SH 249, Houston, Texas 77070
(281) 370-0670





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 [ 4 ] No [ ]



The number of shares of the registrant's Common Stock, $.01
par value, outstanding as of October 31, 1999, was approximately 1,693
million.





PART I. FINANCIAL INFORMATION



Item 1. Financial Statements

|COMPAQ COMPUTER CORPORATION                                         
|--------------------------------------------------------------------
|CONSOLIDATED BALANCE SHEET                                          
|(Unaudited)                                                         
|                                                                    
|                                                                    
|(In millions, except par value)                                     
|                                                                    
|ASSETS                                                              
|Current assets:                                                     
|Cash and cash equivalents                                           
|Short-term investments                                              
|Accounts receivable, net                                            
|Inventories                                                         
|Deferred income taxes                                               
|Other current assets                                                
|Total current assets                                                
|Property, plant and equipment, net                                  
|Deferred income taxes                                               
|Investments                                                         
|Intangible and other assets                                         
|                                                                    
|                                                                    
|LIABILITIES AND STOCKHOLDERS' EQUITY                                
|Current liabilities:                                                
|Short-term borrowings                                               
|Accounts payable                                                    
|Deferred income                                                     
|Accrued restructuring costs                                         
|Other current liabilities                                           
|Total current liabilities                                           
|Postretirement and other postemployment benefits                    
|Minority interest                                                   
|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:              
|1,711 million and 1,693 million shares at September 30, 1999 and    
|1,698 million and 1,687 million shares at December 31, 1998)        
|Retained earnings                                                   
|Accumulated comprehensive income (loss)                             
|Treasury stock at cost                                              
|Total stockholders' equity                                          
|                                                                    
|                                                                    
|See accompanying notes to interim consolidated financial
statements.



|COMPAQ COMPUTER CORPORATION                                                 
|----------------------------------------------------------------------------
|CONSOLIDATED STATEMENT OF INCOME                                            
|(Unaudited)                                                                 
|                                                                            
|                                                                            
|                                                                            
|(In millions, except per share amounts)                                     
|                                                                            
|                                                                            
|                                                                            
|Revenue:                                                                    
|Products                                                                    
|Services                                                                    
|Total revenue                                                               
|                                                                            
|Cost of sales:                                                              
|Products                                                                    
|Services                                                                    
|Total cost of sales                                                         
|                                                                            
|Selling, general and administrative expense                                 
|Research and development costs                                              
|Purchased in-process technology                                             
|Restructuring and related charges                                           
|Gain on sale of businesses                                                  
|Other (income) expense, net                                                 
|                                                                            
|                                                                            
|Income (loss) before provision for income taxes                             
|Provision (benefit) for income taxes                                        
|Net income (loss)                                                           
|                                                                            
|                                                                            
|Earnings (loss) per common share:                                           
|Basic                                                                       
|Diluted                                                                     
|                                                                            
|                                                                            
|Shares used in computing earnings (loss) per                                
|common share:                                                               
|Basic                                                                       
|Diluted                                                                     
|See accompanying notes to interim consolidated financial
statements.        
|                                                                            
|COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
|                                                                            
|                                                                            
|(In millions)                                                               
|                                                                            
|                                                                            
|Cash flows from operating activities:                                       
|Net income (loss)                                                           
|Adjustments to reconcile net income to net cash                             
|provided by operating activities:                                           
|Depreciation and amortization                                               
|Purchased in-process technology                                             
|Restructuring and related charges                                           
|Deferred income taxes                                                       
|Gain on sale of businesses                                                  
|Stock compensation charge                                                   
|Changes in operating assets and liabilities, net of                         
|effects of acquired and divested businesses                                 
|Net cash provided by operating activities                                   
|Cash flows from investing activities:                                       
|Capital expenditures, net                                                   
|Purchases of short-term investments                                         
|Proceeds from maturities of short-term investments                          
|Acquisitions of businesses, net of cash acquired                            
|Proceeds from sale of businesses                                            
|Other, net                                                                  
|Net cash used in investing activities                                       
|Cash flows from financing activities:                                       
|Proceeds from short-term borrowings                                         
|Payments to retire Digital preferred stock                                  
|Payments to retire debt                                                     
|Purchase of treasury shares                                                 
|Issuance of common stock pursuant to stock option plans                     
|Tax benefit associated with stock options                                   
|Dividends to shareholders                                                   
|Other, net                                                                  
|Net cash provided by (used in) financing activities                         
|Effect of exchange rate changes on cash and cash equivalents                
|Net decrease in cash and cash equivalents                                   
|Cash and cash equivalents at beginning of period                            
|Cash and cash equivalents at end of period                                  



See accompanying notes to interim consolidated financial
statements.





|COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
|----------------------------------------------------------------------------
|Supplemental Cash Flow Information                                          
|                                                                            
|(In millions)                                                               
|                                                                            
|                                                                            
|Acquisitions of businesses                                                  
|Fair value of:                                                              
|Assets acquired                                                             
|Liabilities assumed                                                         
|Stock issued                                                                
|Options issued                                                              
|Cash paid                                                                   
|Less: Cash acquired                                                         
|Net cash paid for acquisitions                                              
|Sale of businesses                                                          
|Fair value of:                                                              
|Equity proceeds                                                             
|Note receivable                                                             
|Cash received                                                               
|                                                                            
|Less: Basis in net assets sold                                              
|Gain on sale of businesses                                                  
|See accompanying notes to interim consolidated financial
statements.        





COMPAQ COMPUTER CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Basis of Presentation

The accompanying unaudited interim consolidated financial
statements of Compaq Computer Corporation ("Compaq") as of
September 30, 1999 and December 31, 1998 and for the three
and nine month periods ended September 30, 1999 and 1998 have been prepared
on substantially the same basis as Compaq's annual consolidated financial
statements and should be read in conjunction with Compaq's Annual Report on
Form 10-K for the year ended December 31, 1998. In Compaq's opinion, the
interim consolidated financial statements reflect all adjustments, consisting of
only normal recurring adjustments, necessary for a fair presentation of the
results for those periods and the financial condition at those dates. The
consolidated results for interim periods are not necessarily indicative of
results to be expected for the full year.

Compaq completed the acquisition of Digital Equipment
Corporation ("Digital"), Shopping.Com ("SDC") and Zip2
Corporation ("Zip2") in June 1998, February 1999 and April 1999,
respectively. These acquisitions were accounted for as purchases. In August
1999, Compaq sold a majority interest in SDC, Zip2 and AltaVista, a business
acquired in the Digital acquisition (collectively "AltaVista"), to
CMGI, Inc. ("CMGI"). Accordingly, Compaq's interim consolidated
financial statements include the results of operations and the estimated fair
values of the assets acquired and liabilities assumed from the respective dates
of acquisition through divestiture or September 30, 1999, as applicable.

Note 2 - Acquisitions and Divestitures

In August 1999, Compaq sold an 81.5 percent equity interest
in AltaVista for approximately 19 million CMGI common shares, CMGI
preferred shares convertible into 1.8 million CMGI common shares and a $220
million three year note receivable. On October 28, 1999, CMGI converted the CMGI
preferred shares held by Compaq into 1.8 million CMGI common shares. CMGI
common shares of 20.8 million carry certain restrictions whereby Compaq may not
sell 50 percent of its CMGI common shares in less than one year and the
remainder in less than 18 months from the date of the transaction. Total
consideration received from CMGI was valued at $1.8 billion. After adjusting for
the net assets sold and for the expenses associated with the divestiture, Compaq
realized a gain of approximately $1.2 billion ($670 million, net of tax). Compaq
accounts for its minority investments in CMGI and AltaVista under the cost
method.

