<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   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, 1999

                                      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

                                 GATEWAY, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

          DELAWARE                                          42-1249184
(STATE OR OTHER JURISDICTION OF                          (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                         IDENTIFICATION NO.)

                            4545 TOWNE CENTRE COURT
                         SAN DIEGO, CALIFORNIA  92121
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)

      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 799-3401


    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 August 9, 1999, there were 156,612,356 shares of the Common Stock of
the Company, $.01 par value per share, outstanding. As of August 9, 1999, there
were no shares of the Company's Class A Common Stock, $.01 par value per share,
outstanding.
<PAGE>

                           I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                                 GATEWAY, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
           FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
                   (in thousands, except per share amounts)
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED JUNE 30,   SIX MONTHS ENDED JUNE 30,
                                                  ---------------------------   -------------------------
<S>                                               <C>            <C>            <C>           <C>
                                                      1998           1999           1998          1999
                                                  ----------     ----------     ----------    ----------
Net sales                                         $1,618,909     $1,912,109     $3,346,837    $4,015,520
Cost of goods sold                                 1,285,221      1,490,723      2,676,655     3,143,630
                                                  ----------     ----------     ----------    ----------
      Gross profit                                   333,688        421,386        670,182       871,890
Selling, general and administrative expenses         249,699        298,463        476,992       608,159
                                                  ----------     ----------     ----------    ----------
      Operating income                                83,989        122,923        193,190       263,731
Other income, net                                     10,917         16,491         20,265        31,275
                                                  ----------     ----------     ----------    ----------
      Income before income taxes                      94,906        139,414        213,455       295,006
Provision for income taxes                            34,166         50,189         76,844       106,202
                                                  ----------     ----------     ----------    ----------
      Net income                                  $   60,740     $   89,225     $  136,611    $  188,804
                                                  ==========     ==========     ==========    ==========
Share and per share information:
      Net income per share:
           Basic                                  $     0.39     $     0.57     $     0.88    $     1.21
                                                  ==========     ==========     ==========    ==========
           Diluted                                $     0.38     $     0.56     $     0.86    $     1.18
                                                  ==========     ==========     ==========    ==========
      Weighted average shares outstanding:
           Basic                                     155,427        156,443        154,990       156,470
                                                  ==========     ==========     ==========    ==========
           Diluted                                   158,887        160,157        158,231       160,377
                                                  ==========     ==========     ==========    ==========
</TABLE>

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

                                       2
<PAGE>

                                 GATEWAY, INC.
                          CONSOLIDATED BALANCE SHEETS
                      DECEMBER 31, 1998 AND JUNE 30, 1999
              (in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,             JUNE 30,
                                                                         1998                    1999
                                                                      ------------            ----------
ASSETS                                                                                        (unaudited)
<S>                                                                   <C>                     <C>
Current assets:
     Cash and cash equivalents                                        $ 1,169,810              $ 1,060,920
     Marketable securities                                                158,657                  167,399
     Accounts receivable, net                                             558,851                  584,882
     Inventory                                                            167,924                  121,451
     Other                                                                172,944                  321,841
                                                                      -----------              -----------
          Total current assets                                          2,228,186                2,256,493
Property, plant and equipment, net                                        530,988                  624,185
Intangibles, net                                                           65,944                   59,693
Other assets                                                               65,262                  127,213
                                                                      -----------              -----------
                                                                      $ 2,890,380              $ 3,067,584
                                                                      ===========              ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Notes payable and current maturities of long-term obligations    $    11,415              $     4,788
     Accounts payable                                                     718,071                  711,217
     Accrued liabilities                                                  415,265                  466,511
     Accrued royalties payable                                            167,873                  162,160
     Other current liabilities                                            117,050                  111,147
                                                                      -----------              -----------
          Total current liabilities                                     1,429,674                1,455,823
Long-term obligations, net of current maturities                            3,360                    1,973
Warranty and other liabilities                                            112,971                  113,552
                                                                      -----------              -----------
          Total liabilities                                             1,546,005                1,571,348
                                                                      -----------              -----------
Contingencies (Note 5)

