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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2001

OR

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number 0-22784

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GATEWAY, INC.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

42-1249184(I.R.S. Employer
Identification No.)


4545 Towne Centre Court
San Diego, California 92121(Address of principal executive offices, zip code)

Registrant's
telephone number, including area code:(858) 799-3401

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes /x/  No / /

As
of July 19, 2001, there were 323,114,937 shares of the Common Stock of the Company, $.01 par value per share, outstanding. As of July 19, 2001, there were no shares
of the Company's Class A Common Stock, $.01 par value per share, outstanding.

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I.  FINANCIAL INFORMATION

Item 1. Financial Statements

Gateway, Inc.  CONSOLIDATED STATEMENTS OF OPERATIONS  For the three and six months ended June 30, 2001 and 2000  (in thousands, except per share amounts)  (unaudited)

|                                                                |                                                                                           | Three Months Ended June 30, |           | Six Months Ended June 30, |        
|--------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | --------------------------- | --------- | ------------------------- | -------
|
|Net sales                                                       |                                                                                           | $                           | 1,500,875 |                           | $      
|Cost of goods sold                                              |                                                                                           |                             | 1,220,769 |                           |        
|                                                                |                                                                                           |                             |           |                           |        
|                                                                | Gross profit                                                                              |                             |           | 280,106                   |        
|Selling, general and administrative expenses                    |                                                                                           |                             | 333,546   |                           |        
|                                                                |                                                                                           |                             |           |                           |        
|                                                                | Operating income (loss)                                                                   |                             |           | (53,440                   | )      
|Other income (loss), net                                        |                                                                                           |                             | 22,872    |                           |        
|                                                                |                                                                                           |                             |           |                           |        
|                                                                | Income (loss) before income taxes and cumulative effect of change in accounting principle |                             |           | (30,568                   | )      
|Provision (benefit) for income taxes                            |                                                                                           |                             | (9,782    | )                         |        
|                                                                |                                                                                           |                             |           |                           |        
|                                                                | Net income (loss) before cumulative effect of change in accounting principle              |                             |           | (20,786                   | )      
|                                                                |                                                                                           |                             |           |                           |        
|Cumulative effect of change in accounting principle, net of tax |                                                                                           |                             |          |                           |        
|                                                                |                                                                                           |                             |           |                           |        
|                                                                | Net income (loss)                                                                         |                             | $         | (20,786                   | )      
|                                                                |                                                                                           |                             |           |                           |        
|                                                                | Net income (loss) per share before cumulative effect of change in accounting principle:   |                             |           |                           |        
|                                                                |                                                                                           | Basic                       |           | $                         | (0.06  
|                                                                |                                                                                           |                             |           |                           |        
|                                                                |                                                                                           | Diluted                     |           | $                         | (0.06  
|                                                                |                                                                                           |                             |           |                           |        
|                                                                | Net income (loss) per share after cumulative effect of change in accounting principle:    |                             |           |                           |        
|                                                                |                                                                                           | Basic                       |           | $                         | (0.06  
|                                                                |                                                                                           |                             |           |                           |        
|                                                                |                                                                                           | Diluted                     |           | $                         | (0.06  
|                                                                |                                                                                           |                             |           |                           |        
|                                                                | Weighted average shares outstanding:                                                      |                             |           |                           |        
|                                                                |                                                                                           | Basic                       |           |                           | 323,014
|                                                                |                                                                                           |                             |           |                           |        
|                                                                |                                                                                           | Diluted                     |           |                           | 323,014
|                                                                |                                                                                           |                             |           |                           |        

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

1

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Gateway, Inc.
CONSOLIDATED BALANCE SHEETS
June 30, 2001 and December 31, 2000
(in thousands, except per share amounts)

|                                                 |                                                                                                                                    | June 30,
2001              |           | December 31,
2000 |          
|------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | --------- | ----------------- | ---------
|
|ASSETS                                           |                                                                                                                                    |                            |           |                   |          
|Current assets:                                  |                                                                                                                                    |                            |           |                   |          
|                                                 | Cash and cash equivalents                                                                                                          |                            | $         | 786,316           |          
|                                                 | Marketable securities                                                                                                              |                            |           | 242,257           |          
|                                                 | Accounts receivable, net                                                                                                           |                            |           | 438,702           |          
|                                                 | Inventory                                                                                                                          |                            |           | 164,053           |          
|                                                 | Other                                                                                                                              |                            |           | 516,031           |          
|                                                 |                                                                                                                                    |                            |           |                   |          
|                                                 |                                                                                                                                    | Total current assets       |           |                   | 2,147,359
|Property, plant and equipment, net               |                                                                                                                                    |                            | 785,966   |                   |          
|Intangibles, net                                 |                                                                                                                                    |                            | 43,427    |                   |          
|Other assets                                     |                                                                                                                                    |                            | 524,535   |                   |          
|                                                 |                                                                                                                                    |                            |           |                   |          
|                                                 |                                                                                                                                    | $                          | 3,501,287 |                   | $        
|                                                 |                                                                                                                                    |                            |           |                   |          
|LIABILITIES AND STOCKHOLDERS' EQUITY             |                                                                                                                                    |                            |           |                   |          
|Current liabilities:                             |                                                                                                                                    |                            |           |                   |          
|                                                 | Accounts payable                                                                                                                   |                            | $         | 560,680           |          
|                                                 | Accrued liabilities                                                                                                                |                            |           | 472,820           |          
|                                                 | Accrued royalties                                                                                                                  |                            |           | 151,022           |          
|                                                 | Other current liabilities                                                                                                          |                            |           | 133,534           |          
|                                                 |                                                                                                                                    |                            |           |                   |          
|                                                 |                                                                                                                                    | Total current liabilities  |           |                   | 1,318,056
|Long-term obligations, net of current maturities |                                                                                                                                    |                            | 204,196   |                   |          
|Warranty and other liabilities                   |                                                                                                                                    |                            | 125,755   |                   |          
|                                                 |                                                                                                                                    |                            |           |                   |          
|                                                 |                                                                                                                                    | Total liabilities          |           |                   | 1,648,007
|                                                 |                                                                                                                                    |                            |           |                   |          
|Contingencies (Note 9)                           |                                                                                                                                    |                            |           |                   |          
|Stockholders' equity:                            |                                                                                                                                    |                            |           |                   |          
|                                                 | Preferred Stock, $.01 par value, 5,000 shares authorized; none issued and outstanding                                              |                            |           |                  |          
|                                                 | Class A Common Stock, nonvoting, $.01 par value, 1,000 shares Authorized; none issued and outstanding                              |                            |           |                  |          
|                                                 | Common Stock, $.01 par value, 1,000,000 shares authorized; 324,071 shares and 323,955 shares issued in 2001 and 2000, respectively |                            |           | 3,241             |          
|                                                 | Additional paid-in capital                                                                                                         |                            |           | 743,025           |          
|                                                 | Treasury stock, at cost, 481 shares and 552 shares in 2001 and 2000, respectively                                                  |                            |           | (19,340           | )        
|                                                 | Retained earnings                                                                                                                  |                            |           | 1,126,645         |          
|                                                 | Accumulated other comprehensive income (loss)                                                                                      |                            |           | (291              | )        
|                                                 |                                                                                                                                    |                            |           |                   |          
|                                                 |                                                                                                                                    | Total stockholders' equity |           |                   | 1,853,280
|                                                 |                                                                                                                                    |                            |           |                   |          
|                                                 |                                                                                                                                    | $                          | 3,501,287 |                   | $        
|                                                 |                                                                                                                                    |                            |           |                   |          