In June 1999, Compaq sold certain network switching assets
for $70 million in cash. Compaq realized a gain on the sale of $26 million
($16 million, net of tax), recorded as gain on sale of businesses. The
assets sold consisted of intangible assets and property, plant and equipment.

In April 1999, Compaq acquired Zip2 for an aggregate purchase
price of $341 million consisting of $307 million in cash, the issuance of
employee stock options to purchase AltaVista stock with a fair value of $28
million and other acquisition costs. In February 1999, Compaq acquired SDC for
an aggregate purchase price of $257 million consisting of $219 million in cash,
the issuance of employee stock options with a fair value of $32 million and
other acquisition costs. The aggregate purchase price of each acquisition was
allocated to the respective assets acquired and liabilities assumed, consisting
primarily of goodwill of $349 million for Zip2 and $288 million for SDC. Prior
to the divestiture, goodwill was being amortized over three years from
respective dates of acquisition.

Proforma statements of operations reflecting the
aforementioned acquisitions and divestitures are not shown as such disclosure is
not required.

Note 3 - Restructuring and Related Charges

In September 1999, Compaq's management approved a
restructuring plan to realign the company's organization, reduce
infrastructure and overhead, and eliminate excess and duplicative facilities.
Restructuring and related charges of $868 million ($600 million, net
of tax) were expensed. These charges were comprised of $787 million of
accrued restructuring costs, $58 million of related asset impairment
charges and a $23 million pension curtailment loss to recognize a change in
Compaq's projected pension benefit obligation in connection with employee
separations.
    Components of accrued restructuring costs relating to the
1999 action as of September 30, 1999 are given below:

|                                           | Beginning Accrual |  | Expenditures  |  | September 30,
1999
|------------------------------------------ | ----------------- |  | ------------- |  | ------------------
|                                           |                   |  | (in millions) |  |                   
|                                           |                   |  |               |  |                   
|Employee separations                       | $ 491             |  | $ ( 22 )      |  | $ 469             
|Facility closure costs                     | 96                |  | ---           |  | 96                
|Contract cancellation and other exit costs | 200               |  | ( 42 )        |  | 158               
|Total accrued restructuring costs          | $ 787             |  | $ ( 64 )      |  | $ 723             

Accrued restructuring costs for employee separations related
to approximately 7,000 employees worldwide affecting the majority of business
functions, job classes and regions, with a majority of the reductions occurring
in North America and Europe. Employee separation benefits include severance,
medical and other benefits. Facility closure costs of $96 million were
associated with the closure of 3.3 million square feet of manufacturing,
distribution and office space in North America, Europe and Asia through sale or
lease terminations. Contract cancellation and other exit costs of $200 million
primarily related to terminating contractual obligations in connection with
exiting the Compaq branded networking products business and included $47 million
for non-cash items. Compaq expects to substantially complete the initiatives
contemplated in its restructuring plans within twelve months, with significant
actions to be taken by December 31, 1999.

In connection with the restructuring plan, Compaq performed a
review of its long lived assets to identify potential impairments. As a result
of this review, Compaq recorded a $58 million charge during the third quarter of
1999 for asset impairments resulting from abandonment or write-down to fair
value of certain assets. Approximately $40 million related to the closure of a
Compaq assembly plant in Asia.

In June 1998, Compaq recorded a restructuring charge of
approximately $1.7 billion to integrate the operations of Compaq and
Digital. Accrued restructuring costs included separation benefits for
approximately 17,000 employees, consolidation and closure of 13.2 million square
feet of office, distribution and manufacturing space, termination of Digital
contractual obligations and relocation costs of Digital employees. Restructuring
costs related to Digital were recorded as a component of the Digital acquisition
and costs related to Compaq were charged to operations. Compaq has completed
most of the actions contemplated under the restructuring plans. Accrued
restructuring costs at September 30, 1999 include amounts for actions that
have already been taken, but for which expenditures have not yet been made.
Accrued restructuring costs as of September 30, 1999 and amounts charged
against the provision during 1999 are as follows:

|                                  | December 31,
 1998 |  | Expenditures  |  | September 30,
1999
|--------------------------------- | ------------------ |  | ------------- |  | ------------------
|                                  |                    |  | (in millions) |  |                   
|                                  |                    |  |               |  |                   
|Employee separations              | $   723            |  | $ ( 425 )     |  | $ 298             
|Facility closure costs            | 317                |  | ( 63 )        |  | 254               
|Relocation                        | 43                 |  | ( 8 )         |  | 35                
|Other exit costs                  | 27                 |  | ( 10 )        |  | 17                
|Total accrued restructuring costs | $ 1,110            |  | $ ( 506 )     |  | $ 604             

Approximately $145 million of the accrual at
September 30, 1999 related to future cash payments to employees separated
prior to September 30, 1999.

For the nine months ended September 30, 1999, employee
separations due to both restructuring actions totaled 5,058, of which 822 were
pursuant to the restructuring action approved in September, 1999. The net
headcount reduction for the nine months ended September 30, 1999, including
attrition and restructuring, offset by selective hiring, totaled 2,531. Since
the date of the Digital acquisition, employee separations due to restructuring
actions were 15,600. The net headcount reduction since the date of the Digital
acquisition, including attrition and restructuring, offset by selective hiring,
was 15,311. Total headcount at September 30, 1999 was 68,134.

Note 4 - Certain Balance Sheet Components

Inventories consisted of the following:

|                 | September 30,
1999 |  | December 31,
1998
|---------------- | ------------------ |  | -----------------
|                 | (in millions)     
|Raw materials    | $   471            |  | $    404         
|Work in progress | 401                |  | 403              
|Finished goods   | 1,259              |  | 1,198            
|                 | $ 2,131            |  | $ 2,005          

At September 30, 1999 Compaq held $3.1 billion of minority
equity investments in companies having operations or technology in areas within
Compaq's strategic focus. Certain of the investments carried restrictions on
immediate trading. Those investments in public companies with trading
restrictions of less than one year at September 30, 1999 were classified as
available for sale. The fair value of available for sale investments at
September 30, 1999 was approximately $1.8 billion. The unrealized gain on
these investments was approximately $983 million ($639 million, net of
tax), recorded as a component of other comprehensive income.

Compaq has a $1.5 billion short-term commercial paper program
which is supported by a $3 billion credit facility. Outstanding commercial
paper reduces available borrowings under this credit facility. At
September 30, 1999, Compaq had approximately $1.3 billion in
commercial paper outstanding under the program, with a weighted average interest
rate of 5.8 percent. The carrying amounts of the borrowings under the commercial
paper program approximate their fair value.

On July 22, 1999, the board of directors of Compaq approved a
cash dividend of $0.02 per share of common stock, or approximately $34 million,
to shareholders of record as of September 30, 1999. Dividends paid for the
nine months ended September 30, 1999 were $102 million. Compaq
repurchased approximately 7 million common shares in the nine months ended
September 30, 1999 for a cost of approximately $208 million under a
systematic stock repurchase program.