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, 220,000 and 1,000,000 shares
       authorized in 1998 and 1999, respectively;
       156,569 shares and 157,325 shares issued,
       in 1998 and 1999, respectively                                       1,566                    1,573
     Additional paid-in capital                                           365,986                  386,481
     Retained earnings                                                    980,908                1,169,712
     Treasury stock                                                            --                  (54,888)
     Accumulated other comprehensive income                                (4,085)                  (6,642)
                                                                      -----------              -----------
          Total stockholders' equity                                    1,344,375                1,496,236
                                                                      -----------              -----------
                                                                      $ 2,890,380              $ 3,067,584
                                                                      ===========              ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

                                       3
<PAGE>

                                 GATEWAY, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
                                (in thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                      SIX MONTHS ENDED JUNE 30,
                                                                      -------------------------
                                                                          1998           1999
                                                                      ------------ ------------
Cash flows from operating activities:
<S>                                                                   <C>            <C>
    Net Income                                                        $ 136,611      $  188,804
    Adjustments to reconcile net income to net
      cash provided by operating activities:
            Depreciation and amortization                                49,652          65,256
            Provision for uncollectible accounts receivable               1,923           6,564
            Deferred income taxes                                       (26,412)        (25,725)
            Other, net                                                      695             518
            Changes in operating assets and liabilities:
                Accounts receivable                                     (19,584)        (32,594)
                Inventory                                                94,400          46,472
                Other assets                                              1,045         (29,900)
                Accounts payable                                         33,942          (6,102)
                Accrued liabilities                                      50,329          51,687
                Accrued royalties                                         1,809          (5,713)
                Other current liabilities                                 3,182           9,363
                Other liabilities                                        (1,492)            581
                                                                      ---------      ----------
                    Net cash provided by operating activities           326,100         269,211
                                                                      ---------      ----------
Cash flows from investing activities:
    Capital expenditures                                                (78,630)       (151,833)
    Investment in unconsolidated affiliate                                    -         (77,726)
    Purchases of available-for-sale securities                          (99,248)        (82,739)
    Proceeds from maturity of held-to-maturity securities                11,864          73,787
    Proceeds from sales of available-for-sale securities                 33,898               -
    Other investments                                                    (1,145)        (78,616)
                                                                      ---------      ----------
                    Net cash used in investing activities              (133,261)       (317,127)
                                                                      ---------      ----------
Cash flows from financing activities:
    Purchase of treasury stock                                                -         (70,784)
    Principal payments on long-term obligations and notes payable        (4,294)         (8,015)
    Stock options exercised                                              18,918          21,133
                                                                      ---------      ----------
        Net cash provided by (used in) financing activities              14,624         (57,666)
Foreign exchange effect on cash and cash equivalents                     (1,456)         (3,308)
                                                                      ---------      ----------
Net increase in cash and cash equivalents                               206,007        (108,890)
Cash and cash equivalents, beginning of period                          593,601       1,169,810
                                                                      ---------      ----------
Cash and cash equivalents, end of period                              $ 799,608      $1,060,920
                                                                      =========      ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

                                       4
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL:

     The accompanying unaudited consolidated financial statements of Gateway,
Inc. (the "Company") as of June 30, 1999 and for the three and six months ended
June 30, 1998 and 1999 have been prepared on the same basis as the audited
consolidated financial statements for the year ended December 31, 1998 and, in
the opinion of management, reflect all adjustments (consisting of normal
recurring adjustments) necessary to fairly state the consolidated financial
position, and the consolidated results of operations and cash flows for the
interim period.  The results for the interim period 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, 1998, which are included in the Company's 1998 Annual
Report to the Securities and Exchange Commission on Form 10-K.  The preparation
of the consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities, and the reported amounts of revenues and expenses during
the reported period.  Actual results could differ from those estimates.

