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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended September 30, 2003



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)



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|Delaware                                                       |  | 42-1249184                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



14303 Gateway Place

Poway, California 92064

(Address of principal executive offices, zip code)



Registrants telephone number, including area code: (858) 848-3401



---



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 ̈



Indicate by check mark whether the Registrant is an
accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes  x    No ̈



As of November 11, 2003 there
were 324,388,803 shares of the Common Stock of Gateway, $.01 par value per share, outstanding. As of November 11, 2003 there were no shares of Gateways Class A Common Stock, $.01 par value per share, outstanding.



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##### Table of Contents

GATEWAY, INC



FORM 10-Q



For the period ended September 30, 2003



Table of Contents



|           |  |                                                                                       |  | Page
|---------- |  | ------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                      
|Part I     |  | Financial Information                                                                 |  |     
|           |  |                                                                                      
|Item 1     |  | Financial Statements                                                                  |  |     
|           |  |                                                                                      
|           |  | Consolidated Condensed Statements of Operations                                       |  | 1   
|           |  |                                                                                      
|           |  | Consolidated Condensed Balance Sheets                                                 |  | 2   
|           |  |                                                                                      
|           |  | Consolidated Condensed Statements of Cash Flows                                       |  | 3   
|           |  |                                                                                      
|           |  | Notes to Consolidated Condensed Financial Statements                                  |  | 4   
|           |  |                                                                                      
|Item 2     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 19  
|           |  |                                                                                      
|Item 3     |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 34  
|           |  |                                                                                      
|Item 4     |  | Controls and Procedures                                                               |  | 34  
|           |  |                                                                                      
|Part II    |  | Other Information                                                                     |  |     
|           |  |                                                                                      
|Item 1     |  | Legal Proceedings                                                                     |  | 35  
|           |  |                                                                                      
|Item 6     |  | Exhibits and Reports on Form 8-K                                                      |  | 35  
|           | 
|Signatures |  | 36                                                                                   



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I.    FINANCIAL INFORMATION



|ITEM 1. |  | FINANCIAL STATEMENTS
|------- |  | --------------------



GATEWAY, INC.



CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS (Unaudited)

For the three and nine months ended September 30, 2003 and 2002

(in thousands, except per share amounts)



|                                             |  | Three Months EndedSeptember 30, |          |   | Nine Months EndedSeptember 30, |  
|-------------------------------------------- |  | ------------------------------- | -------- | - | ------------------------------ | -
|                                             |  | 2003                            |          |   | 2002                           |  
|Net sales                                    |  | $                               | 883,140  |   |                                | $
|Cost of goods sold                           |  |                                 | 794,938  |   |                                |  
|                                             |  |                                 |          |   |                                |  
|Gross profit                                 |  |                                 | 88,202   |   |                                |  
|Selling, general and administrative expenses |  |                                 | 229,504  |   |                                |  
|                                             |  |                                 |          |   |                                |  
|Operating loss                               |  |                                 | (141,302 | ) |                                |  
|Other income, net                            |  |                                 | 5,246    |   |                                |  
|                                             |  |                                 |          |   |                                |  
|Loss before income taxes                     |  |                                 | (136,056 | ) |                                |  
|Benefit for income taxes                     |  |                                 |         |   |                                |  
|                                             |  |                                 |          |   |                                |  
|Net loss                                     |  | $                               | (136,056 | ) |                                | $
|Preferred stock dividends and accretion      |  |                                 | (2,785   | ) |                                |  
|                                             |  |                                 |          |   |                                |  
|Net loss attributable to common stockholders |  | $                               | (138,841 | ) |                                | $
|                                             |  |                                 |          |   |                                |  
|Basic and diluted net loss per share         |  | $                               | (0.43    | ) |                                | $
|                                             |  |                                 |          |   |                                |  
|Weighted average shares outstanding:         |  |                                 |          |   |                                |  
|Basic and diluted                            |  |                                 | 324,116  |   |                                |  
|                                             |  |                                 |          |   |                                |  





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



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CONSOLIDATED CONDENSED BALANCE SHEETS

September 30, 2003 and December 31, 2002

(in thousands, except per share amounts)