Note 5 - Comprehensive Income

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

|                                      | Three months ended
September 30, |  | Nine months ended 
September 30,
|------------------------------------- | -------------------------------- |  | --------------------------------
|                                      | 1999                             |  | 1998                            
|                                      | (in millions)                   
|Net income (loss)                     | $ 140                            |  | $ 115                           
|Other comprehensive income (loss):    |                                  |  |                                 
|Foreign currency translations         | 3                                |  | 8                               
|Unrealized gains on
      investments | 574                              |  | ---                             
|Comprehensive income (loss)           | $ 717                            |  | $ 123                           

Note 6 - Other Income and Expense

Other income and expense consisted of the following:

|                                                     | Three months ended September 30, |  | Nine months ended September 30,
|---------------------------------------------------- | -------------------------------- |  | -------------------------------
|                                                     | 1999                             |  | 1998                           
|                                                     | (in millions)                   
|Interest and dividend income                         | $ ( 53 )                         |  | $ ( 55 )                       
|Interest expense (income) associated
   with hedging | ( 2 )                            |  | 6                              
|Other interest expense                               | 39                               |  | 45                             
|Currency losses, net                                 | 60                               |  | 21                             
|Other, net                                           | 7                                |  | 1                              
|Other (income) expense, net                          | $   51                           |  | $  18                          

Note 7 - 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 were not used in the
calculation of diluted loss per share for the nine months ended
September 30, 1998, due to their antidilutive effect.

Stock options to purchase 70 million and 16 million
shares of common stock for the three month periods and 47 million and 13
million shares of common stock for the nine month periods ended
September 30, 1999 and 1998, respectively, were outstanding but not
included in the computation of diluted earnings per common share because the
option exercise price was greater than the average market price of the common
shares.

The following table illustrates the calculation of earnings
per common share:

|                                                              | Three months ended September 30,        |  | Nine months ended September 30,
|------------------------------------------------------------- | --------------------------------------- |  | -------------------------------
|                                                              | 1999                                    |  | 1998                           
|                                                              | (in millions, except per share amounts)
|Net income (loss)                                             | $ 140                                   |  | $ 115                          
|Plus: Gain on redemption of Digital
          preferred stock | ---                                     |  | ---                            
|Net income (loss) available to common shareholders            | $ 140                                   |  | $ 115                          
|Shares used in computing earnings (loss) per common share:    |                                         |  |                                
|Basic                                                         | 1,693                                   |  | 1,675                          
|Diluted                                                       | 1,730                                   |  | 1,737                          
|Earnings (loss) per common share:                             |                                         |  |                                
|Basic                                                         | $ 0.08                                  |  | $ 0.07                         
|Diluted                                                       | $ 0.08                                  |  | $ 0.07                         

Note 8 - Segment Data

In the third quarter of 1999, Compaq's operations and
corresponding organizational structures were realigned into three strategic
business groups that offer different products and services. They are managed
separately as each business group targets different markets with diverse
technology and solutions needs. Financial data for periods reported prior to the
realignment have been restated to conform to the current presentation.

Compaq's reported segments are Enterprise Solutions and
Services, Commercial Personal Computing, and Consumer. Enterprise Solutions and
Services provides business critical servers, industry standard servers, storage
products and NonStopTM eBusiness solutions, as well as professional and
customer services. Commercial Personal Computing delivers standards-based
computing emphasizing Internet access through workstations, desktops, portables, monitors,
handheld devices and life cycle management products. Consumer targets home users
with Internet-ready desktop PCs, portables, printers and related products as
well as Internet access and e-services. Business activities that do not qualify
for separate segment reporting are aggregated in the Other segment.

The accounting policies of the segments are the same as those
used in the preparation of Compaq's consolidated financial statements. Compaq
evaluates the performance of its operating segments based on segment operating
income, which includes sales and marketing expenses, research and development
costs and other overhead charges directly attributable to the operating segment.
Certain expenses which are managed outside of the operating segments are
excluded. These consist primarily of corporate and unallocated shared expenses,
income taxes, other non-recurring charges for purchased in-process technology
and restructuring and related charges, and other income and expense items.
Unallocated shared expenses are comprised primarily of indirect information
management expenses, certain costs related to business integration and other
general and administrative expenses that are separately managed. Gains and
losses associated with sale of businesses and investments are excluded from
segment operating income. Compaq does not include inter-segment transfers
between segments for management reporting purposes.

Summary financial data by operating segment is as follows:

|                                  | Three months ended September 30, |  | Nine months ended
September 30,
|--------------------------------- | -------------------------------- |  | -------------------------------
|                                  | 1999                             |  | 1998                           
|                                  | (in millions)                   
|Enterprise Solutions and Services |                                  |  |                                
|Revenue                           | $ 4,940                          |  | $ 4,416                        
|Operating income                  | 599                              |  | 320                            
|Commercial Personal Computing     |                                  |  |                                
|Revenue                           | 2,727                            |  | 3,097                          
|Operating income (loss)           | ( 169 )                          |  | 116                            
|Consumer                          |                                  |  |                                
|Revenue                           | 1,469                            |  | 1,282                          
|Operating income                  | 65                               |  | 43                             
|Other                             |                                  |  |                                
|Revenue                           | 72                               |  | ( 4 )                          
|Operating loss                    | ( 101 )                          |  | ( 48 )                         
|Consolidated segment totals       |                                  |  |                                
|Revenue                           | $ 9,208                          |  | $ 8,791                        
|Operating income                  | $    394                         |  | $    431                       

A reconciliation of the company's consolidated segment
operating income to consolidated income (loss) before provision for income taxes
follows:

|                                                | Three months ended September 30, |  | Nine months ended September 30,
|----------------------------------------------- | -------------------------------- |  | -------------------------------
|                                                | 1999                             |  | 1998                           
|                                                | (in millions)                   
|Consolidated segment operating income           | $ 394                            |  | $ 431                          
|Corporate and unallocated shared expenses       | ( 325 )                          |  | ( 275 )                        
|Purchased in-process technology                 | ---                              |  | ---                            
|Restructuring and related charges               | ( 868 )                          |  | ---                            
|Gain on sale of businesses                      | 1,156                            |  | ---                            
|Income (loss) before provision for income taxes | $ 357                            |  | $ 156                          

Note 9 - 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 allege that a number of individual defendants sold Compaq common stock
at these inflated prices. Lead counsel for the plaintiffs has been appointed.
Plaintiffs filed a consolidated amended complaint on March 16, 1999. The
plaintiffs in the above actions seek monetary damages, interest, costs and
expenses. Compaq filed a motion to dismiss in May 1999. The plaintiffs filed a
memorandum of laws in opposition to the motion to dismiss in August 1999. In
September, Compaq filed a reply memorandum in support of its motion to dismiss
the 1998 securities claims.

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. Plaintiffs filed a consolidated amended complaint in October 1999.
Compaq will file a motion to dismiss.

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 percent Cumulative Preferred Stock and Digital's financial
results for the quarter ended April 2, 1994. During 1995, the lawsuits were
consolidated into three cases, which were pending before the United States
District Court for the District of Massachusetts. In August 1995, the
Massachusetts federal court granted the defendants' motion to dismiss all
three cases in their entirety. In May 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 10 - Subsequent Events

On October 28, 1999, the board of directors of Compaq
approved a cash dividend of $0.025 per share of common stock, or approximately
$42 million, to shareholders of record as of December 31, 1999.

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations

Compaq is the second-largest computer company in the world
and the largest global supplier of computer systems. Compaq develops and markets
hardware, software, solutions and services, including industry-leading
enterprise computing solutions, fault-tolerant business-critical solutions,
enterprise and network storage solutions, commercial desktop and portable
products and consumer PCs. Compaq products are sold and supported in more than
100 countries through a network of authorized Compaq marketing partners.

The following discussion should be read in conjunction with the unaudited
interim consolidated financial statements presented under Item 1.