2. COMPREHENSIVE INCOME:

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

     Comprehensive income for the three and six month periods ended June 30,
1998 and 1999 was as follows:

<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED        SIX MONTHS ENDED
                                                      JUNE 30,                 JUNE 30,
                                               ----------------------------------------------
                                                 1998         1999        1998         1999
                                               --------     --------    --------     --------
                                                                (in thousands)
                                                                 (unaudited)

COMPREHENSIVE  INCOME:
<S>                                            <C>          <C>         <C>          <C>
Net income                                     $ 60,740     $ 89,225    $136,611     $188,804
Foreign currency translation                     (1,621)        (510)     (1,873)      (2,556)
Unrealized gain (loss) on available-for-sale
  securities                                        (34)        (359)        154           (1)
                                               --------     --------    --------     --------
Total comprehensive income                      $59,085     $ 88,356    $134,892     $186,247
                                               ========     ========    ========     ========
</TABLE>

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.

                                       5
<PAGE>

     The following table sets forth a reconciliation of shares used in the
computation of basic and diluted earnings per share.

<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED        SIX MONTHS ENDED
                                                      JUNE 30,                 JUNE 30,
                                               ----------------------------------------------
                                                 1998         1999        1998         1999
                                               --------     --------    --------     --------
                                                                (in thousands)
                                                                 (unaudited)

<S>                                            <C>          <C>         <C>          <C>
Net income for basic and diluted
  earnings per share                          $ 60,740     $ 89,225    $136,611     $188,804
                                              ========     ========    ========     ========
Weighted average shares for basic
  earnings per share                           155,427      156,443     154,990      156,470
Dilutive effect of stock options                 3,460        3,714       3,241        3,907
                                              --------     --------    --------     --------
Weighted average shares for diluted
  earnings per share                           158,887      160,157     158,231      160,377
                                              ========     ========    ========     ========
</TABLE>
4. SELECTED BALANCE SHEET INFORMATION:

                                              DECEMBER 31,  JUNE 30,
                                                 1998         1999
                                              -----------  -----------
                                                           (unaudited)
                                                   (in thousands)
Accounts receivable, net:
   Accounts receivable                        $573,799     $601,136
   Less allowance for uncollectible accounts   (14,948)     (16,254)
                                              ---------    --------
                                              $558,851     $584,882
                                              ========     ========
Inventory:
  Components and subassemblies                $155,746     $118,075
  Finished goods                                12,178        3,376
                                              ---------    --------
                                              $167,924     $121,451
                                              ========     ========

5. CONTINGENCIES:

     The Company is a party to various lawsuits and administrative proceedings
arising in the ordinary course of its 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 adversely affect the Company's business, financial
position, results of operations or cash flows.

                                       6
<PAGE>

6. INVESTMENT IN UNCONSOLIDATED AFFILIATE:

     During the first quarter of 1999, the Company purchased a 19.9% interest in
NECX Direct, LLC, an on-line e-commerce computer peripheral retailer.  The
purchase price of approximately $77.6 million includes a two year option to
acquire the remaining 80.1% interest for additional consideration.  The
investment is being accounted for using the cost method.

7. STOCK REPURCHASE PROGRAM:

     During the first half of 1999, the Company repurchased 1,076,765 shares of
common stock. Of the shares repurchased 236,265 were reissued upon the exercise
of employee stock options. The Company is currently authorized to repurchase up
to the lesser of 10,000,000 shares or $250 million of its available common
stock.

8. SEGMENT DATA:

     The Company evaluates the performance of its consumer and business segments
based on segment sales and operating income and does not include segment assets
or other income and expense items for management reporting purposes.  Operating
income for these segments includes selling, general, and administrative expenses
and other overhead charges directly attributable to the segment and excludes
certain expenses managed outside the reportable segments.  Costs excluded from
the consumer and business segments primarily consist of corporate marketing
costs and other general and administrative expenses that are separately managed.

     The following table sets forth summary information by segment:

<TABLE>
<CAPTION>
                             THREE MONTHS ENDED                SIX MONTHS ENDED
                                   JUNE 30,                        June 30,
                         ---------------------------      --------------------------
                             1998            1999            1998             1999
                         ----------       ----------      ----------      ----------
                                            (in thousands)
                                              (unaudited)
<S>                      <C>             <C>              <C>             <C>
Net sales:
   Consumer              $  710,764      $  902,655       $1,613,535       $2,114,428
   Business                 908,145       1,009,454        1,733,302        1,901,092
   Non-segment                    -               -                -                -
                         ----------      ----------       ----------       ----------
   Consolidated          $1,618,909      $1,912,109       $3,346,837       $4,015,520
                         ==========      ==========       ==========       ==========
Operating income:
   Consumer              $   57,327      $   99,493       $  161,701       $  258,442
   Business                 156,811         168,669          288,001          316,430
   Non-segment             (130,149)       (145,239)        (256,512)        (311,141)
                         ----------      ----------       ----------       ----------
   Consolidated          $   83,989      $  122,923       $  193,190       $  263,731
                         ==========      ==========       ==========       ==========
</TABLE>