|                                                                                                                                                                       |  | September 30,2003 |           |   | December 31,2002
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ----------------
|                                                                                                                                                                       |  | (unaudited)       |           |   |                 
|ASSETS                                                                                                                                                                 |  |                   |           |   |                 
|Current assets:                                                                                                                                                        |  |                   |           |   |                 
|Cash and cash equivalents                                                                                                                                              |  | $                 | 409,534   |   |                 
|Marketable securities                                                                                                                                                  |  |                   | 687,454   |   |                 
|Accounts receivable, net                                                                                                                                               |  |                   | 216,421   |   |                 
|Inventory                                                                                                                                                              |  |                   | 99,974    |   |                 
|Other, net                                                                                                                                                             |  |                   | 269,499   |   |                 
|                                                                                                                                                                       |  |                   |           |   |                 
|Total current assets                                                                                                                                                   |  |                   | 1,682,882 |   |                 
|Property, plant and equipment, net                                                                                                                                     |  |                   | 354,841   |   |                 
|Intangibles, net                                                                                                                                                       |  |                   | 16,310    |   |                 
|Other assets, net                                                                                                                                                      |  |                   | 26,086    |   |                 
|                                                                                                                                                                       |  |                   |           |   |                 
|                                                                                                                                                                       |  | $                 | 2,080,119 |   |                 
|                                                                                                                                                                       |  |                   |           |   |                 
|LIABILITIES AND EQUITY                                                                                                                                                 |  |                   |           |   |                 
|Current liabilities:                                                                                                                                                   |  |                   |           |   |                 
|Accounts payable                                                                                                                                                       |  | $                 | 346,404   |   |                 
|Accrued liabilities                                                                                                                                                    |  |                   | 247,762   |   |                 
|Accrued royalties                                                                                                                                                      |  |                   | 64,717    |   |                 
|Other current liabilities                                                                                                                                              |  |                   | 239,309   |   |                 
|                                                                                                                                                                       |  |                   |           |   |                 
|Total current liabilities                                                                                                                                              |  |                   | 898,192   |   |                 
|Long-term liabilities                                                                                                                                                  |  |                   | 148,907   |   |                 
|                                                                                                                                                                       |  |                   |           |   |                 
|Total liabilities                                                                                                                                                      |  |                   | 1,047,099 |   |                 
|                                                                                                                                                                       |  |                   |           |   |                 
|Contingencies (Note 6)                                                                                                                                                 |  |                   |           |   |                 
|Series C redeemable, convertible preferred stock, $.01 par value, $200,000 liquidation value, 50 shares authorized, issued and
outstanding                             |  |                   | 197,143   |   |                 
|                                                                                                                                                                       |  |                   |           |   |                 
|Stockholders equity:                                                                                                                                                  |  |                   |           |   |                 
|Series A convertible preferred stock, $.01 par value, $200,000 liquidation value, 50 shares authorized, issued and
outstanding                                         |  |                   | 200,000   |   |                 
|Preferred stock, $.01 par value, 4,900 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; 324,300 and 324,072 shares issued and outstanding at September 30, 2003
and December 31, 2002, respectively |  |                   | 3,243     |   |                 
|Additional paid-in capital                                                                                                                                             |  |                   | 734,047   |   |                 
|(Accumulated deficit) retained earnings                                                                                                                                |  |                   | (104,510  | ) |                 
|Accumulated other comprehensive income                                                                                                                                 |  |                   | 3,097     |   |                 
|                                                                                                                                                                       |  |                   |           |   |                 
|Total stockholders equity                                                                                                                                             |  |                   | 835,877   |   |                 
|                                                                                                                                                                       |  |                   |           |   |                 
|                                                                                                                                                                       |  | $                 | 2,080,119 |   |                 
|                                                                                                                                                                       |  |                   |           |   |                 



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



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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

For the nine months ended September 30, 2003 and
2002

(in thousands)



|                                                                                |  | Nine Months EndedSeptember 30, |         
|------------------------------------------------------------------------------- |  | ------------------------------ | --------
|                                                                                |  | 2003                           |         
|Cash flows from operating activities:                                           |  |                                |         
|Net loss                                                                        |  | $                              | (403,538
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                                |         
|Depreciation and amortization                                                   |  |                                | 132,168 
|Provision for doubtful accounts receivable                                      |  |                                | 8,961   
|Write-downs of property and equipment                                           |  |                                | 57,149  
|Loss on investments                                                             |  |                                | 393     
|Loss on sale of property and equipment                                          |  |                                | 6,052   
|Gain on settlement of an acquisition liability                                  |  |                                |        
|Other, net                                                                      |  |                                | 1,248   
|Changes in operating assets and liabilities:                                    |  |                                |         
|Accounts receivable                                                             |  |                                | (27,566 
|Inventory                                                                       |  |                                | (11,213 
|Other current assets                                                            |  |                                | 327,653 
|Accounts payable                                                                |  |                                | 67,849  
|Accrued liabilities                                                             |  |                                | (117,549
|Accrued royalties                                                               |  |                                | 8,033   
|Other current liabilities                                                       |  |                                | 21,634  
|                                                                                |  |                                |         
|Net cash provided by operating activities                                       |  |                                | 71,274  
|                                                                                |  |                                |         
|Cash flows from investing activities:                                           |  |                                |         
|Capital expenditures                                                            |  |                                | (57,718 
|Proceeds from principal payments of notes receivable                            |  |                                | 20,045  
|Proceeds from the sale of an investment                                         |  |                                |        
|Purchases of available-for-sale securities, net                                 |  |                                | (83,580 
|Proceeds from the sale of financing receivables                                 |  |                                |        
|                                                                                |  |                                |         
|Net cash used in investing activities                                           |  |                                | (121,253
|                                                                                |  |                                |         
|Cash flows from financing activities:                                           |  |                                |         
|Payments of preferred dividends                                                 |  |                                | (7,380  
|Stock options exercised                                                         |  |                                | 1,290   
|                                                                                |  |                                |         
|Net cash used in financing activities                                           |  |                                | (6,090  
|                                                                                |  |                                |         
|Net decrease in cash and cash equivalents                                       |  |                                | (56,069 
|Cash and cash equivalents, beginning of period                                  |  |                                | 465,603 
|                                                                                |  |                                |         
|Cash and cash equivalents, end of period                                        |  | $                              | 409,534 
|                                                                                |  |                                |         