Results of Operations

AS DISCUSSED IN NOTE 8 OF THE NOTES TO INTERIM CONSOLIDATED
FINANCIAL STATEMENTS, COMPAQ HAS REALIGNED ITS MANAGEMENT AND OPERATIONAL
STRUCTURE. ACCORDINGLY, COMPAQ HAS REDEFINED ITS OPERATING SEGMENTS AND HAS
RESTATED OPERATING SEGMENT DATA FROM THAT PREVIOUSLY REPORTED. THE 1998
RESTATEMENT WAS MADE TO BE CONSISTENT WITH THE 1999 PRESENTATION.

The three and nine month periods ended September 30,
1999 reflect the acquisitions of Digital, SDC and Zip2 in June 1998, February
1999 and April 1999, respectively. These acquisitions were accounted for as
purchases. In August 1999, Compaq sold a majority interest in AltaVista to CMGI.
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 respective dates of acquisition through
divestiture or September 30, 1999, as applicable.

Compaq's reported segments are Enterprise Solutions and
Services, Commercial Personal Computing, and Consumer. Enterprise Solutions and
Services provides  business critical servers, industry standard servers, network storage
products and NonStopTM  eBusiness solutions, as well as professional and customer services. Commercial
Personal Computing delivers standards-based  computing emphasizing Internet access through
workstations, desktops, portables, monitors, handheld devices and life cycle
management products. Consumer targets home users with Internet-ready desktop
PCs, portables, printers and related products as well as Internet access and
e-services. Business activities that do not qualify for separate segment
reporting are aggregated in the Other segment and are comprised primarily of
AltaVista and Compaq Financial Services.

The following table sets forth segment revenue and operating
income for the three and nine months ended September 30, 1999 and 1998.

|                                  | Three months ended September 30, |  | Nine months ended September 30,
|--------------------------------- | -------------------------------- |  | -------------------------------
|                                  | 1999                             |  | 1998                           
|                                  | (in millions)                   
|Enterprise Solutions and Services |                                  |  |                                
|Revenue                           | $ 4,940                          |  | $ 4,416                        
|Operating income                  | 599                              |  | 320                            
|Commercial Personal Computing     |                                  |  |                                
|Revenue                           | 2,727                            |  | 3,097                          
|Operating income (loss)           | ( 169 )                          |  | 116                            
|Consumer                          |                                  |  |                                
|Revenue                           | 1,469                            |  | 1,282                          
|Operating income                  | 65                               |  | 43                             
|Other                             |                                  |  |                                
|Revenue                           | 72                               |  | ( 4 )                          
|Operating loss                    | ( 101 )                          |  | ( 48 )                         
|Consolidated segment totals       |                                  |  |                                
|Revenue                           | $ 9,208                          |  | $ 8,791                        
|Operating income                  | $    394                         |  | $    431                       



The accounting policies of the segments are the same as those
used in the preparation of Compaq's consolidated financial statements. Compaq
evaluates the performance of its operating segments based on segment operating
income, which includes sales and marketing expenses, research and development
costs and other overhead charges directly attributable to the operating segment.
Certain expenses which are managed outside of the operating segments are
excluded. These consist primarily of corporate and unallocated shared expenses,
income taxes, other non-recurring charges for purchased in-process technology
and restructuring and related charges, and other income and expense items.
Unallocated shared expenses are comprised primarily of indirect information
management expenses, certain costs related to business integration and other
general and administrative expenses that are separately managed. Gains and
losses associated with sale of businesses and investments are excluded from
segment operating income. Compaq does not include inter-segment transfers
between segments for management reporting purposes.

A reconciliation of the company's consolidated segment
operating income to consolidated income (loss) before provision for income taxes
follows:

|                                                | Three months ended September 30, |  | Nine months ended September 30,
|----------------------------------------------- | -------------------------------- |  | -------------------------------
|                                                | 1999                             |  | 1998                           
|                                                | (in millions)                   
|Consolidated segment operating income           | $ 394                            |  | $ 431                          
|Corporate and unallocated shared expenses       | ( 325 )                          |  | ( 275 )                        
|Purchased in-process technology                 | ---                              |  | ---                            
|Restructuring and related charges               | ( 868 )                          |  | ---                            
|Gain on sale of businesses                      | 1,156                            |  | ---                            
|Income (loss) before provision for income taxes | $ 357                            |  | $ 156                          

Overview

Compaq reported third quarter 1999 consolidated net income of
$140 million ($0.08 per share), an increase of $25 million, or
22 percent, over the third quarter of 1998. Contributing to higher earnings
in the third quarter as compared to 1998 was a one-time gain on the sale of a
business partially offset by a non-recurring charge for restructuring and
related matters, higher corporate and unallocated shared expenses and lower segment
operating income. For the first nine months of 1999, net income was
$237 million ($0.15 per share), an increase of $3.7 billion. Included
in net income in the corresponding period in 1998 was a one-time charge for
purchased in-process technology of $3.2 billion related to the acquisition of
Digital. The other key elements contributing to the improvement in the first
nine months of 1999 were benefits from the sale of businesses and higher segment
operating income reflecting the acquisition of Digital, partially offset by
restructuring and related charges and higher corporate and unallocated shared expenses.

For the third quarter of 1999, worldwide revenue was
$9.2 billion, an increase of $417 million, or 4.7 percent,
compared with the third quarter of 1998. Higher revenue from Enterprise
Solutions and Services and Consumer groups was partially offset by declines in
Commercial Personal Computing group sales. For the first nine months of 1999,
revenue was $28 billion, an increase of $7.7 billion, or
38 percent, over the same period last year with revenue in each business
group higher in comparison with the prior period. Revenue amounts in the first
nine months of 1998 reflect the acquisition of Digital in June 1998 while 1999
revenue reflects Digital amounts for the entire nine month period.

Total gross margin as reported for the third quarter of 1999
was 23.2 percent, an improvement of 2.7 percentage points from the second
quarter of 1999. As previously reported, second quarter 1999 gross margin was
affected by a write-off of capitalized software costs related to certain
discontinued products, increased warranty obligations for several commercial PC
products no longer shipping and penalties related to some long-term purchasing
commitments. Without these effects, gross margins improved 1 percentage
point compared to the second quarter. Third quarter 1999 gross margin decreased
1.7 percentage points from the third quarter of 1998 primarily due to lower
gross margins in the Commercial Personal Computing group. Gross margin for the
nine months ended 1999 was 22.8 percent, an increase of 1.5 percentage
points from the corresponding period in 1998. Prior year gross margin was
affected by significant pricing and promotional actions taken by Compaq in the
North American market during the first and second quarter of 1998.

Operating expenses reported in the third quarter of 1999 were
$2.016 billion, which includes a $42 million one-time non-cash charge
related to AltaVista employee compensation. Operating expenses decreased from
$2.198 billion in the second quarter of 1999 to $1.974 billion
(excluding the one-time charge) in the third quarter of 1999, a $224 million, or
10 percent, improvement. The key items contributing to lower operating
expenses were the continuation of the company's restructuring begun in the
second quarter of 1998, the company's restructuring and cost containment
initiatives begun in the third quarter of 1999 and a reduction of goodwill
amortization expense related to the sale of AltaVista. For the first nine months
of 1999, operating expenses were $6.1 billion, an increase of $1.8 billion
from the corresponding period in 1998. Operating expense amounts in the first
nine months of 1998 reflect the acquisition of Digital in June 1998 while 1999
operating expense reflects Digital amounts for the entire nine month period.