                                       7
<PAGE>

9. SUBSEQUENT EVENT:

     On August 9, 1999, the Company announced that its Board of Directors
approved a two-for-one common stock split to be effected in the form of a stock
dividend.  The shares will be distributed on or about September 7, 1999 to
shareholders of record as of August 20, 1999.  Share and per share data for all
periods presented herein have not been restated to reflect the two-for-one
common stock split.

                                       8
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

     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.  There are many factors that affect the Company's
business and its results of operation, 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:

<TABLE>
<CAPTION>
                                     THREE MONTHS ENDED                      SIX MONTHS ENDED
                                          JUNE 30,                                JUNE 30,
                              ---------------------------------    ------------------------------------
                                  1998      CHANGE       1999         1998        CHANGE        1999
                              ----------    ------   ----------    ----------     ------     ----------
<S>                           <C>           <C>      <C>           <C>            <C>        <C>
                                                     (dollars in thousands)

Net sales                     $1,618,909    18.1%    $1,912,109    $3,346,837     20.0%      $4,015,520
Gross profit                     333,688    26.3%       421,386       670,182     30.1%         871,890
  Percentage of net sales           20.6%                  22.0%         20.0%                     21.7%
Selling, general and
  administrative expenses        249,699    19.5%       298,463       476,992     27.5%         608,159
  Percentage of net sales           15.4%                  15.6%         14.3%                     15.2%
Operating income                  83,989    46.4%       122,923       193,190     36.5%         263,731
  Percentage of net sales            5.2%                   6.4%          5.8%                      6.6%
Net income                    $   60,740    46.9%    $   89,225       136,611     38.2%      $  188,804
</TABLE>

Net Sales
---------

     Consolidated net sales rose to $1.9 billion for the second quarter of 1999
and to $4.0 billion for first six months of 1999.  This represents increases of
18% and 20%, respectively, over the comparable periods of 1998 and a decrease of
9% from the first quarter of 1999 to the second quarter of 1999 due to seasonal
trends in consumer sales.  For the second quarter of 1999, consumer segment
sales were $0.9 billion and business segment sales were $1.0 billion, which
represented respective increases of 27% and 11% over the second quarter of 1998.
For the first half of 1999, consumer segment sales were $2.1 billion and
business segment sales were $1.9 billion, which represented respective increases
of 31% and 10% over the comparable period of 1998.  For the first quarter of
1999 to the second quarter of 1999, consumer segment sales declined 26% and
business segment sales increased 13%.

                                       9
<PAGE>

     The increased consolidated net sales for the second quarter and first half
of 1999 over the comparable periods of 1998 were primarily driven by continued
strong unit growth in the United States and continued momentum in the Asia
Pacific region ("APAC").  Unit shipments worldwide grew to 1,003,900 in the
second quarter of 1999 and 2,089,000 for the first half of the year.  This
represented increases of 36% and 39%, respectively, over the comparable periods
of 1998.  Increases in unit sales were attributed to several key elements such
as the Company's unique multi-channel strategy, including sales from phone, Web,
and Gateway Country(SM) stores, continued focus on delivering superior
products and services, and the Your:)Ware(SM) consumer and business programs.

     The effect of increased unit sales on consolidated net revenue for the
second quarter and first half of 1999 were partially offset by declines in
average unit prices (AUPs) of 13% and 14%, respectively, compared to the
comparable periods of 1998.  AUPs continued on a declining trend in the second
quarter of 1999 due to component cost decreases and the Company's broadening of
its product offerings in the sub $1,000 PC market.  This has been partially
offset by an increase in non-system revenue. The Company expects the
industry trend of declining AUPs to continue and intends to mitigate this by
diversifying its revenue stream with software bundles, internet service,
financing and other service offerings.