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



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)



|1. |  | General:
|-- |  | --------



The accompanying unaudited consolidated condensed financial statements of Gateway, Inc. (Gateway) as of September 30, 2003 and for the three
and nine months ended September 30, 2003 and 2002 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2002 and, in the opinion of management, reflect all adjustments necessary to
fairly state the consolidated condensed financial position, results of operations and cash flows for the interim periods. All adjustments noted above 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 Gateways audited consolidated financial statements and notes thereto for the year ended
December 31, 2002, which are included in Gateways 2002 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (SEC).



Gateway is a direct marketer of personal computers (PCs), PC-related products and services and consumer electronics products and services.
Consumer electronics and PC-related products and services (CE/non-PC) consist of all products and services other than the PC, including but not limited to digital TVs, digital cameras and system and networking products and services.



The significant accounting policies used in the preparation of
the consolidated condensed financial statements of Gateway are as follows:



| | (a) |  | Basis of Presentation:
| | --- |  | ----------------------



The consolidated condensed financial statements include the accounts of Gateway and our majority owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated. Certain reclassifications have been made to prior years financial statements to conform to current year presentation. These reclassifications had no impact on previously reported net loss or
stockholders equity.



| | (b) |  | Use of Estimates:
| | --- |  | -----------------



The preparation of 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 the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates under different assumptions or conditions.



| | (c) |  | Cash and Cash Equivalents:
| | --- |  | --------------------------



Gateway considers all highly liquid debt instruments and money market funds with an original maturity of three months or less to be cash equivalents. The
carrying amount approximates fair value because of the short maturities of these instruments.



| | (d) |  | Marketable Securities and Long-Term Investments:
| | --- |  | ------------------------------------------------



Marketable securities consist of mutual funds, equity securities which are in the process of being liquidated, commercial paper and debt securities with
market values that approximate their amortized cost. Marketable securities are classified as available-for-sale and are adjusted to their fair market value using quoted market prices. Long-term investments, including publicly traded equity
securities, represent minority investments in companies having operations or technology in areas within or adjacent to Gateways strategic focus. Certain of the investments carry restrictions on immediate disposition. An investment in a public
company, which carried Rule 144 restrictions on disposition within one year, was classified as available-for-sale as Gateway expected to



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)

(Unaudited)



fully dispose of the investment within one year. This investment was adjusted to fair value each period through charges/credits to accumulated other
comprehensive income. Fair value was determined based on quoted market prices. Unrealized gains and losses are recorded as a component of accumulated other comprehensive income. Upon disposition of these investments, the specific identification
method is used to determine the cost basis in computing realized gains or losses. Declines in value that are considered to be other-than-temporary are reported in other income, net.



Gateway regularly monitors and evaluates the realizable value of our investments. When assessing the investments for
other-than-temporary declines in value, Gateway considers such factors as, among other things, how significant the decline in value is as a percentage of the original cost, how long the market value of the investment has been less than our original
cost, the performance of the investees stock price in relation to the stock price of its competitors within the industry and the market in general, analyst recommendations, any news that has been released specific to the investee and the
outlook for the overall industry in which the investee operates. Gateway also reviews the financial statements of the investee to determine if the investee is experiencing financial difficulties and considers new products/services that the investee
may have forthcoming that will improve its operating results. If events and circumstances indicate that a decline in the value of these assets has occurred and is other than temporary, Gateway records a charge to other income, net.



| | (e) |  | Inventory:
| | --- |  | ----------



Inventory, which is comprised of component parts, subassemblies and finished goods, is valued at the lower of first-in, first-out (FIFO) cost or market. Component parts and subassemblies consist of raw materials and
products other than the PC such as peripherals, software not included with the PC, accessories, consumer electronics and digital television products. On a quarterly basis, Gateway compares on a part by part basis, the amount of the inventory on hand
and under commitment with our latest forecasted requirements to determine whether write-downs for excess or obsolete inventory are required. Although the write-downs for excess or obsolete inventory reflected in Gateways consolidated condensed
balance sheets at September 30, 2003 and December 31, 2002 are considered adequate by Gateways management, there can be no assurance that these write-downs will prove to be adequate over time to cover ultimate losses in connection with
Gateways inventory.