Enterprise Solutions and Services

In the Enterprise Solutions and Services group, revenue for
the third quarter of 1999 was $4.9 billion, up $524 million, or
12 percent, from the third quarter of 1998. Segment operating income was
$599 million, an increase of $279 million, or 87 percent, from the
third quarter of 1998. The enterprise business represented 54 percent of
Compaq's revenue in the third quarter of 1999. For the first nine months of
1999, revenue increased $5.7 billion, or 62 percent, to $14.8 billion and
operating income grew $815 million when compared to the corresponding 1998
period. Revenue and operating income amounts in the first nine months of 1998
reflect the acquisition of Digital in June 1998 while 1999 revenue and operating
income reflects Digital amounts for the entire nine month period.

The following table displays product and service revenue
included in the Enterprise Solutions and Services group for the periods
indicated.

|                                                   | Three months ended September 30, |  | Nine months ended September 30,
|-------------------------------------------------- | -------------------------------- |  | -------------------------------
|                                                   | 1999                             |  | 1998                           
|                                                   | (in millions)                   
|Product revenue                                    | $ 3,319                          |  | $ 2,905                        
|Service revenue                                    | 1,621                            |  | 1,511                          
|Total Enterprise Solutions and Services
   revenue | $ 4,940                          |  | $ 4,416                        



Product revenue for the third quarter grew 14 percent
year over year to $3.3 billion. This increase in revenue resulted from
strong growth in the Industry Standard Server Division, which grew
27 percent over the third quarter of 1998; Business Critical Server
Division (Alpha and Himalaya platforms, Tru64 UNIX, OpenVMS and Linux operating
systems), which grew 12 percent over the third quarter of 1998; and Storage
Division, which grew 12 percent year over year. For the first nine months
of 1999, product revenue was nearly $10 billion, higher by $2.9 billion, or 41
percent, when compared to 1998, in large part reflecting the acquisition of
Digital. During the third quarter, Compaq introduced its ProLiant 8-way server,
which, coupled with a product mix shift toward higher end devices, favorably
impacted revenue during the third quarter of 1999.

Services revenue grew 7 percent year over year to
$1.6 billion, with Compaq Professional Services revenue growing
17 percent from the third quarter of 1998. Increased service contracts,
including a major contract with a U.S. government agency, benefited the quarter.
Service revenue was $4.9 billion in the first nine months of 1999, an
increase of $2.8 billion, or 133 percent, compared with the
corresponding period in 1998, in large part reflecting the acquisition of
Digital.

Enterprise Solutions and Services operating income in the
third quarter of 1999 was benefited by lower operating expenses while margins
remained relatively unchanged compared to the corresponding period in 1998.
Operating expenses decreased $151 million, or 12 percent, as the
impact of the company's restructuring and cost containment initiatives began
to benefit results. For the first nine months of 1999 operating expenses
increased $1.1 billion to $3.4 billion compared to the corresponding
period in 1998. Operating expense amounts in the first nine months of 1998
reflect the acquisition of Digital in June 1998 while 1999 operating expense
reflects Digital amounts for the entire nine month period.

During the third quarter of 1999, Compaq announced intentions
to cease product development on its Windows NT adaptation for Compaq's Alpha
Server systems. Compaq will instead increase its Windows NT efforts on its
Intel-based ProLiant platform while targeting Alpha Servers toward the high-end
enterprise market using Compaq Tru64 UNIX and OpenVMS operating systems. Compaq
is offering additional programs for certain customers who have previously
deployed Windows NT on Compaq's Alpha Servers. The costs of such benefits are
expected to impact fourth quarter 1999 segment operating income by approximately
$50 million to $100 million and an additional $100 million to
$150 million in the first quarter of 2000. Compaq believes this action will
help clarify its platform strategy and customer value proposition for Windows
NT, Alpha Servers and Intel solutions.

Commercial Personal Computing

Commercial Personal Computing revenue was $2.7 billion
for the third quarter of 1999, a decrease of $370 million, or 12 percent,
from the third quarter of 1998. Commercial Personal Computing reported an
operating loss of $169 million during the third quarter of 1999, compared
to a loss of $225 million in the second quarter of 1999, and an operating
profit of $116 million in the third quarter of 1998. Commercial PC products
accounted for 30 percent of Compaq's revenue in the third quarter of
1999. For the first nine months of 1999, Commercial PC revenue was $9.1 billion,
an increase of $1.2 billion, or 15 percent, and operating loss increased
$208 million to $347 million when compared to the corresponding 1998 period.

Several factors impacted Compaq's
Commercial PC business
during the third quarter, including aggressive pricing pressure, intense
competition in the small and medium business market, the impact of the Taiwan
earthquake and the reseller channel reducing its inventory.

During the third quarter of 1999 average unit price declined
16 percent while units shipped grew 5 percent compared with the
corresponding period in 1998. Compaq either maintained or grew its market share
in all geographies except North America. During the third quarter, Compaq
maintained its position as the number one worldwide PC company, with market
share of 13.8 percent according to third party sources. Nonetheless, Compaq
believes it has not kept pace with shifts in the PC sales and distribution
model. Compaq plans to move aggressively to new business models in order to
position the company for the next generation of PC innovation and Internet
access.

During the third quarter of 1999, Commercial PC incurred
increased operating losses when compared to the corresponding period in 1998 due
to a reduction in gross margin of 8.4 percentage points. For the first nine
months of 1999, Commercial PC operating loss was higher by $208 million due to a
decline in gross margin of 2.2 percentage points and higher operating expenses.
Gross margin for the three and nine months ended September 30, 1999 was
adversely affected by declines in average unit prices, industry-wide increases
in the costs of memory components and higher costs associated with extended
warranties.

Consumer

Third quarter 1999 Consumer group revenue was
$1.5 billion, up $187 million, or 15 percent from the third quarter 1998.
Segment operating income for the quarter was $65 million, an increase of
$22 million, or 51 percent, from the prior year's quarter. The Consumer
business represented 16 percent of the company's revenue in the quarter.
For the first nine months of 1999, revenue increased $678 million, or 20
percent, to $4 billion and operating income grew $74 million, or 62 percent, to
$193 million when compared to the corresponding 1998 period.

According to third party sources, Compaq maintained its
strong number one worldwide consumer PC market share position during the third
quarter. Revenue was benefited by unit growth of 53 percent in desktop PCs
and 44 percent in mobile PCs year over year partially offset by declines in
average unit prices and the reseller channel reducing its inventory. The
Consumer group saw significant year over year growth in Europe, Latin America,
Asia-Pacific and Greater China during the third quarter.

Third quarter 1999 Consumer operating income improved $22
million compared to the prior period due to lower operating expenses on a
percentage of revenue basis. For the first nine months of 1999, Consumer
operating income was favorably impacted by 1 percentage point higher gross
margin and modestly lower operating expenses on a percentage of revenue basis
when compared to the corresponding period in 1998.

Other

Included in Other segment was revenue from AltaVista of $25
million and $81 million and operating loss of $104 million and
$256 million for the three and nine months ended September 30, 1999,
respectively. AltaVista operating loss for these periods included goodwill and
intangibles amortization of $52 million and $153 million. As previously
described, Compaq sold a majority interest in AltaVista to CMGI in August 1999.

Corporate and Unallocated Shared Expenses

The results of the three business groups exclude separately
managed corporate and unallocated shared expenses, which totaled
$325 million in the third quarter and $994 million for the first nine
months of 1999. Corporate and unallocated shared expenses were comprised of
information management costs of $123 million and $333 million,
corporate costs of $136 million and $435 million, and other costs of
$66 million and $226 million for the three and nine months ended
September 30, 1999, respectively. The corporate and unallocated shared
expenses were higher in both periods when compared to 1998 primarily due to
increased information management and corporate communications costs, partially
offset by lower corporate staff costs. Lower interest income and increased
currency losses also contributed to the increase in corporate and unallocated
shared expenses.