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

2

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Gateway, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2001 and 2000
(in thousands)
(unaudited)

|                                                     |                                                                                                    | Six Months Ended June 30,                           |                    
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------- | --------------------------------------------------- | -------------------
|
|Cash flows from operating activities:                |                                                                                                    |                                                     |                    
|                                                     | Net income (loss)                                                                                  |                                                     | $                  
|                                                     | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |                                                     |                    
|                                                     |                                                                                                    | Depreciation and amortization                       |                    
|                                                     |                                                                                                    | Provision for uncollectible accounts receivable     |                    
|                                                     |                                                                                                    | Deferred income taxes                               |                    
|                                                     |                                                                                                    | Cumulative effect of change in accounting principle |                    
|                                                     |                                                                                                    | Impairment of long lived assets                     |                    
|                                                     |                                                                                                    | Realized loss on investments                        |                    
|                                                     |                                                                                                    | Other, net                                          |                    
|                                                     |                                                                                                    | Changes in operating assets and liabilities:        |                    
|                                                     |                                                                                                    |                                                     | Accounts receivable
|                                                     |                                                                                                    |                                                     | Inventory          
|                                                     |                                                                                                    |                                                     | Other assets       
|                                                     |                                                                                                    |                                                     | Accounts payable   
|                                                     |                                                                                                    |                                                     | Accrued liabilities
|                                                     |                                                                                                    |                                                     | Accrued royalties  
|                                                     |                                                                                                    |                                                     | Other liabilities  
|                                                     |                                                                                                    |                                                     |                    
|                                                     |                                                                                                    |                                                     |                    
|                                                     |                                                                                                    |                                                     |                    
|Cash flows from investing activities:                |                                                                                                    |                                                     |                    
|                                                     | Capital expenditures                                                                               |                                                     |                    
|                                                     | Investments in unconsolidated affiliates                                                           |                                                     |                    
|                                                     | Purchases of available-for-sale securities, net of proceeds                                        |                                                     |                    
|                                                     | Proceeds from the sale of financing receivables                                                    |                                                     |                    
|                                                     | Finance receivables, net of repayments                                                             |                                                     |                    
|                                                     | Purchase of note receivable                                                                        |                                                     |                    
|                                                     | Other, net                                                                                         |                                                     |                    
|                                                     |                                                                                                    |                                                     |                    
|                                                     |                                                                                                    | Net cash provided by (used in) investing activities |                    
|                                                     |                                                                                                    |                                                     |                    
|Cash flows from financing activities:                |                                                                                                    |                                                     |                    
|                                                     | Share repurchases                                                                                  |                                                     |                    
|                                                     | Proceeds from issuance of long-term obligations                                                    |                                                     |                    
|                                                     | Principal payments on long-term obligations                                                        |                                                     |                    
|                                                     | Stock options exercised                                                                            |                                                     |                    
|                                                     |                                                                                                    |                                                     |                    
|                                                     |                                                                                                    | Net cash provided by financing activities           |                    
|                                                     | Foreign exchange effect on cash and cash equivalents                                               |                                                     |                    
|                                                     |                                                                                                    |                                                     |                    
|Net increase (decrease) in cash and cash equivalents |                                                                                                    |                                                     | 302,319            
|Cash and cash equivalents, beginning of period       |                                                                                                    |                                                     | 483,997            
|                                                     |                                                                                                    |                                                     |                    
|Cash and cash equivalents, end of period             |                                                                                                    | $                                                   | 786,316            
|                                                     |                                                                                                    |                                                     |                    

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

3

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)

1. General:

The accompanying unaudited consolidated financial statements of Gateway, Inc. (the "Company") as of June 30, 2001 and for the three and six
months ended June 30, 2001 and 2000 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2000 and, in the opinion of
management, reflect all adjustments necessary to fairly state the consolidated financial position, results of operations and cash flows for the interim periods. All adjustments are of a normal,
recurring nature. The results for the interim periods are not necessarily indicative of results to be expected for any other interim period or the entire year. These financial statements should be
read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2000, which are included in the Company's 2000 Annual Report
on Form 10-K, filed with the Securities and Exchange Commission. Certain reclassifications have been made to prior period financial statements to conform to current periods'
presentation. These reclassifications had no impact on previously reported net income or stockholders' equity. The preparation of the consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

2. Comprehensive Income (Loss):

Comprehensive income (loss) for the Company includes net income (loss), foreign currency translation effects, and unrealized gains or losses on derivatives
qualifying as hedges and available-for-sale securities which are charged or credited to the accumulated other comprehensive income (loss) account within stockholders' equity.