| | (f) |  | Property, Plant and Equipment:
| | --- |  | ------------------------------



Property, plant and equipment are stated at cost. Depreciation is provided using the straight-line method over the assets estimated useful lives as
follows:



|                                |  | Estimated Useful Life (Years)
|------------------------------- |  | -----------------------------
|Office and Production Equipment |  | 1-7                          
|Furniture & Fixtures            |  | 7-10                         
|Internal Use Software           |  | 3-5                          
|Vehicles                        |  | 3                            
|Leasehold Improvements          |  | Lesser of 10 or Lease Life   
|Buildings                       |  | 35                           



Effective January 1,
2003, Gateway changed the accounting estimates related to depreciation for the estimated service lives for furniture and fixtures and leasehold improvements in our stores which were reduced to seven years. The change was based on an analysis of the
expected lease life of our existing stores. This change in estimate resulted in approximately $2.1 million and $9.1 million in additional depreciation expense for the third quarter and first nine months of 2003, respectively. The effects of this
change will also be present in future quarters until such time as the assets are fully depreciated.



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)

(Unaudited)



Effective July 1, 2003, Gateway changed the accounting estimates related to the estimated service
lives for certain information technology assets, which were reduced to 12 months. The change was based on an analysis of the expected lives of some of our information technology assets that was related to our outsourcing initiatives. This change in
estimate resulted in approximately $6.8 million in additional depreciation expense for the third quarter of 2003 discussed in Note 7 . The effects of this change will also be present in future quarters until such time as the assets are fully
depreciated.



Upon sale or retirement of property, plant and
equipment, the related costs and accumulated depreciation or amortization are removed from the accounts and any gain or loss is included in the determination of net loss.



| | (g) |  | Intangible Assets:
| | --- |  | ------------------



Intangible assets are amortized on a straight-line basis over four to ten years.



| | (h) |  | Long-lived Assets:
| | --- |  | ------------------



Gateway reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. An asset is considered to be impaired when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition does not exceed its carrying amount. The amount of impairment loss,
if any, is measured as the difference between the net book value of the asset and its estimated fair value.



| | (i) |  | Royalties:
| | --- |  | ----------



Gateway has royalty-bearing license agreements that allow Gateway to sell certain hardware and software which are protected by patent, copyright or license. Royalty costs are accrued and included in cost of goods sold
at the time revenue is recognized or amortized over the period of benefit.



| | (j) |  | Warranty:
| | --- |  | ---------



Gateway provides standard warranties with the sale of products. The estimated cost of providing the product warranty is recorded at the time revenue is recognized. Gateway maintains product quality programs and
processes, including actively monitoring and evaluating the quality of suppliers. Estimated warranty costs are affected by ongoing product failure rates, specific product class failures outside of experience and material usage and service delivery
costs incurred in correcting a product failure or in providing customer support. See Note 3 for the discussion of the decrease in our accrued warranty liability. A reconciliation of changes in Gateways accrued warranty liability, which is
included in accrued liabilities and long-term liabilities, is as follows (in thousands):



|December 31, 2002                                |  | $ | 67,141   |  
|------------------------------------------------ |  | - | -------- | -
|Accruals for warranties issued during the period |  |   | 95,371   |  
|Adjustments related to pre-existing warranties   |  |   |         |  
|Settlements made                                 |  |   | (129,301 | )
|                                                 |  |   |          |  
|September 30, 2003                               |  | $ | 33,211   |  
|                                                 |  |   |          |  



| | (k) |  | Revenue Recognition:
| | --- |  | --------------------



Gateway recognizes revenue pursuant to applicable accounting standards, including SEC Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements (SAB 101). SAB 101, as amended, summarizes certain of the SEC staffs views in applying generally accepted accounting principles to revenue recognition in financial statements and provides guidance on
revenue recognition issues in the absence of authoritative literature addressing a specific arrangement or a specific industry.



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)

(Unaudited)



Gateway recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred,
the sales price is fixed or determinable, and collectibility is reasonably assured. Revenue from the sale of products is recognized upon delivery of the products to customers. Revenue from services that are rendered by Gateway, such as extended
warranties, is recognized straight-line over the service period, while training revenue is recognized as the services are provided. Other than internet services, revenue from the sale of services that are rendered by third parties, such as
installation, is generally recognized when the associated product is delivered and installed, if applicable. We offer our customers internet services which are provided by third parties. The revenue associated with these services is based on the
estimated monthly active subscriber counts, which are reported to Gateway by the service providers and recognized as the services are provided.