Purchased In-Process Technology

As previously reported, 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.

During the third quarter of 1999, Compaq announced intentions
to cease product development on its Windows NT adaptation for Compaq's Alpha
Server systems. Compaq will instead increase its Windows NT efforts on its
Intel-based ProLiant platform while targeting Alpha Servers toward the high-end
enterprise market using Compaq Tru64 UNIX and OpenVMS operating systems. Compaq
is offering additional programs for certain customers who have previously
deployed Windows NT on Compaq's Alpha Servers. The costs of such benefits are
expected to impact fourth quarter 1999 segment operating income by approximately
$50 million to $100 million and an additional $100 million to
$150 million in the first quarter of 2000.

Restructuring and Related Charges

In September 1999, Compaq's management approved a
restructuring plan to realign the company's organization, reduce
infrastructure and overhead, and eliminate excess and duplicative facilities.
Restructuring and related charges of $868 million ($600 million, net
of tax) were expensed. These charges were comprised of $787 million of
accrued restructuring costs, $58 million of related asset impairment
charges and a $23 million pension curtailment loss to recognize a change in
Compaq's projected pension benefit obligation in connection with employee
separations.

Components of accrued restructuring costs relating to the
1999 action as of September 30, 1999 are given below:

|                                           | Beginning Accrual |  | Expenditures  |  | September 30,
1999
|------------------------------------------ | ----------------- |  | ------------- |  | ------------------
|                                           |                   |  | (in millions) |  |                   
|                                           |                   |  |               |  |                   
|Employee separations                       | $ 491             |  | $ ( 22 )      |  | $ 469             
|Facility closure costs                     | 96                |  | ---           |  | 96                
|Contract cancellation and other exit costs | 200               |  | ( 42 )        |  | 158               
|Total accrued restructuring costs          | $ 787             |  | $ ( 64 )      |  | $ 723             

Accrued restructuring costs for employee separations related
to approximately 7,000 employees worldwide affecting the majority of business
functions, job classes and regions, with a majority of the reductions occurring
in North America and Europe. Employee separation benefits include severance,
medical and other benefits. Facility closure costs of $96 million were
associated with the closure of 3.3 million square feet of manufacturing,
distribution and office space in North America, Europe and Asia through sale or
lease terminations. Contract cancellation and other exit costs of $200 million
primarily related to terminating contractual obligations in connection with
exiting the Compaq branded networking products business, and included $47
million for non-cash items.

Compaq expects to substantially complete the initiatives
contemplated in its restructuring plans within twelve months, with significant
actions to be taken by December 31, 1999. Compaq believes that, upon conclusion
of its restructuring initiatives, its cost structure will be significantly
reduced. However, there can be no assurance that such cost reductions can be
sustained or that the estimated costs of such actions will not change.

In connection with the restructuring plan, Compaq performed a
review of its long lived assets to identify potential impairments. As a result
of this review, Compaq recorded a $58 million charge during the third
quarter of 1999 for asset impairments resulting from abandonment or write-down
to fair value of certain assets. Approximately $40 million related to the
closure of a Compaq assembly plant in Asia.

In June 1998, Compaq recorded a restructuring charge of
approximately $1.7 billion to integrate the operations of Compaq and
Digital. Accrued restructuring costs included separation benefits for
approximately 17,000 employees, consolidation and closure of 13.2 million square
feet of office, distribution and manufacturing space, termination of Digital
contractual obligations and relocation costs of Digital employees. Restructuring
costs related to Digital were recorded as a component of the Digital acquisition
and costs related to Compaq were charged to operations. Compaq has completed
most of the actions contemplated under the restructuring plans. Accrued
restructuring costs at September 30, 1999 include amounts for actions that
have already been taken, but for which expenditures have not yet been made.
Accrued restructuring costs as of September 30, 1999 and amounts charged
against the provision during 1999 are as follows:

|                                  | December 31, 1998 |  | Expenditures  |  | September 30,
1999
|--------------------------------- | ----------------- |  | ------------- |  | ------------------
|                                  |                   |  | (in millions) |  |                   
|                                  |                   |  |               |  |                   
|Employee separations              | $   723           |  | $ ( 425 )     |  | $ 298             
|Facility closure costs            | 317               |  | ( 63 )        |  | 254               
|Relocation                        | 43                |  | ( 8 )         |  | 35                
|Other exit costs                  | 27                |  | ( 10 )        |  | 17                
|Total accrued restructuring costs | $ 1,110           |  | $ ( 506 )     |  | $
604             

Approximately $145 million of the accrual at
September 30, 1999 related to future cash payments to employees separated
prior to September 30, 1999.

For the nine months ended September 30, 1999, employee
separations due to both restructuring actions totaled 5,058, of which 822 were
pursuant to the restructuring action approved in September, 1999. The net
headcount reduction for the nine months ended September 30, 1999, including
attrition and restructuring, offset by selective hiring, totaled 2,531. Since
the date of the Digital acquisition, employee separations due to restructuring
actions were 15,600. The net headcount reduction since the date of the Digital
acquisition, including attrition and restructuring, offset by selective hiring,
was 15,311. Total headcount at September 30, 1999 was 68,134.

Gain on Sale of Businesses

In August 1999, Compaq sold an 81.5 percent equity interest
in AltaVista for approximately 19 million CMGI common shares, CMGI
preferred shares convertible into 1.8 million CMGI common shares and a $220
million three year note receivable. On October 28, 1999, CMGI converted the CMGI preferred shares held by Compaq into 1.8 million CMGI
common shares. CMGI common shares of 20.8 million carry certain restrictions
whereby Compaq may not sell 50 percent of its CMGI common shares in less than
one year and the remainder in less than 18 months from the date of the
transaction. Total consideration received from CMGI was valued at $1.8 billion.
After adjusting for the net assets sold and for the expenses associated with the
divestiture, Compaq realized a gain of approximately $1.2 billion ($670 million,
net of tax). Compaq accounts for its minority investments in CMGI and AltaVista
under the cost method.

In June 1999, Compaq sold certain network switching assets
for $70 million in cash. Compaq realized a gain on the sale of $26 million
($16 million, net of tax), recorded as gain on sale of businesses. The
assets sold consisted of intangible assets and property, plant and equipment.

Other Items

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
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, 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 plans to adopt FAS 133 effective
January 1, 2000. Compaq believes adoption of FAS 133 will not have a
material adverse effect on its consolidated results of operations or financial
condition.

Liquidity and Capital Resources

Compaq's cash and cash equivalents decreased to $2.3
billion at September 30, 1999, from $4.1 billion at December 31, 1998.
The decrease resulted from $3.1 billion used in investing activities, offset in
part by $456 million provided by operating activities and $855 million provided
by financing activities.

Net cash of $456 million provided by operating
activities was comprised of net income adjusted for depreciation and
amortization of $1.3 billion offset by $591 million used in working capital
and other activities. Net cash used in working capital and other activities
resulted primarily from an increase in inventories, cash payments for accounts
payable and cash payments for restructuring activities, partially offset by cash
receipts for accounts receivable and an increase in other current liabilities.
Days sales outstanding for the third quarter was 61 days versus 56 days for the
fourth quarter of 1998. Inventory turns for the third quarter of 1999 were 13.2
versus 15.9 for the fourth quarter of 1998.

Net cash of $3.1 billion used in investing activities
resulted primarily from the following items. Compaq paid cash of $219 million,
net of cash acquired, for the acquisition of SDC and $295 million, net of cash
acquired, for the acquisition of Zip2. Compaq also used cash of $867 million for
capital expenditures and $1.4 billion for the purchase of short-term
investments.