Comprehensive
income (loss) for the three and six month periods ended June 30, 2001 and 2000 was as follows (in thousands):

|                                                           |  | Three Months Ended June 30, |         | Six Months Ended June 30, |  
|---------------------------------------------------------- |  | --------------------------- | ------- | ------------------------- | -
|
|Comprehensive income (loss):                               |  |                             |         |                           |  
|Net income (loss)                                          |  | $                           | (20,786 | )                         | $
|Foreign currency translation                               |  |                             | 18,931  |                           |  
|Unrealized gain (loss) on derivatives qualifying as hedges |  |                             | (4,576  | )                         |  
|Unrealized loss on available-for-sale securities           |  |                             | (2,200  | )                         |  
|                                                           |  |                             |         |                           |  
|                                                           |  | $                           | (8,631  | )                         | $
|                                                           |  |                             |         |                           |  

3. Share and Per Share Information:

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 stock equivalents and the weighted average number of common shares outstanding during the period. Diluted shares for the three months and six
months ended June 30, 2001 excludes 1,150,659 and 1,358,410, respectively, weighted average incremental shares related to employee common stock options. These shares are excluded for their
respective periods as their effect is anti-dilutive on net loss per share.

4

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The following table sets forth a reconciliation of shares used in the computation of basic and diluted earnings per share (in thousands):

|                                                       |  | Three Months Ended June 30, |  | Six Months Ended June 30,
|------------------------------------------------------ |  | --------------------------- |  | -------------------------
|
|Weighted average shares for basic earnings per share   |  | 323,014                     |  | 321,265                  
|Dilutive effect of stock options                       |  |                            |  | 10,462                   
|                                                       |  |                             |  |                          
|Weighted average shares for diluted earnings per share |  | 323,014                     |  | 331,727                  
|                                                       |  |                             |  |                          

4. Changes in Accounting Principles:

In the first quarter of 2001, the Company adopted Statement of Financial Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133). Under FAS 133, as amended, all derivative instruments (including certain derivative instruments embedded in other contracts) are recognized in the balance sheet at
their fair values. Changes in fair values are recognized immediately in earnings, unless the derivatives qualify as hedges of future cash flows. For derivatives qualifying as hedges of future cash
flows, the effective portion of changes in fair value is recorded temporarily in accumulated other comprehensive income (loss), then recognized in earnings along with the related effects of the hedged
items after the transaction occurs. Any ineffective portion of a hedge is reported in earnings as it occurs.

The
Company uses foreign currency forward contracts to hedge foreign currency transactions. These forward contracts are designated as cash flow hedges and generally have three to six
month terms.
Additionally, the Company holds warrants as investments in connection with certain strategic relationships.

On
January 1, 2001, the Company's financial statements were adjusted by $23.9 million, net of tax effects of $13.9 million, to record the cumulative effect of
adopting this accounting change. The Company recorded $4.6 million in other comprehensive income and $4.6 million in other comprehensive loss, during the first quarter and second
quarter, respectively, related to the changes in the fair value of derivatives qualifying as hedges of future cash flows. Unrealized gains and losses recorded in other income were not significant.

The
Company adopted Securities and Exchange Commission Staff Accounting Bulletin No. 101 (SAB 101) "Revenue Recognized in Financial Statements" effective January 1,
2000, to recognize revenue upon delivery rather than shipment of products.

5. Financing Receivables:

In February 2001, the Company sold approximately $500 million of financing receivables to a third party at book value with no recourse.
Subsequently, management decided that, while it will continue to offer customer financing, it will discontinue providing customer financing to lesser quality credits. In late March 2001,
management made the further decision to sell the substantial balance of its remaining finance receivables portfolio consisting of such lesser quality credits. As a result of this decision, in the
first quarter the Company recorded an additional charge of $100 million, included in cost of goods sold, to reduce the carrying value of these receivables to their estimated net realizable
value. In the second quarter of 2001, the Company recorded $23 million of income, included in other income (loss), net, related to the financing receivables held for sale. At June 30,
2001, these finance receivables are included in other current assets.

5

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6. Selected Balance Sheet Information (in thousands):

June 30,
2001

December 31,
2000(audited)Accounts receivable, net:Accounts receivable

$
452,332

$
557,479Less allowance for uncollectible accounts


(13,630
)

(12,724
)$
438,702

$
544,755Inventory:Components and subassemblies

$
126,825

$
252,085Finished goods


37,228


62,984$
164,053

$
315,069


7. Long-term Obligations:

On February 2, 2001, in connection with its strategic relationship with America Online, Inc. (AOL), the Company issued AOL a $200 million,
3% convertible note due December 22, 2020 at an initial conversion price of $33.676 per share which includes a premium. AOL may require the Company to purchase the note (at the par value plus
accrued interest to date of purchase) on December 22, 2004, 2009, or 2014, payable in stock or cash, at the option of the Company. The Company, at its option, may redeem the notes (at par value
plus accrued interest to date of redemption) any time on or after December 22, 2004.

The
Company maintains an unsecured committed credit facility with certain banks aggregating $300 million, consisting of a revolving line of credit facility and a
sub-facility for letters of credit. As of June 30, 2001, the revolving line of credit facility had no amounts outstanding. As a result of the Company's restructuring and other
charges discussed more fully in Note 10, the Company was not in compliance with a certain financial convenant of the credit facility during the second quarter for a period of time. The Company
has obtained an appropriate amendment of this covenant. Management believes the Company's current sources of working capital will provide adequate flexibility for the Company's financial needs for at
least the next 12 months.