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

<TABLE>
<CAPTION>

                       THREE MONTHS ENDED                                    SIX MONTHS ENDED
                            JUNE 30,                                             JUNE 30,
                  ---------------------------------------       --------------------------------------------
                    1998            CHANGE        1999             1998              CHANGE         1999
                  ---------       ----------   ----------       ----------        -----------    ----------
<S>               <C>             <C>          <C>              <C>                <C>            <C>
                                                (dollars in thousands)

Net sales
  United States   $1,371,291       17.8%       $1,614,962       $2,832,893          20.2%         $3,406,479
  Europe             130,682      (14.2%)         112,192          293,690         (13.5%)           253,969
  Asia Pacific       116,936       58.2%          184,955          220,254          61.2%            355,072
                  ----------      -----        ----------       ----------         -----          ----------
  Consolidated    $1,618,909       18.1%       $1,912,109       $3,346,837          20.0%         $4,015,520
                  ==========      =====        ==========       ==========         =====          ==========
</TABLE>

     In the United States unit shipments rose 36% in the second quarter of 1999
and 39% for the first half of 1999 over the comparable periods of 1998.  The
APAC region continued to achieve significant increases in unit shipments with
growth of 77% and 86% for the second quarter and first half of 1999,
respectively, over the comparable periods of 1998 while increasing 6% in the
second quarter of 1999 compared to the first quarter of 1999.   Unit shipments
in the European region  ("EMEA") were flat in the second quarter and first half
of 1999 versus the comparable periods of 1998 and decreased 19% in the second
quarter of 1999 compared to the first quarter of 1999.

GROSS PROFIT
-------------

     Gross profit in the second quarter of 1999 increased 26% over the
comparable period of 1998 to $421.4 million and decreased 6% compared to the
first quarter of 1999. For the first half of 1999, gross profit increased 30% to
$871.9 million over the comparable period of 1998. Margin productivity was
driven by an increase in non-system income, pricing discipline, and focused
vendor management. As a percentage of sales, gross profit for the second quarter
of 1999 was 22.0%, up from 20.6% in the second quarter of 1998 and 21.4% in the
first quarter of 1999, representing the sixth consecutive quarter of year-over
year gross profit improvement. As a percentage of sales, gross profit for the
first six months of 1999 was 21.7%, up from 20.0% in the comparable period of
1998.

                                       10
<PAGE>

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------

     Selling, general & administrative ("SG&A") expenses in the second quarter
of 1999 increased 20% to $298.5 million over the second quarter of 1998, while
decreasing 4% compared to the first quarter of 1999. The increase over the
second quarter of 1998 is attributable to increasing internet capabilities,
expanding systems infrastructure, the expansion of Gateway Country(SM) stores
and international expansion. As a percentage of sales, SG&A expenses were 15.6%
for the second quarter of 1999, compared to 15.4% and 14.7% in the second
quarter of 1998 and the first quarter of 1999, respectively. For the first half
of 1999, SG&A expenses increased 28% to $608.2 million over the comparable
period of 1998 while increasing from 14.3% to 15.2% as a percentage of sales.

OPERATING INCOME
----------------

     Due to the strong unit growth and gross margin efficiencies discussed above
operating income increased 46% to $122.9 million in the second quarter of 1999
compared to the second quarter of 1998.  As a percentage of sales operating
income increased to 6.4% in the second quarter of 1999 from 5.2% in the second
quarter of 1998 and decreased from 6.7% in the first quarter of 1999.  For the
first half of 1999, operating income increased 36.5% to $263.7 million over the
comparable 1998 period, while as a percentage of sales, operating income
increased to 6.6% from 5.8% during the same periods.  Operating income for the
consumer and business segments in the second quarter of 1999 was $99.5 million
and $168.7 million, respectively, while operating expenses not allocated to a
segment were $145.2 million. For the first half of 1999, operating income for
the consumer and business segments was $258.4 and $316.4, respectively, while
operating expenses not allocated to a segment were $311.1 million.  Operating
income for the consumer and business segments includes SG&A expenses and other
overhead charges directly attributable to the segment and excludes certain
expenses managed outside the reportable segments.  Costs excluded from the
consumer and business segments primarily consist of corporate marketing costs
and other SG&A expenses that are separately managed.