Net cash of $855 million provided by financing activities
consisted primarily of short-term borrowings of $1.3 billion, partially offset
by a $400 million payment for the retirement of Digital preferred stock and $208
million in stock repurchases.

Future uses of cash during the remainder of 1999 include an
estimated $275 million in capital expenditures for land, buildings and
equipment, an estimated $350 million for purchases of equipment to be leased and
cash expenditures for the planned restructuring activities as previously
discussed.

Compaq also 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 September 30, 1999, the estimated costs to be incurred to
develop the purchased in-process technology into commercially viable products
totaled approximately $2.9 billion in the aggregate through the year 2005 ($90
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).

Compaq currently expects to fund expenditures for capital
requirements as well as liquidity needs from a combination of available cash
balances, internally generated funds and financing arrangements. Compaq has a
$1 billion revolving credit facility which was renewed during the quarter
and expires in October 2000 and a $3 billion revolving credit facility that
expires in 2002. Both of these facilities were unused at September 30,
1999. Compaq has also established a $1.5 billion short-term commercial
paper program, supported by the $3 billion credit facility. Outstanding
commercial paper reduces available borrowings under this credit facility. At
September 30, 1999, Compaq had approximately $1.3 billion in
commercial paper outstanding under the program, with a weighted average interest
rate of 5.8 percent. Additionally, Compaq maintains various uncommitted
lines of credit, which totaled approximately $650 million at September 30,
1999. There were no outstanding borrowings against these lines at
September 30, 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.

On October 28, 1999, the board of directors of Compaq
approved a cash dividend of $0.025 per share of common stock, or approximately
$42 million, to shareholders of record as of December 31, 1999.

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.

Transition to direct sales could negatively affect financial
results. In recent years, the market for personal computers has shifted from
sales through resellers toward direct sales to end users. 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
frequently present a more efficient business model for personal computer sales,
particularly in the small and medium business market. Compaq has not kept pace
with changes in the industry's sales and distribution model and 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 by simplifying its product
set and pricing model, re-engineering the channel delivery model and more
rapidly expanding e-commerce capabilities for large, medium and small
businesses. The failure to successfully implement these programs in a timely
manner could have a material adverse impact on its business. In addition, if
Compaq does not achieve direct capacity quickly, its transition from indirect
sales to direct sales could lead to a loss of sales if resellers favor other
brands or if the financial condition of resellers erodes as a result of Compaq's
transition.

Credit risks could increase if financial condition of
resellers erodes. Compaq's primary means of distribution is through
distributors and resellers. Compaq continually monitors and manages the credit
it extends to distributors and resellers and attempts to limit credit risks by
utilizing risk transfer arrangements and obtaining security interests. Recently
distributors and 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 its distributors and
resellers erodes. Upon the financial failure of a distributor or reseller,
Compaq could experience disruptions in distribution as well as a loss associated
with the unsecured portion of any outstanding accounts receivable.

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. Compaq has experienced this pressure, particularly in its
Commercial Personal Computing group. This pressure may continue in the future.

New form factors introduce uncertainty into the market.

Delays in new systems implementation could hamper operational
efficiency.

Employee retention could hamper business operations. Compaq
competes for employees in an industry in which employee stock options are used
to attract and motivate employees. As Compaq has experienced a decline in its
stock price in 1999, its employee turnover has increased. In searching for new
employees and retaining its current employees Compaq competes with other
technology companies, including start-up Internet companies that may be
perceived as offering significant opportunities to realize wealth. Compaq has a
number of management openings, including the position of Chief Financial
Officer. Compaq's failure to attract key employees to fill these openings or
the loss of significant numbers of additional key employees could make it
difficult for Compaq to achieve its current business plans.

Restructuring activities could impede operations. Compaq
undertook significant restructuring activities in the third quarter of 1999 that
will continue to be carried out in 2000. In addition, a number of actions remain
to be completed from its restructuring activities initiated in 1998. Compaq
expects to substantially complete the initiatives contemplated in its
restructuring plans within twelve months, with significant actions taken by
December 31, 1999. These activities are focused on alignment around three
business groups, each of which will be structured to be competitive within its
sphere of operations. Compaq is focused on bringing its operational expenses to
appropriate levels for each of its businesses while simultaneously implementing
extensive new programs. The significant risks associated with these actions can
include delays in decision-making, lack of clear lines of authority during
transitions, customer confusion about Compaq's future products and services,
and an adverse impact on employee morale and retention. Compaq believes that,
upon conclusion of its restructuring initiatives, its cost structure will be
significantly reduced. However, there can be no assurance that such cost
reductions can be sustained or that the estimated costs of such actions will not
change.

Integrating businesses could divert focus. 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;
furthermore, 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. During the third quarter of 1999, Compaq announced intentions
to cease product development on its Windows NT adaptation for Compaq's Alpha
Server systems. Compaq will instead increase its Windows NT efforts on its
Intel-based ProLiant platform while targeting Alpha Servers toward the high-end
enterprise market using Compaq Tru64 UNIX and Open VMS operating systems. Compaq
is offering additional programs for certain customers who previously deployed
Windows NT on Compaq's Alpha Servers. The costs of such programs are expected
to impact fourth quarter 1999 segment operating income by approximately $50
million to $100 million and an additional $100 to $150 million in the first
quarter of 2000.

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
percent. Based on third-party research, enterprise market revenue is expected to
expand at a growth rate of 8 percent and the high technology service sector
revenue is expected to expand at a rate of 13 percent. The actual 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 part 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. Compaq expects
that concerns about implementing new systems will slow demand for certain of its
Enterprise Solutions and Services products in the last six weeks of the fourth
quarter of 1999. Compaq does not anticipate an impact on its Commercial Personal
Computing and Consumer businesses because while certain customers may delay
purchases at year end, others may acquire new units to ensure that their units
are ready for the next millennium.

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 is affected.

Component shortages could curtail production. From time
to time supply for key components in Compaq's products lags behind worldwide
demand. In the event that supply of a key material component is delayed or
curtailed, Compaq's ability to ship the related product in desired quantities
and in a timely manner could be adversely affected. Industry shortages currently
exist for certain types of display panels, microprocessors, memory and
capacitors. Compaq attempts to mitigate the risks of component shortages by
working closely with key suppliers on product plans, coordinated product
introductions, purchases on the spot market, and selected strategic purchases.

Doing business in certain locations creates additional risks.
Manufacturing operations in developing countries, such as Brazil and China, and
the expansion of sales into economically volatile areas such as Asia-Pacific,
Latin America and other emerging markets, subject Compaq to a number of economic
and other risks, such as financial instability among resellers in these regions.
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. Compaq is also subject to any political and financial
instability in the countries in which it operates, including inflation,
recession, currency devaluation and interest rate fluctuations. Compaq continues
to monitor its business operations in these regions and takes various measures
to manage risks in these areas.

Minority investments could adversely affect liquidity and
earnings. Compaq holds minority interests in companies having operations or
technology in areas within Compaq's strategic focus. Some of these investments
are in research and development, start-up or development stage companies or
companies where operations are not yet sufficient to establish them as going
concerns. As a result, Compaq may be called upon under contractual or other
terms to provide funding for operations of such investees and may share in the
losses of such entities. While Compaq's share of such losses has not been
significant to-date, Compaq anticipates that such losses will increase in the
future. Certain other investments are in publicly traded companies whose share
prices are highly volatile. Thus far, however, the overall financial impact of
these investments has been favorable. Adverse changes in market conditions or
poor operating results of underlying investments could result in Compaq
incurring losses or an inability to recover the carrying value of its
investments.