8. Income Taxes:

The Company recorded a tax benefit of $10 million or 32% for the second quarter of 2001 and a tax benefit of $145 million or 22% for the first
six months of 2001. This tax benefit for the first six months of 2001 is net of a tax assessment in a foreign subsidiary and an increase in the deferred tax valuation allowance for certain tax
carryover items principally related to the Company's foreign operations. The change in the valuation allowance was the result of management's assessment that the realization of these carryover items
was no longer more likely than not based on the Company's international restructuring activities. The estimated effective tax rate for the year is 22%, including the items discussed above, with the
balance of the year estimated at 32%. Excluding these items, the effective tax rate for the year 2001 would have been 32% compared to 38% for 2000. This lower effective tax rate is principally the
result of not recording any tax benefits associated with current year foreign operating losses.

9. Contingencies:

On December 7, 2000, James Burton ("Burton") filed a purported class action complaint against Gateway, one of its former officers, and one director, in
the United States District Court for the

6

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Southern District of California for alleged violation of federal securities laws. Since December 2000, six similar cases have been filed in the same court by other plaintiffs. The complaints
were amended to allege among other things that the defendants misrepresented Gateway's financial performance in securities filings and in statements to the public, and purport to be class actions on
behalf of purchasers of Gateway's stock between April 14, 2000 and February 28, 2001 (the "class period"). The Complaints seek damages and attorneys' fees. On December 18, 2000,
the Court entered an Order directing counsel for the lead plaintiffs to file a single consolidated complaint within 60 days after the Court's designation of a "lead plaintiff." On
April 23, 2001, plaintiffs' counsel filed a Revised Motion to Appoint Perry Capital and Teachers' Retirement System of Louisiana as Lead Plaintiff and to Approve Plaintiff's Choice of Lead
Counsel, and this motion was granted by the court on May 18, 2001. On July 16, 2001, the lead plaintiff filed a consolidated complaint alleging violations of the federal securities laws
for the class period.

On
March 27, 2001, Bruce Eubank ("Eubank") filed a shareholder derivative suit on behalf of Gateway against its Board of Directors and two of Gateway's former officers in the
Superior Court of the State of California, County of San Diego. The Eubank complaint alleges among other things that the defendants breached their fiduciary duties to Gateway and wasted corporate
assets and seeks compensatory and punitive damages, an accounting, injunctive relief, and attorney's fees. On May 15, 2001, Jacob Scheinhartz ("Scheinhartz") filed a similar derivative suit in
the United States District Court for the Southern District of California. The Company has filed motions seeking dismissal of the
Eubank lawsuit. The Scheinhartz lawsuit has been voluntarily stayed pending motions to dismiss the consolidated federal class actions.

The
Company's obligation to indemnify its officers and directors under the aforementioned lawsuits is insured, to the extent of the limits of the applicable insurance policies,
subject to potential reservations of rights. The Company intends to vigorously defend these actions, and believes that in the event that it is not fully successful, insurance coverage should be
available to defray a portion, or substantially all, of the expense of defending and settling the lawsuits or paying a judgment. However, the Company is unable to predict the ultimate outcome of the
litigation. There can be no assurance the Company will be successful in defending the lawsuits or that if unsuccessful, that insurance will be available to pay all or any portion of the expense of the
lawsuits. The Company's consolidated financial statements do not include any adjustments related to these matters.

Additionally,
the Company is party to various lawsuits and administrative proceedings arising in the ordinary course of business. The Company evaluates such lawsuits and proceedings
on a case-by-case basis, and its policy is to vigorously contest any such claims which it believes are without merit. The Company's management believes that the ultimate
resolution of such pending matters will not materially and adversely affect the Company's business, consolidated financial position, and results of operations or cash flows.

10. Restructuring and Other Special Charges:

During the first quarter of 2001, the Company approved a restructuring plan to, among other things, reduce its workforce, close certain retail locations,
consolidate facilities, redefine its information technology strategy, and exit certain other activities. Pre-tax charges of $24 million (including non-cash charges of
$19 million) and $390 million (including non-cash charges of $283 million) were recorded in the second and first quarters of 2001, respectively, to provide for these
actions and other related items. The charges are included in selling, general and administrative expenses.

7

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The following table summarizes charges recorded during the first quarter of 2001 for exit activities and asset write-downs (in millions):

|                                               |  | Exit Activities |    |  |   |    |  |  
|---------------------------------------------- |  | --------------- | -- |  | - | -- |  | -
|
|Productivity Initiatives                       |  | $               | 30 |  | $ | 9  |  | $
|Facilities/Capital Assets                      |  |                 |   |  |   | 4  |  |  
|Operating Assets                               |  |                 |   |  |   | 27 |  |  
|International Restructuring                    |  |                 |   |  |   | 22 |  |  
|Impairment of goodwill and related intangibles |  |                 |   |  |   |   |  |  
|Other                                          |  |                 |   |  |   | 15 |  |  
|                                               |  |                 |    |  |   |    |  |  
|Total                                          |  | $               | 30 |  | $ | 77 |  | $
|                                               |  |                 |    |  |   |    |  |  

The
accrued restructuring costs and amounts charged against the provision as of June 30, 2001 and total charges recorded during the second quarter of 2001 were as follows (in
millions):

|                            |  | Exit Activities |    |  |   |   |  |  
|--------------------------- |  | --------------- | -- |  | - | - |  | -
|
|Productivity Initiatives    |  | $               | 9  |  | $ |  |  | $
|Facilities/Capital Assets   |  |                 | 4  |  |   |  |  |  
|Operating Assets            |  |                 | 27 |  |   |  |  |  
|International Restructuring |  |                 | 22 |  |   | 5 |  |  
|Other                       |  |                 | 15 |  |   |  |  |  
|                            |  |                 |    |  |   |   |  |  
|Total                       |  | $               | 77 |  | $ | 5 |  | $
|                            |  |                 |    |  |   |   |  |  

The
nature of the charges is as follows:



8

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During
the first quarter of 2001, the Company recorded total restructuring and other special charges of $533 million. Included in this amount is the $390 million
described above, a charge to other income (loss), net of $43 million to write-down the carrying value of securities and long-term receivables associated with a strategic
restructuring decision and, as described in Note 5, a $100 million charge to reduce the carrying value of the Company's consumer finance receivables. During the second quarter of 2001,
the Company recorded total restructuring and other special charges of $44 million. Included in this amount is $24 million described in the immediately preceding table above, and a charge
of $20 million included in other income (loss), net, to record the write down of the carrying value of an investment.