OTHER INCOME
------------

     Other income, net includes other income net of expenses, such as interest
income and expense and foreign exchange transaction gains and losses.  Other
income, net increased to $16.5 million in the second quarter of 1999 from $10.9
million in the second quarter of 1998 and $14.8 million in the first quarter of
1999.  For the first half of 1999, other income, net increased to $31.3 million
from $20.3 million reported in the comparable 1998 period.  The increases were
primarily due to the additional interest income generated by increases in cash
balances and marketable securities.

INCOME TAXES
------------

     The Company's annualized effective tax rate was 36.0% for the second
quarter and the first half of 1999, flat compared to the comparable periods of
1998 and first quarter of 1999.

                                       11
<PAGE>

Liquidity and Capital Resources
-------------------------------

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

<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED JUNE 30,
                                         ---------------------------
                                            1998            1999
                                         -----------     -----------
<S>                                       <C>            <C>
                                            (dollars in thousands)

Cash and marketable securities            $891,851       $1,228,319
Days of sales in accounts receivable            29               28
Inventory turnover                              30               42
Days in accounts payable                        37               43
</TABLE>

     At June 30, 1999, the Company had cash and cash equivalents of $1.1
billion, marketable securities of $167.4 million and an unsecured committed
credit facility with certain banks of $225 million, consisting of a revolving
line of credit facility and a sub-facility for letters of credit.  At June 30,
1999, no amounts were outstanding under the revolving line of credit.
Approximately $2.0 million was committed to support outstanding standby letters
of credit.

     The Company generated $269.2 million in cash from operations during the
first half of 1999, including $235.4 million of net income adjusted for non-cash
items.  Decreases in inventory levels and days sales in accounts receivable, and
increase in days purchases in accounts payable balances are attributable to the
Company's increased focus on working capital management.  The Company used
approximately $151.8 million in cash for facilities, equipment, and software and
$9.0 million to purchase investments in marketable securities, net of proceeds
of securities sold.

     During the first quarter of 1999, the Company purchased a 19.9% interest in
NECX Direct, LLC, an on-line e-commerce computer peripheral retailer.  The
purchase price of approximately $77.7 million includes a two year option to
acquire the remaining 80.1% interest for additional consideration.

     At June 30, 1999, the Company had long-term indebtedness and capital lease
obligations of approximately $6.8 million.  These obligations relate primarily
to the Company's expansion of international operations and its investments in
equipment and facilities.

     The Company anticipates that it will retain all earnings in the foreseeable
future for development of its business and will not distribute earnings to its
stockholders as dividends.

     On April 30, 1999, the Company filed a universal shelf registration
statement which contemplates that the Company may from time to time sell up to
$1.0 billion of debt or equity securities, which will provide the Company with
greater flexibility to respond to acquisition and market opportunities.

     Management believes the Company's current and anticipated sources of
working capital, including net cash provided by operating activities and amounts
available under existing credit facilities, will provide adequate flexibility
for the Company's financial needs for at least the next 12 months.

                                       12
<PAGE>

NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------

     In June of 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which is
effective for fiscal years beginning after June 15, 2000.  The objective of the
statement is to establish accounting and reporting standards for derivative
instruments and hedging activities.  The Company uses foreign currency forward
contracts, a derivative instrument, to hedge foreign currency transactions and
anticipated foreign currency transactions.  The adoption of this new accounting
pronouncement is not expected to be material to the Company's consolidated
financial position or results of operations.

YEAR 2000
---------

     The "Year 2000" issue has arisen because many existing computer programs
and chip-based embedded technology systems use only the last two digits to refer
to a year, and therefore, do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications could
fail or create erroneous results.