Opportunities for market share in the consumer business could
increase revenue. In October 1999, two of Compaq's competitors in the
consumer market announced that they would curtail their sales to consumers in
North America. Their departure will give Compaq an opportunity to gain market
share and increase revenue. Compaq's ability to take advantage of these
changes could be hampered by component shortages and strong competition in the
consumer sector. Although Compaq believes that certain of these customers will
be attracted to Compaq's brand, Compaq remains focused on profitable market
share growth and will not compete solely on price.

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 these possibilities cannot be eliminated, Compaq
is incorporating Year 2000 concerns into its contingency plans for dealing with
catastrophic events.

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
its own so that the task force 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
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. As of September 30, 1999, Compaq was complete
with its remediation of Priority 1 and Priority 2 items and closed the third
quarter in a Year 2000 ready environment worldwide for its internal supporting
systems and infrastructure. To ensure that the integrity of the Year 2000 ready
internal environment is maintained, a freeze on changes to applications and
infrastructure, with tightly controlled exceptions, has been established from
October 18, 1999 to January 15, 2000.

Compaq has conducted a review of its internal production
equipment, production and procurement suppliers and key channel partners
regarding Year 2000 readiness. Internal production equipment has been tested and
upgraded to achieve a Year 2000 readiness state. Suppliers, including strategic
OEMs, have been reviewed and risk assessments have been completed. Management
believes that each of its strategic OEMs has achieved a Year 2000 readiness
state or is implementing plans to achieve readiness in a timely manner. In
certain cases, Compaq has identified critical component suppliers who operate in
what the company has deemed "high-risk" countries. While these
suppliers continue to address their Year 2000 issues, Compaq is finalizing
contingency plans for these components and will begin implementing these plans
as appropriate. Reviews of key channel partners have also been completed. With
respect to suppliers and distributors, because Compaq's readiness depends upon
their successful remediation of Year 2000 problems, failures on the part of
suppliers and distributors remain a possibility and could have a material
adverse impact on future results.

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.

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 $123 million, of which
approximately 93 percent has been incurred through September 1999. The remaining
costs are primarily designated for incident management, finalizing and
validating business continuity plans, and program shutdown. 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 included in this estimate.

Effective tax rate. Compaq's effective tax rate for the
three and nine months ended September 30, 1999 increased to 61 percent and
53 percent, respectively, as compared to 26 percent for the three and nine
months ended September 30, 1998, before the effect of non-deductible
purchased in-process technology in 1998. The higher effective tax rate in 1999
was primarily due to the tax rates in the various jurisdictions that were
affected by the gain on sale of businesses and the restructuring and related
charges. The 1999 effective tax rate was also increased for the effect of a
non-deductible stock option compensation charge. Compaq anticipates an effective
tax rate of approximately 23 percent to 26 percent for the remainder
of 1999.
This rate is primarily affected by the proportion of manufacturing income to
total income which Compaq earns in Singapore that is subject to an ongoing tax
holiday.

The Singapore tax holiday for manufacturing operations can be
maintained through 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 its Singaporean manufacturing
subsidiary and its ability to reinvest those earnings permanently outside the
United States. 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. Compaq expects an increase in its overall effective tax rate in
2000 primarily related to an anticipated decline in the earnings of its
Singaporean subsidiary as a percentage of Compaq's total.

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. Quantitative and Qualitative Disclosures About
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

The value of the U.S. dollar affects Compaq's financial
results. Changes in exchange rates may positively or negatively affect Compaq's
revenues, gross margins, operating expenses and retained earnings as expressed
in U.S. dollars. Compaq engages in hedging programs aimed at limiting in part
the impact of currency fluctuations. 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. Compaq purchases foreign
currency option contracts from time to time as well as short-term forward
exchange contracts to protect against currency exchange risks associated with
the anticipated revenues of Compaq's international marketing subsidiaries,
with the exception of 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, Compaq's revenues or costs are adversely affected
when the U.S. dollar sustains a strengthening position against currencies in
which Compaq sells products and services or a weakening exchange rate against
currencies in which Compaq incurs costs.

Compaq is exposed to equity price risks on the marketable
portion of investments in publicly traded equity securities. These investments
are generally in companies having operations or technology in areas within
Compaq's strategic focus. Compaq typically does not attempt to reduce or
eliminate its market exposure on these securities. A 20 percent adverse change
in equity prices would result in an approximate $360 million decrease in the
fair value of the company's available for sale securities as of September 30,
1999.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 9 to unaudited interim consolidated financial
statements.

Item 6. Exhibits and Reports on Form 8-K



(a)
      Exhibit No.
      Description10.18
      U.S. $1,000,000,000 Revolving Credit Agreement
(364-Day) dated as of October 1, 1999 among Compaq Computer Corporation,
Bank of America, N.A., as Sole Administrative Agent, The Chase Manhattan Bank
and Citibank, N.A., as Syndication Agents, and The Banks party hereto, arranged
by Bank of America Securities LLC, as Sole Lead Arranger and Sole Book Manager27
      EDGAR financial data schedule


> (b)
>           Reports on Form
>             8-K(i)
>           Report on Form 8-K dated July 22, 1999, containing Compaq's news release dated July 22, 1999, announcing the appointment of Michael D. Capellas as president and chief executive officer(ii)
>           Report on Form 8-K dated July 28, 1999, containing Compaq's news release dated July 28, 1999, announcing its earnings results for the second quarter of 1999(iii)
>           Report on Form 8-K dated August 19, 1999, containing Compaq's news release dated August 19, 1999, announcing the completion of CMGI's acquisition of a majority stake in AltaVista and Compaq's position as
> the largest shareholder in CMGI effective August 18, 1999(iv)
>           Report on Form 8-K dated October 27, 1999, containing Compaq's news release dated October 26, 1999, with respect to its earning release for the third quarter of 1999(v)
>           Report on Form 8-K dated November 3, 1999, containing summary financial data by operating segment for the third quarter of 1999

> 

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





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.



November 12, 1999
COMPAQ COMPUTER CORPORATION


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








EXHIBIT 27<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 SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.</LEGEND><MULTIPLIER> 1,000,000<TABLE><CAPTION><BTB><S>
<C><PERIOD-TYPE>
9-MOS<FISCAL-YEAR-END>
DEC-31-1999<PERIOD-END>
SEP-30-1999<CASH>
2,253<SECURITIES>
1,444<RECEIVABLES>
6,618<ALLOWANCES>
0<INVENTORY>
2,131<CURRENT-ASSETS>
14,706<PP&E>
3,141<DEPRECIATION>
0<TOTAL-ASSETS>
24,751<CURRENT-LIABILITIES>
12,008<BONDS>
0<COMMON>
7,555<PREFERRED-MANDATORY>
0<PREFERRED>
0<OTHER-SE>
4,649<TOTAL-LIABILITY-AND-EQUITY>
24,751<SALES>
23,187<TOTAL-REVENUES>
28,047<CGS>
18,348<TOTAL-COSTS>
21,648<OTHER-EXPENSES>
6,095<LOSS-PROVISION>
0<INTEREST-EXPENSE>
112<INCOME-PRETAX>
499<INCOME-TAX>
262<INCOME-CONTINUING>
237<DISCONTINUED>
0<EXTRAORDINARY>
0<CHANGES>
0<NET-INCOME>
237<EPS-BASIC>
0.15<EPS-DILUTED>
0.15<FN></TABLE>