11. Segment Data:

The Company's segments are based on geography and, in the United States (U.S.), by customer class. Geographic segments include the U.S.; Europe, Middle East,
Africa (EMEA); and Asia Pacific. Customer class segments in the U.S. are Consumer and Business. The Company evaluates the performance of its Consumer and Business segments based on sales and operating
income, and does not include segment assets or other income and expense items for management reporting purposes. Management evaluates net sales by customer class based on units shipped in the period.
Segment operating income includes selling, general and administrative expenses and other overhead charges directly attributable to the segment and excludes certain expenses managed outside the
reporting segment. Costs excluded from the segments primarily consist of general and administrative expenses that are managed on a corporate-wide basis and, for the quarter and six months
ended June 30, 2001, includes restructuring and other special charges discussed in Note 10. Certain non-segment amounts for prior periods have been reclassified to conform
with current year presentation.

9

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The following table sets forth summary information by segment (in thousands):

|                         |                | Three Months Ended June 30, |           | Six months Ended June 30, |        
|------------------------ | -------------- | --------------------------- | --------- | ------------------------- | -------
|
|Net sales:               |                |                             |           |                           |        
|                         | United States: |                             |           |                           |        
|                         |                | Consumer                    |           | $                         | 644,724
|                         |                | Business                    |           |                           | 673,386
|                         |                | Non-segment                 |           |                           |       
|                         |                |                             |           |                           |        
|                         |                |                             | 1,318,110 |                           |        
|                         | EMEA           |                             |           | 72,500                    |        
|                         | Asia Pacific   |                             |           | 110,265                   |        
|                         |                |                             |           |                           |        
|                         | Consolidated   |                             | $         | 1,500,875                 |        
|                         |                |                             |           |                           |        
|Operating income (loss): |                |                             |           |                           |        
|                         | United States: |                             |           |                           |        
|                         |                | Consumer                    |           | $                         | 27,645 
|                         |                | Business                    |           |                           | 58,768 
|                         |                |                             |           |                           |        
|                         |                |                             | 86,413    |                           |        
|                         | EMEA           |                             |           | (14,849                   | )      
|                         | Asia Pacific   |                             |           | (16,193                   | )      
|                         | Non-segment    |                             |           | (108,811                  | )      
|                         |                |                             |           |                           |        
|                         | Consolidated   |                             | $         | (53,440                   | )      
|                         |                |                             |           |                           |        

10

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

The following should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document. This
Report includes forward-looking statements made based on current management expectations pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These
statements are not guarantees of future performance and actual outcomes may differ materially from what is expressed or forecasted. The Company assumes no obligation to update these forward looking
statements to reflect events that occur or circumstances that exist after the date on which they were made. There are many factors that affect the Company's business, consolidated financial position,
results of operations and cash flows, including the factors discussed or referenced below.

Results of Operations

The following table sets forth, for the periods indicated, certain data derived from the Company's consolidated statements of operations and certain of such
data expressed as a percentage of net sales:

Three Months Ended
June 30,

Six Months Ended
June 30,2001

2000

2001

2000(dollars in thousands)Net sales

$
1,500,875

$
2,207,017

$
3,534,385

$
4,605,967Gross profit


280,106


499,371


477,411


1,017,873Percentage of net sales


18.7
%

22.6
%

13.5
%

22.1
%Selling, general and administrative expenses


333,546


335,782


1,106,806


668,020Percentage of net sales


22.2
%

15.2
%

31.3
%

14.5
%Operating income (loss)


(53,440
)

163,589


(629,395
)

349,853Percentage of net sales


(3.6
%)

7.4
%

(17.8
%)

7.6
%Net income (loss) before cumulative effect of change in accounting principle

$
(20,786
)
$
118,178

$
(499,839
)
$
249,669


Net Sales

Gateway consolidated net sales decreased to $1.5 billion and $3.5 billion in the second quarter and first six months of 2001, respectively,
representing decreases of 32% and 23%, respectively, over the comparable periods of 2000. In the second quarter and first six months of 2001, unit shipments decreased over the comparable periods of
2000 by 21% and 16%, respectively.

11

---

The following table summarizes the Company's net sales, for the periods indicated, by geographic region:

Three Months Ended
June 30,

Six months Ended
June 30,2001

2000

2001

2000Net sales:United States:Consumer

$
644,724

$
1,107,614

$
1,761,188

$
2,485,278Business


673,386


736,927


1,328,553


1,352,409Non-segment





(1,789
)




3,9771,318,110


1,842,752


3,089,741


3,841,664EMEA


72,500


135,153


187,100


319,464Asia Pacific


110,265


229,112


257,544


444,839Consolidated

$
1,500,875

$
2,207,017

$
3,534,385

$
4,605,967


Management
had previously indicated that beginning in the second quarter of 2001 it will report approximately $200 million less net sales per quarter related to a number of
strategic actions taken to discontinue certain non-profitable revenue streams which include, among other things, the closure of underperforming retail locations, restructuring
international markets, discontinuing lower quality consumer lending, modifications to its ISP business model, and exiting certain indirect sales activities.