     STATE OF READINESS: The Company has adopted a seven-step process toward
Year 2000 readiness consisting of the following: (i) awareness: fostering an
understanding of and commitment to the problem and its potential risks;  (ii)
inventory: identifying and locating systems and technology components that may
be affected; (iii) assessment: reviewing these components for Year 2000
compliance and assessing the scope of potential Year 2000 issues; (iv) planning:
defining the technical solutions, labor and work plans necessary for each
affected system; (v) remediation/replacement: completing the programming to
upgrade or replace the problem software or hardware; (vi) testing and compliance
validation: conducting testing followed by independent validation by a separate
internal verification team; and (vii) implementation: placing the corrected
systems and technology back into the business environment with a management
monitoring system to ensure ongoing compliance.

     The Company has grouped its internal systems and technology into the
following three categories for purposes of Year 2000 compliance: (i) information
resource applications and technology consisting of enterprise-wide systems
supported by the Company's centralized information technology organization (IT);
(ii) business processes consisting of hardware, software, and associated
computer chips as well as external vendors used in the operation of the
Company's core business functions; and (iii) building systems consisting of non-
IT equipment that use embedded computer chips such as elevators, automated room
key systems and HVAC equipment. The Company is prioritizing its efforts based on
the severity with which non-compliance would affect service, core business
processes or revenues, and whether there are viable, non-automated fallback
procedures (Mission Criticality).

     As of the end of the second quarter, the Company believes the Awareness and
Inventory phases are complete. For IT systems, the Company believes the
assessment, planning and remediation/replacement phases are over 90% complete
with testing and compliance validation complete for 85% of the inventory.  For
business processes and building systems, the Company believes the assessment and
planning phases are complete with remediation/replacement and testing and
compliance validation currently at 70%.  The Company plans to complete the
remediation/replacement and testing phases for its mission critical IT systems
during the third quarter of 1999 with the remaining portion of 1999 reserved for
unplanned contingencies and compliance validation and quality assurance.  For
mission critical business processes and building systems, the same level of
completion is targeted for October 1999.

                                       13
<PAGE>

     The Company is in Year 2000 compliance communications with its significant
third party suppliers, vendors and business partners. The Company is focusing
its efforts on the business interfaces most critical to its customer service,
core business processes and revenues, including those third parties that support
the most critical enterprise-wide IT systems, the Company's primary suppliers of
non-IT products, or provide the most critical payment processing functions.
Responses have been received from a majority of the third parties that comprise
this group.

     COSTS:  During the first half of 1999, the Company expensed incremental
costs of approximately $7.6 million related to the Year 2000 remediation
efforts, and has expensed $11.2 million on a life-to-date basis.  The current
total estimated cost to complete the Year 2000 remediation efforts is from $14
to $16 million, exclusive of upgrades to existing applications and
implementation of new systems.  Internal and external costs specifically
associated with modifying internal-use software for the Year 2000 will be
charged to expense as incurred.  All of these costs are being funded through
operating cash flows.

     YEAR 2000 CONTINGENCY PLANS: The Company has completed the review of its
existing contingency plans for potential modification to address specific Year
2000 issues as they arise and expects to continue this process during the next
two fiscal quarters.

     COMPANY PRODUCTS:  With respect to PC products sold to customers, for all
the Company hardware based on the Intel(R) family of Pentium processors
(Pentium(R), Pentium(R) Pro, Pentium II(R), Pentium(R)II Xeon(TM) and
Celeron(TM) processors) and using an operating system provided by the Company,
the Company warrants to customers that such systems sold after January 1, 1997,
will process dates correctly before, during and after January 1, 2000.  This
warranty applies to desktop, portable, Destination(R), and server products, and
it is governed by the terms and conditions outlined in the original system
warranty.  It does not include application software, or non-Company branded
external hardware peripherals such as printers, scanners and joysticks.  Because
the Company does not control the design of these products, it cannot ensure how
they access or calculate date information in the computer.  Certain hardware
sold before January 1, 1997 will require remediation or replacement to become
Year 2000 compliant. The Company may experience increased customer claims for
Year 2000 failures for these products and for failures resulting from software
or non-Company branded external hardware peripherals.  Additional information
concerning the Year 2000 issue and the Company's compliance program is available
on the Company's website at www.gateway.com/.