Gateway records reductions in revenue in the current period for future product returns related to current period revenue. Management analyzes historical
returns, current economic trends, changes in customer demand and acceptance of Gateway products when evaluating the adequacy of the sales returns allowances in any accounting period. Gateway records reductions to revenue for estimated commitments
related to customer incentive programs, including customer rebates and other sales incentives, including, among other things, trade-ins and referral credits.



A schedule of changes to extended warranty deferred revenue, which is included in other current liabilities and long-term liabilities, and recognition of
extended warranty revenue is as follows (in thousands):



|December 31, 2002 extended warranty deferred revenue  |  | $ | 147,599 |  
|----------------------------------------------------- |  | - | ------- | -
|Additions to extended warranty deferred revenue       |  |   | 124,830 |  
|Extended warranty revenue recognition                 |  |   | (68,462 | )
|                                                      |  |   |         |  
|September 30, 2003 extended warranty deferred revenue |  | $ | 203,967 |  
|                                                      |  |   |         |  



| | (l) |  | Advertising Costs:
| | --- |  | ------------------



Advertising costs are charged to expense as incurred.



| | (m) |  | Income Taxes:
| | --- |  | -------------



The provision/benefit for income taxes is computed using the liability method, under which deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of
the deferred tax assets will not be realized.



| | (n) |  | Net Loss Per Share (in thousands):
| | --- |  | ----------------------------------



Basic earnings per common share is computed using net loss attributable to common stockholders and the weighted average number of common shares
outstanding during the period. Diluted earnings per common share is computed using net loss attributable to common stockholders and the combination of dilutive potential common stock and the weighted average number of common shares outstanding
during the period. Diluted shares for the three months ended September 30, 2003 and 2002 excludes 26,269 and 22,268 potential shares of common stock, respectively, and for the nine months ended September 30, 2003 and 2002 excludes 23,668 and 22,305
weighted average incremental shares, respectively, related to Series A Convertible Preferred Stock and employee and director stock options. These shares are excluded despite their exercise prices being below the average market price, or assuming the
if converted method for the Series A Convertible Preferred Stock, as their effect is anti-dilutive. The Series C Redeemable Convertible Preferred Stock is contingently convertible to 5,939 shares and is not included in calculating
earnings per share as the contingency was not met as of September 30, 2003. In addition, for the three months ended September 30, 2003 and 2002 Gateway has



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)

(Unaudited)



excluded 36,086 and 57,397 shares, respectively, and for the nine months ended September 30, 2003 and 2002 excluded 44,355 and 58,164 shares, respectively,
related to non-employee warrants and employee and director stock options which have exercise prices greater than the average market price of the common shares.



| | (o) |  | Derivative Instruments, Hedging Activities and Foreign Currency:
| | --- |  | ----------------------------------------------------------------



Gateway considers the U.S. dollar to be our functional currency for certain of Gateways international operations and the local currency for all
others. For subsidiaries where the local currency is the functional currency, the assets and liabilities are translated into US dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average
exchange rates prevailing during the period. Gains and losses from translation are included in accumulated other comprehensive income. Gains and losses resulting from remeasuring monetary asset and liability accounts that are denominated in
currencies other than a subsidiarys functional currency are included in other income, net.



| | (p) |  | Stock-Based Compensation:
| | --- |  | -------------------------



Gateway measures compensation expense for our employee and non-employee director stock-based compensation using the intrinsic value method. Compensation
charges related to other non-employee stock-based compensation are measured using fair value methods.



Gateway uses the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123). The fair value of options was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for all grants in 2003 and 2002: dividend yield of zero percent;
risk-free interest rates ranging from 1.0 to 5.3 percent; and expected lives of the options of three and one-half years. The expected volatility used in estimating the fair market value on the date of grant was 71 percent.



No stock-based employee compensation cost is reflected in net loss, as all
options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Had compensation expense for employee and director stock options been determined based on the fair value of the
options on the date of the grant, net loss and net loss per share would have resulted in the pro forma amounts indicated below (in thousands, except per share amounts):



|                                                                                                                                            |  | Three Months EndedSeptember 30, |          |   | Nine Months EndedSeptember 30, |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | -------- | - | ------------------------------ | -
|                                                                                                                                            |  | 2003                            |          |   | 2002                           |  
|Net loss attributable to common stockholders  as reported                                                                                  |  | $                               | (138,841 | ) |                                | $
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related
tax effects |  |                                 | (6,289   | ) |                                |  
|                                                                                                                                            |  |                                 |          |   |                                |  
|Net loss attributable to common stockholders  pro forma                                                                                    |  | $                               | (145,130 | ) |                                | $
|                                                                                                                                            |  |                                 |          |   |                                |  
|Net loss per share  as reported:                                                                                                           |  |                                 |          |   |                                |  
|Basic and diluted                                                                                                                           |  | $                               | (0.43    | ) |                                | $
|                                                                                                                                            |  |                                 |          |   |                                |  
|Net loss per share  pro forma:                                                                                                             |  |                                 |          |   |                                |  
|Basic and diluted                                                                                                                           |  | $                               | (0.45    | ) |                                | $
|                                                                                                                                            |  |                                 |          |   |                                |  