In
the United States, consumer net sales declined 42% and 29% during the second quarter and first six months of 2001 while unit shipments declined 36% and 29%, respectively, over the
same periods of 2000. The Company continued to experience a decline in consumer demand for PC and PC-related products and services in the first half of 2001 which is a continuing trend from the last
quarter of 2000. Excluding the impact of the strategic actions mentioned above, consumer net sales declined approximately 33% and 35%, respectively, during the second quarter and first six months of
2001, over the same periods of 2000. Management expects that the weak consumer demand will continue through the second half of 2001. In the business segment in the United States net sales declined by
9% and 2% during the second quarter and first six months of 2001, respectively, over the same periods of 2000 while unit shipments increased by 9% and 14%, respectively, over the same periods of 2000.
The business segment experienced continued growth during the second quarter of 2001 in unit shipments to small and medium businesses, posting a 27% increase over the same period of 2000 while unit
shipments to education and government customers increased 11% and 3%, respectively, over the same periods of 2000.

International
net sales were 12% of total Company net sales in the second quarter of 2001. For the second quarter and first six months of 2001, Europe, Middle East and Africa ("EMEA")
net sales decreased 46% and 41%, respectively, over the second quarter and first six months of 2000 while unit shipments declined 46% and 34%, respectively, over the same periods of 2000. The declines
are attributable to, among other things, softening consumer demand, particularly in the United Kingdom, and the elimination by the Company of non-profitable revenue streams, including
certain retail relationships in Germany, France and The Netherlands. For the second quarter and first six months of 2001, the Asia Pacific region net sales decreased 52% and 42%, respectively, over
the second quarter and first six months of 2000 while unit shipments declined 36% and 26%, respectively, over the same periods of 2000. The declines for the Asia Pacific region are due primarily to
declines experienced in the Japan and Australian markets, product competitiveness issues and intense price competition.

Beyond-the-box
revenue, including software and peripheral sales, internet service provider (ISP) income, financing, warranty and training revenue and other
non-PC revenue, totaled $259 million or 17% of net sales for the second quarter of 2001 and $726 million or 21% of net sales for the first six

12

---

months of 2001, as compared to $396 million or 18% of net sales in the second quarter of 2000 and $733 million or 16% of net sales in the first six months of 2000.
Beyond-the-box revenue in the first quarter of 2001, excluding income from the consumer financing portfolio that was put up for sale was $447 million or 22% of net
sales, with $326 million sold at the point of sale and $121 million sold after the point of sale compared to $144 million sold at the point of sale and $115 million sold
after the point of sale in the second quarter of 2001. The decline in beyond-the-box revenue is primarily attributable to the decline in unit shipments as well as the Company's
decision to discontinue certain non-profitable revenue streams mentioned above. During the first quarter of 2001, the Company modified its strategic alliance with America Online (AOL)
whereby it will convert existing Gateway.net customers to the AOL-branded Internet access in order to improve the customer experience and the economic return to the Company for such subscribers. In
addition, the Company will begin to participate earlier in a greater share of recurring income on new prepaid ISP subscribers rather than earning a higher fee for
re-selling prepaid ISP subscriptions at the point of sale and participating in the recurring income stream at a later date. The change in the strategic alliance has resulted in the Company
reporting substantially less revenue from ISP at the point of sale. The Company expects to report increased recurring revenue and gross profit in future periods as a result of this change. This change
has the effect of negatively impacting average selling price, as well as the sales mix percentage of beyond-the-box revenue while favorably impacting the gross profit
percentage of beyond-the-box items.

As
part of a strategic review carried out in the first quarter of the Company's direct sales policy and in response to the recent decline in consumer demand, the Company has announced
it would be curtailing retail expansion plans in 2001 and closing a number of underperforming stores. The Company exited the second quarter of 2001 with 360 Gateway Country ® stores
worldwide and 302 in the United States as compared to 349 stores worldwide and 287 in the United States at the end of the second quarter of 2000.

Average
selling price or ASP, which includes PC and non-PC products and services sold at the point of sale per unit, was $1,501 in the second quarter of 2001, down from
$1,723 in the first quarter of 2001. This decrease is primarily the result of a combination of factors that includes the introduction of the Gateway Guarantee, the reduction of revenue from ISP at the
point of sale discussed above, as well as a shift of sales mix to the Company's business segment, which generally has a lower ASP than the consumer segment. During the second quarter of 2001, the
Company introduced the Gateway Guarantee, a promise to beat the price on comparably equipped national brand PCs. While the program helped increase sales conversion rates in all channels, the
discounting contributed toa decline in ASP and gross profit percentage. Management expects that the pricing environment will be challenging and competitive for the balance of 2001.

Average
unit price (AUP), which is total Company net sales per unit, declined 14% to $1,626 in the second quarter of 2001, compared to the same period in 2000 and declined 12%
sequentially from the first quarter of 2001 substantially for the same reasons the decline in ASP was experienced. The Company experienced an aggressive pricing environment in the first six months of
2001 triggered by a number of large competitors, which resulted in AUP declines from the levelof the prior year.

Gross Profit

Gross profit for the second quarter and first six months of 2001 was $280 million and $477 million, respectively, decreases of 44% and 53%,
respectively, from the same periods of 2000. As a percentage of net sales, gross profit for the second quarter of 2001 decreased to 18.7% from 22.6% in 2000 and decreased to 13.5% in the first six
months of 2001 from 22.1% for the first six months of 2000. These declines in the six months period are due in large part to the losses experienced in the first quarter of 2001 on the Company's
consumer financing portfolio. During the first quarter of 2001, the Company's financing operations experienced an increase to the provision for loan losses on finance receivables,

