Compaq Computer Corporation and Subsidiaries - Page 35




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          subcontractors was 93.1 percent of the Compaq U.S. standard costs           
          weighted to the Compaq Asia production amount.  Compaq Asia                 
          turnkey prices were 93.9 percent of the Compaq U.S. standard                
          cost.  Thus, the relationship between Compaq Asia prices and                
          unrelated subcontractors prices is definite, and a reasonably               
          accurate adjustment can be made using these ratios.                         
               Adjusting for minor physical differences and differences in            
          production time in this manner is consistent with Compaq U.S.               
          actual arm's-length dealings and real world experience:                     
          unrelated subcontractor prices are directly related to Compaq               
          U.S. standard costs to produce the PCA's in-house.  Accordingly,            
          a decrease of $6.4 million in the Compaq Asia aggregate price may           
          be warranted for physical differences and differences in                    
          production time.                                                            
               Quality is also a factor that may affect price.  In this               
          case, however, no adjustment is necessary because the PCA's that            
          were purchased from Compaq Asia were of equal or greater quality            
          than the unrelated subcontractor PCA's.                                     
               Compaq U.S. occasionally reworked defective PCA's that were            
          purchased from Compaq Asia and unrelated subcontractors.  In so             
          doing, Compaq U.S. reworked a significantly higher percentage of            
          unrelated subcontractors' PCA's than of Compaq Asia PCA's.                  
          During 1991 and 1992, Compaq U.S. incurred costs of $1.3 million            
          to rework defective Compaq Asia PCA's.  Compaq U.S. did not                 





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