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)

(Unaudited)



| | (q) |  | Segment Data:
| | --- |  | -------------



Gateway reports segment data based on the internal reporting that is used by management for making operating decisions and assessing performance which is
designated as the source of Gateways reportable operating segments.



| | (r) |  | New Accounting Pronouncements:
| | --- |  | ------------------------------



In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 148, Accounting
for Stock-Based CompensationTransition and Disclosurean amendment of SFAS 123 (SFAS 148). This statement amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value based method
of accounting for stock-based compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures both in annual and interim financial statements about the method of accounting for stock-based
compensation and the effect of the method used on reported results. As provided for in SFAS 148, we have elected to continue to apply the intrinsic value method of accounting, and have adopted the disclosure requirements of SFAS 148.



In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN 46). FIN 46 clarifies the application of Accounting Research Bulletin No. 51 and applied immediately to any variable interest entities created or acquired after January 31, 2003 and to
variable interest entities in which an interest was obtained after that date. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 will be applied at the end of the quarter ended December 31, 2003.
The adoption of this statement in the fourth quarter is not expected to have any impact on our results of operations, financial position or cash flow.



|2. |  | Comprehensive Loss:
|-- |  | -------------------



Comprehensive loss for Gateway includes net loss, foreign currency translation adjustments and unrealized gains or losses on available-for-sale
securities, net. Comprehensive loss for the three and nine months ended September 30, 2003 and 2002 is as follows (in thousands):



|                                                                     |  | Three Months Ended September 30, |          |   | Nine Months Ended September 30, |  
|-------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ------------------------------- | -
|                                                                     |  | 2003                             |          |   | 2002                            |  
|Comprehensive loss:                                                  |  |                                  |          |   |                                 |  
|Net loss                                                             |  | $                                | (136,056 | ) |                                 | $
|Foreign currency translation                                         |  |                                  | (79      | ) |                                 |  
|Unrealized (loss) gain on available-for-sale securities, net         |  |                                  | (904     | ) |                                 |  
|Reclassification adjustment for investment gain included in net loss |  |                                  |         |   |                                 |  
|                                                                     |  |                                  |          |   |                                 |  
|                                                                     |  | $                                | (137,039 | ) |                                 | $
|                                                                     |  |                                  |          |   |                                 |  



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(Unaudited)



|3. |  | Selected Balance Sheet Information (in thousands unless otherwise noted):
|-- |  | -------------------------------------------------------------------------



|                          |  | September 30,2003 |           | December 31,2002
|------------------------- |  | ----------------- | --------- | ----------------
|Cash and cash equivalents |  | $                 | 409,534   |                 
|Marketable securities     |  |                   | 687,454   |                 
|                          |  |                   |           |                 
|                          |  | $                 | 1,096,988 |                 
|                          |  |                   |           |                 



Included in cash and
cash equivalents is approximately $38 million and $45 million in restricted amounts at September 30, 2003 and December 31, 2002, respectively.



|                                     |  | September 30,2003 |         |   | December 31,2002 |  
|------------------------------------ |  | ----------------- | ------- | - | ---------------- | -
|Accounts receivable, net:            |  |                   |         |   |                  |  
|Accounts receivable                  |  | $                 | 221,387 |   |                  | $
|Less allowance for doubtful accounts |  |                   | (4,966  | ) |                  |  
|                                     |  |                   |         |   |                  |  
|                                     |  | $                 | 216,421 |   |                  | $
|                                     |  |                   |         |   |                  |  



The increase in
accounts receivable is due to an increase in credit sales, primarily with small and medium business and government customers, in the third quarter of 2003 versus the fourth quarter of 2002.



|                                  |  | September 30,2003 |        | December 31,2002
|--------------------------------- |  | ----------------- | ------ | ----------------
|Inventory:                        |  |                   |        |                 
|Component parts and subassemblies |  | $                 | 43,955 |                 
|Finished goods                    |  |                   | 12,153 |                 
|Inventory in retail stores        |  |                   | 43,866 |                 
|                                  |  |                   |        |                 
|                                  |  | $                 | 99,974 |                 
|                                  |  |                   |        |                 



The increase in
inventory on hand reflects increased levels of inventory in the retail stores, partially offset by a decrease in the inventory valuation of component parts and subassemblies as a result of outsourcing activities discussed in Note 7.