13

---

resulting in a $75 million operating loss. In addition, while continuing to provide customer financing, the Company made the decision to sell the substantial balance of its remaining portfolio.
As a result of that decision, the Company recorded an additional charge of $100 million in the first quarter of 2001 to reduce the carrying value of those receivables to their estimated net
realizable value. Excluding the effects of the consumer finance portfolio, gross profit in the first quarter of 2001 and first six months of 2001 would have been $372 million and
$653 million or 18.5% of net sales and 18.6% of net sales, respectively, as compared to the 18.7% in the second quarter of 2001. Excluding the effects of the consumer loan portfolio, the
year-over-year comparisons of gross profit percentage are impacted primarily by the competitive pricing environment noted above. As for the sequential comparison of the second quarter of 2001 to the
first quarter of 2001, the gross profit percentage was positively affected by cost declines and the reduction of revenue from ISP at the point of sale, as described above, both of which offset the
discounting effect of the Gateway Guarantee. Management expects that margin pressures will continue for the balance of 2001 given anticipated weak consumer demand and competitive actions taken by the
Company.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (SG&A) in the second quarter and first six months of 2001 totaled $334 million and $1.1 billion, as
compared to $336 million and $668 million during the same periods of 2000. During the first quarter of 2001, the Company approved a restructuring plan which, among other things, has
reduced its workforce, closed certain store locations, consolidated facilities, redefined its information technology strategy, and exited certain other activities. Pre-tax charges of
$390 million in the first quarter of 2001 and $24 million in the second quarter of 2001 were recorded to SG&A to provide for these actions and other related items. See Note 10 to
Consolidated Financial Statements included herein. The strategic decisions made during the first quarter of 2001 are expected to result in additional pre-tax charges of $10 million
in the third quarter of 2001.

Excluding
the restructuring and other activities noted above, SG&A expense would have been $309 million or 20.6% of net sales during the second quarter of 2001 compared with
$336 million or 15.2% of net sales in the second quarter of 2000 and $383 million or 18.8% of net sales in the first quarter of 2001, calculated on a consistent basis. This decline in
SG&A expense, in the second quarter of 2001 as compared to the first quarter of 2001, is the result of a combination of the restructuring decisions made in the first quarter of 2001 and variable cost
declines associated with lower sales volume, as well as other cost reduction efforts.

In
July 2001, the Company announced that it is dramatically accelerating the implementation of its strategy that involves transforming the Company from a traditional
manufacturer of PCs to a leading provider of personalized technology solutions by better leveraging Gateway's existing retail footprint, its powerful brand and its
beyond-the-box solutions leadership. This acceleration will start immediately with the consolidation of the Company's U.S. Consumer and Business operating units into one U.S.
Markets organization and the formation of a new Solutions Group. In addition, the Company announced a new go-to-market model that is based on a structure the Company piloted in
five U.S. markets during the second quarter of 2001. As part of this shift, Gateway will turn its U.S. retail locations into local
technology resource centers, serving as hubs for cross-functional sales, service and marketing teams that will provide customers with unparalleled personalization and local service and support. It is
estimated that the costs associated with implementing this consolidation and restructuring would range from $15 to $20 million and will be accrued for in the third quarter of 2001 as a special
charge, in addition to the special charges relating to restructuring decisions announced in the first quarter of 2001. Management expects that these actions, as well as the restructuring activities
discussed above, will decrease SG&A expenses below levels that would otherwise have been experienced in future periods.

14

---

As part of its effort to align the Company and its cost structure against this accelerated strategic shift, the Company is considering additional measures that could result in a
significant restructuring of its worldwide operations and administrative functions.

Operating Income (Loss)

Operating loss for the second quarter and six months ended June 30, 2001 was $53 million and $629 million, respectively, compared to
operating income of $164 million and $350 million, respectively, for the same periods in 2000. The operating loss for the first six months of 2001 resulted principally from the
restructuring and other special charges and the loss from the consumer financing operations noted above. Excluding the restructuring and other special charges described above, the Company had an
operating loss of approximately $29 million in the second quarter of 2001 compared to operating income of $164 million in the second quarter of 2000.

The
consumer segment had operating income of $28 million in the second quarter of 2001 compared to $145 million in the same period of 2000 and an operating loss of
$4 million in the first six months of 2001 as compared to operating income of $317 million in the first six months of 2000. Business segment operating income was $59 million in
the second quarter of 2001 compared to $112 million in the same period of 2000 and $121 million in the first six months of 2001 compared to $199 million in the first six months of
2000. Internationally, the Company had an operating loss of $31 million in the second quarter of 2001 compared to operating income of $5 million in the same period of 2000 and an
operating loss of $58 million in the first six months of 2001 compared to operating income of $20 million in the first six months of 2000. Non-segment operating losses for
2001 include restructuring and other special charges not allocated to the segments and totaled $109 million and $689 million in the second quarter of 2001 and first six months of 2001,
compared to $99 million and $185 million, respectively, during the same periods of 2000. Operating income for the segments includes SG&A expenses directly attributable to the segment.
Costs excluded from the segments primarily consist of general and administrative expenses that are managed on a corporate-wide basis.

Other Income (Loss), net

Other income (loss), net, consists primarily of income from the consumer financing portfolio held for sale, interest income and expense, gains and losses from
the sale of investments, charges for other than temporary declines of investments and foreign exchange transaction gains and losses. Other income (loss), net, resulted in income of $23 million
during the second quarter of 2001 and a loss of $15 million for the first six months of 2001, as compared to income of $20 million and $37 million, respectively, in the same
periods of 2000. During the first quarter of 2001, the Company recorded a $43 million charge to write down the carrying value of securities and a long-term receivable associated
with a strategic restructuring decision. During the second quarter of 2001, the Company recorded a $20 million write down of an investment, offset by income of $23 million associated
with the consumer financing portfolio held for sale.

Pre-tax Income (Loss)

The pre-tax loss for the second quarter and first six months of 2001 was $31 million and $645 million, respectively, compared to
pre-tax income of $183 million and $387 million for the same periods of 2000. Excluding the $24 million of restructuring and other charges discussed above which are
included in SG&A, the $20 million write down of an investment included in other income (loss), net, and $23 million of income associated with the consumer financing portfolio held for
sale, the Company's pre-tax loss would have been $9 million in the second quarter of 2001 as compared to $6 million in the first quarter of 2001, calculated on a consistent
basis.

