Latest technology company to run into trouble
Earnings slumped to $16m compared to $414m during the first three months of last year. The company says it does not expect an improvement in profitability until the middle of the year.
A price war in the United States is the main reason for the company's loss of income.
The results matched analysts' expectations, according to a survey by First Call Corp. Compaq shares rose 68 3/4 cents to close at $26.75 on the New York Stock Exchange.
Last month, Compaq warned that stagnant computer sales and price wars would force it to report flat profits for the first quarter.
Compaq is the fifth largest computer company in the world and the largest supplier of personal computers with worldwide sales of $24.6bn in 1997.
The warning was the latest in a series of gloomy outlooks from high-tech companies, including Intel and Motorola.
On Wednesday, Intel, the world's largest manufacturer of silicon chips, announced nearly 3,000 job cuts worldwide - 5% of its workforce.
The American company blamed reduced demand for personal computers leading to a 36% drop in profits and a 7% drop in revenue.