|                      |  | September 30,2003 |         | December 31,2002
|--------------------- |  | ----------------- | ------- | ----------------
|Other current assets: |  |                   |         |                 
|Income tax receivable |  | $                 | 17,802  |                 
|Deferred income taxes |  |                   | 45,927  |                 
|Prepaid expenses      |  |                   | 50,253  |                 
|Other                 |  |                   | 155,517 |                 
|                      |  |                   |         |                 
|                      |  | $                 | 269,499 |                 
|                      |  |                   |         |                 



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)

(Unaudited)



The decrease in other current assets primarily reflects the net income tax refund of $287 million
received by Gateway in the first quarter of 2003. The decline in prepaid expenses is primarily related to a decrease in prepaid marketing and prepaid royalty expenses.



|                                    |  | September 30,2003 |          |   | December 31,2002 |  
|----------------------------------- |  | ----------------- | -------- | - | ---------------- | -
|Property, plant and equipment, net: |  |                   |          |   |                  |  
|Property, plant and equipment       |  | $                 | 940,585  |   |                  | $
|Accumulated depreciation            |  |                   | (585,744 | ) |                  |  
|                                    |  |                   |          |   |                  |  
|                                    |  | $                 | 354,841  |   |                  | $
|                                    |  |                   |          |   |                  |  



The decrease in
property, plant and equipment, net results from depreciation expense and the net impact of asset write-downs taken in the restructuring charges in the first and third quarters of 2003.



|                     |  | September 30,2003 |         | December 31,2002
|-------------------- |  | ----------------- | ------- | ----------------
|Accrued liabilities: |  |                   |         |                 
|Warranty             |  | $                 | 29,790  |                 
|Restructuring        |  |                   | 50,679  |                 
|Other                |  |                   | 167,293 |                 
|                     |  |                   |         |                 
|                     |  | $                 | 247,762 |                 
|                     |  |                   |         |                 



The decrease in
accrued liabilities reflects a reduction in expected future warranty costs due to operational improvements and a decline in the warranty accrual attributable to the reduction in PC unit sales relative to previous levels. The restructuring accrual
decreased due to restructuring payments made during 2003, partially offset by the accruals for the first and third quarters of 2003 restructuring actions. See Note 7 for further information. The decrease in other accrued liabilities was driven
primarily by decreases in rebates payable, accrued marketing and consulting expenses and sales tax payable.



|                                          |  | September 30,2003 |         | December 31,2002
|----------------------------------------- |  | ----------------- | ------- | ----------------
|Other current liabilities:                |  |                   |         |                 
|Deferred revenue and customer prepayments |  | $                 | 110,913 |                 
|Other                                     |  |                   | 128,396 |                 
|                                          |  |                   |         |                 
|                                          |  | $                 | 239,309 |                 
|                                          |  |                   |         |                 



The decrease in
deferred revenue and customer prepayments is primarily due to a decrease in customer prepayments driven in part by a lower backlog in delivery of plasma televisions at September 30, 2003 versus December 31, 2002, partially offset by an increase in
the current portion of deferred revenue due to increased sales of extended warranty service plans serviced by Gateway.



|                       |  | September 30,2003 |         | December 31,2002
|---------------------- |  | ----------------- | ------- | ----------------
|Long-term liabilities: |  |                   |         |                 
|Deferred revenue       |  | $                 | 105,559 |                 
|Warranty               |  |                   | 3,421   |                 
|Deferred income taxes  |  |                   | 39,927  |                 
|                       |  |                   |         |                 
|                       |  | $                 | 148,907 |                 
|                       |  |                   |         |                 



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)

(Unaudited)



The increase in deferred revenue is primarily due to increased sales of extended warranty service
plans serviced by Gateway.



|4. |  | Preferred Stock:
|-- |  | ----------------



On February 2, 2001, Gateway received $200 million in exchange for a convertible note due December 22, 2020 in connection with the second closing of the
investment agreement with America Online, Inc. (AOL). In December 2001, this convertible note was extinguished through the issuance of 50,000 shares of non-voting Series C Redeemable Convertible Preferred Stock (Series C Preferred
Stock). The Series C Preferred Stock had a fair value on the date of issuance of approximately $193 million. The fair value of $193 million is being accreted to the face value of $200 million through 2004 using the interest method. The Series
C Preferred Stock bears dividends at an annual rate of 1.5% paid semi-annually. The holder can put the Series C Preferred Stock to Gateway in December 2004, 2009 and 2014 at face value and Gateway can satisfy this put option in cash or registered
common stock at our option. The holder can convert the Series C Preferred Stock to 5,939,948 shares of common stock at any time prior to December 2020, provided Gateways common stock trades over $33.68 for 5 consecutive days. In addition,
Gateway can redeem the Series C Preferred Stock at any time after December 2004 for the face value plus accrued and unpaid dividends.