     RISKS OF THE COMPANY'S YEAR 2000 ISSUES: Based on current information, the
Company believes that the Year 2000 problem will not have a material adverse
effect on the Company, its consolidated financial position,  results of
operations or cash flows.  However, there are no assurances that Year 2000
remediation by the Company or third parties will be properly and timely
completed, and failure to do so could have a material adverse effect on the
Company, its business and its financial condition. The Company cannot predict
the effects that Year 2000 non-compliance would have on it, which would
ultimately depend on numerous uncertainties such as: (i) whether significant
third parties properly and timely address the Year 2000 issue; (ii) whether
broad-based or systemic economic failures may occur, and the severity and
duration of such failures, including loss of utility and/or telecommunications
services, and errors or failures in financial transactions or payment processing
systems such as credit cards; and (iii) whether the Company becomes the subject
of litigation or other proceedings regarding any Year 2000-related events and
the outcome of any such litigation or proceedings.

                                       14
<PAGE>

Factors That May Affect Future Results

     Factors that could impact the Company's results of operations, cash flows
or financial position and cause future results to differ from the Company's
expectations include the following: competitive market conditions;
infrastructure requirements; component supply shortages; short product cycles;
access to technology; risks of international expansion; foreign currency
fluctuations; credit risk of consumer loan accounts; the success of e-commerce;
risks of acquired businesses; increased inventory costs; changes in customer or
geographic sales mix; costs associated with the Year 2000 transition; general
domestic and international economic conditions; as well as risks identified in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998 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 work force 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.

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, 1998.

                                       15
<PAGE>

                             II.  OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS

     The Company is a party to various lawsuits and administrative proceedings
arising in the ordinary course of its 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, results of operations or cash flows.

ITEM 4.  SUBMISSION TO A VOTE OF SECURITY HOLDERS

     The Company's Annual Meeting of Stockholders was held on May 20, 1999.  At
the meeting stockholders voted on (i) the election of two Class III directors of
the Company to hold office until the annual meeting of stockholders of the
Company to be held in 2002 and until a successor is duly elected and qualified,
(ii) approval of an amendment to the Company's Amended and Restated Certificate
of Incorporation to change the Company's name to Gateway, Inc., (iii) approval
of an amendment to the Company's Amended and Restated Certificate of
Incorporation to increase the authorized number of shares of Common Stock, and
(iv) approval of an amendment to the Company's 1995 Employee Stock Purchase
Plan.

<TABLE>
<CAPTION>
                                                  Votes                   Votes                 Withheld/             Broker
                                                   For                    Against               Abstentions          Non-Votes
<C>   <S>                                    <C>                         <C>                      <C>                <C>
1.    Election of Directors
         George H. Krauss                      133,337,739               529,776
         Richard D. Snyder                     133,341,747               525,768

2.    Approval of amendment to
      Certificate of Incorporation to
      change name                              131,471,740               2,043,591                 352,184                 0

3.    Approval of amendment to
      Certificate of Incorporation to
      increase number of authorized
      shares of stock                          117,737,529               15,748,707                381,279                 0

4.    Approval of amendment to 1995
      Employee Stock Purchase Plan             131,241,884               2,224,874                 400,757                 0
</TABLE>

                                       16
<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

    (a)  EXHIBITS:

Exhibit
  No.                   Description of Exhibits
-------        -------------------------------------------------
 3.3           Certificate of Amendment to Amended and Restated Certificate of
               Incorporation of Gateway, Inc.
10.19          Gateway, Inc. 1995 Employee Stock Purchase Plan, as amended.
27.1           Financial Data Schedule, filed herewith.

    (b)  REPORTS ON FORM 8-K:

         No Reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1999.

                                       17
<PAGE>

                                   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:  August 16, 1999            By:  /s/ JOHN J. TODD
                                       ----------------
                                       John J. Todd
                                       Senior Vice President, Chief Financial
                                       Officer and Treasurer (authorized officer
                                       and chief accounting officer)

                                       18
<PAGE>

EXHIBIT
  No.                       INDEX TO EXHIBITS
-------      ------------------------------------------------
 3.3         Certificate of Amendment to Amended and Restated Certificate of
             Incorporation of Gateway, Inc.
10.19        Gateway, Inc. 1995 Employee Stock Purchase Plan, as amended.
27.1         Financial Data Schedule

                                       19