15

---

Income Taxes

The Company recorded a tax benefit of $10 million or 32% for the second quarter of 2001 and a tax benefit of $145 million or 22% for the first
six months of 2001. This tax benefit for the first six months of 2001 is net of a tax assessment in a foreign subsidiary and an increase in the deferred tax valuation allowance for certain tax
carryover items principally related to the Company's foreign operations. The change in the valuation allowance was the result of management's assessment that the realization of these carryover items
was no longer more likely than not based on the Company's international restructuring activities. The estimated effective tax rate for the year is 22%, including the items discussed above, with the
balance of the year estimated at 32%. Excluding these items, the effective tax rate for the year 2001 would have been 32% compared to 38% for 2000. This lower effective tax rate is principally the
result of not recording any tax benefits associated with current year foreign operating losses.

Liquidity and Capital Resources

The following table presents selected financial statistics and information for the periods indicated:

Three Months Ended June 30,2001

2000(dollars in thousands)Cash and marketable securities

$
1,028,573

$
938,949Days of sales in accounts receivable


26


21Days inventory on hand


13


15Days in accounts payable


41


39Cash conversion cycle


(2
)

(3
)


At
June 30, 2001, the Company had cash and cash equivalents of $786 million and marketable securities of $242 million. The Company maintains an unsecured
committed credit facility with certain banks aggregating $300 million, consisting of a revolving line of credit facility and a sub-facility for letters of credit. As of
June 30, 2001, the revolving line of credit facility had no amounts outstanding. As a result of the Company's restructuring and other charges discussed more fully in Note 10, the Company
was not in compliance with a certain financial convenant of the credit facility during the second quarter for a period of time. The Company has obtained an appropriate amendment of this covenant.
Management believes the Company's current sources of working capital, including amounts available under existing credit facilities, will provide adequate flexibility for the Company's financial needs
for at least the next 12 months.

The
Company used $123 million in cash from operations during the six months of 2001, including $194 million of net loss adjusted for non-cash items. Other
significant factors affecting available cash include a decrease in inventory levels of $151 million and accounts receivable of $94 million, offset by a decrease in accounts payable and
other accrued liabilities of $333 million. The Company used approximately $139 million for the acquisition of new facilities, information systems and equipment and $112 million to
purchase marketable securities, net of proceeds. The Company generated $503 million from proceeds from the sale of finance receivables and used $28 million in originating finance
receivables, net of repayments while the Company received $200 million in connection with the investment agreement with AOL, for which the Company issued AOL a convertible senior note as a part
of the second of three planned closings. The Company also expects to sell most of the remaining consumer finance receivables portfolio during the third quarter of 2001 and generate cash as a result of
such sale. Management has made the decision to discontinue providing consumer financing to potential customers with lesser quality credit.

16

---

As a result of the restructuring plan described in the Note 10 to the accompanying Consolidated Financial Statements, the Company expects future cash outlays of
$53 million primarily for discontinuing certain retail operation and international restructuring. The total cash outlay is expected to be funded from existing cash balances and internally
generated cash flows from operations. Execution of the restructuring plan is anticipated to be substantially complete by the end of the third quarter of 2001.

As
more fully described above under the discussion of SG&A, in July 2001 the Company announced a consolidation and restructuring that will create its U.S. Markets and Solutions
Groups. It is estimated that the cost of implementing these actions will range from $15 to $20 million and any such cash related expenditures will be funded from existing cash balances and
internally generated cash flows.

Factors That May Affect Future Results

Factors that could impact the Company's business, consolidated financial position, results of operations and cash flows and cause future results to differ from
the Company's expectations include the following: competitive market conditions; the ability to transform the Company to a technology solutions provider and restructure its operations and cost
structure; risks of acquisitions, joint ventures and strategic alliances; component supply shortages; short product cycles; access to new technology; infrastructure requirements; risks of
international operations; foreign currency fluctuations; ability to grow in e-commerce business; risks of minority investments; risks of finance receivables; increased inventory costs;
changes in customer, product or geographic sales mix; as well as risks identified in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 and
other filings with the Securities and Exchange Commission.

The
Company has experienced, and may continue to experience, problems with respect to the size of its workforce and production facilities and the adequacy of its management
information and other systems, purchasing and inventory controls, and the forecasting of component part needs. These problems can result in high backlog of product orders, delays in customer support
response times and increased expense levels.

Short
product life cycles characterize the PC industry, resulting from rapid changes in technology and consumer preferences and declining product prices. The Company's
in-house engineering personnel work closely with PC component suppliers and other technology developers to evaluate the latest developments in PC-related technology. There can
be no assurance that the Company will continue to have access to or the right to use new technology or will be successful in incorporating such new technology in its products or features in a timely
manner.

During
the first quarter of 2001, management announced a number of strategic decisions and restructuring activities that curtailed or modified certain existing activities with a
resulting decrease in revenue related to such activities. There can be no assurance that the Company will be able to offset this reduction in its revenue with increased revenue from other business
activities and that accordingly, there will not be an impact on results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There has not been a material change in the Company's exposure to foreign currency risks since December 31, 2000.

17

---



II. OTHER INFORMATION

Item 1.Legal Proceedings

See Note 9 to the unaudited condensed consolidated financial statements which is incorporated by reference.

Item 6.Exhibits and Reports on Form 8-K

Exhibit
No.

Description of Exhibits10.10

Gateway, Inc. Management Incentive Plan, as amended (filed herewith)


No
Reports on Form 8-K were filed by the Company during the quarter ended June 30, 2001.

18

---



SIGNATURE

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.

|                    |  | GATEWAY, INC.
|------------------- |  | -------------
|Date: July 23, 2001 |  | By:          
|                    |  | By           

19

---

INDEX TO EXHIBITS

|Exhibit
No. |  |                                                                     
|----------- |  | --------------------------------------------------------------------
|10.10       |  | Gateway, Inc. Management Incentive Plan, as amended (filed herewith)

---

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