Gateway issued 50,000 shares of nonvoting Series A Convertible Preferred Stock (Series A Preferred Stock) to AOL in exchange for $200 million
in December 2001. This issuance was the third and final funding under the investment agreement which, among other things, reduced the total investment amount to $600 million for AOL. The Series A Preferred Stock will automatically convert into
common stock of Gateway in December 2004 at a conversion rate between $8.99 and $10.07 per share based on the fair value of Gateways common stock at the date of conversion. If our common stock price on that date is comparable to our common
stock price as of September 30, 2003, the Series A would convert into a total of 22,238,283 shares of our common stock. The Series A Preferred Stock is convertible earlier than December 2004 at the option of AOL in the event of certain
circumstances. The Series A Preferred Stock bears dividends at an annual rate of 2.92% paid quarterly.



Holders of Preferred Stock are entitled to receive dividends when and as declared by the Board of Directors. If dividends on the Preferred Stock are not
paid, they continue to accrue and, in general, we may not buy back our common stock while any such dividends remain unpaid. In addition, if dividends remain unpaid for (i) any two consecutive quarters or (ii) three quarterly payment periods in any
six consecutive quarterly payment periods, then (1) if such dividends are unpaid on the Series A Preferred Stock, the holder has the option to convert the Series A Preferred Stock into 22,238,283 shares of Gateway common stock based on a conversion
price of $8.99 per share, and (2) certain restrictions on the transfer of the Preferred Stock and the Gateway common stock held by the holder of the Preferred Stock are lifted.



The accretion and dividends on preferred stock are subtracted from net loss in calculating net loss attributable to common
stockholders for the purposes of computing earnings per share.



|5. |  | Income Taxes:
|-- |  | -------------



Gateway records a tax provision/benefit for the anticipated tax consequences of our reported results of operations. The benefit from income taxes is
computed using the liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. In the
third quarter and first nine months of 2003, Gateway recorded a deferred tax asset in the amount of $50 million and $149 million, respectively, both of which are equal to 37% of the loss before income taxes. Gateway also recorded a corresponding
valuation allowance in the amount of $50 million and $149 million in the third quarter and first nine months of 2003, respectively. This



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(Unaudited)



resulted in no net change in net deferred tax assets and accordingly no provision/benefit for income taxes was reflected during the third quarter and first
nine months of 2003. In the third quarter and first nine months of 2002, Gateway recorded a tax benefit of $28 million and $134 million, respectively, both of which are equal to 37% of the loss before income taxes. Gateway expects to maintain a full
valuation allowance on future tax benefits until an appropriate level of profitability is sustained.



|6. |  | Contingencies:
|-- |  | --------------



Gateway is a party to various lawsuits, claims, investigations and administrative proceedings that arise in connection with our business, including those
identified below. Gateway evaluates such matters on a case by case basis, and our policy is to vigorously contest any such claims which we believe are without merit.



Intergraph Hardware Technologies Company v. Dell Computer Corporation, Hewlett-Packard, Inc. & Gateway, Inc. is a
suit filed in the United States District Court in the Eastern District of Texas on December 16, 2002. The suit alleges Gateway infringed three patents related to cache memory. Intergraph seeks unspecified damages, an injunction, prejudgment
interest, costs and attorneys fees. Gateway has answered the complaint denying all allegations and alleging numerous affirmative defenses, and has asserted counterclaims for declaratory judgment. Trial is currently scheduled for August 2, 2004.



UNOVA, Inc. v. Apple Computer, Inc., et al.is a suit
that was filed against Gateway and six other defendants in the Central District of California on May 8, 2002. The suit alleges that portable computers manufactured by the named defendants infringe eight patents. Plaintiff sought unspecified past
damages from Gateway and other relief. Gateway had answered the complaint denying all allegations and asserting numerous affirmative defenses. On September 15, 2003, Unova and Gateway announced the settlement of their dispute. The settlement did not
have a material impact on Gateways consolidated condensed financial position, results of operations or cash flow.



Lucent Technologies, Inc. v. Gateway, Inc. is a suit filed on June 6, 2002 in the United States District Court in the Eastern District of Virginia,
and subsequently transferred to the United States District Court in the Southern District of California. The suit alleges that Gateway infringed seven patents related to PC systems and software. Plaintiff seeks unspecified damages and injunctive
relief. Gateway has answered the complaint denying all allegations and asserting numerous affirmative defenses, and discovery has commenced. On or about February 26, 2003, Microsoft intervened in the action, seeking to challenge Lucents
allegations with respect to five of the seven patents. In addition, on April 8, 2003, Microsoft filed an action against Lucent in the United States District Court for the Southern District of California. The suit seeks declaratory judgment that
Microsoft products do not infringe patents held by Lucent, including the five patents upon which Microsoft based its intervention in the action Lucent brought against Gateway. On February 20, 2003, Lucent also sued Dell Computer in the United States
District Court for the District of Delaware on six patents, all of which are included in Microsofts declaratory judgment action, and several of which are asserted by Lucent against Gateway. The suit against Dell was subsequently transferred to
the United States District Court for the Southern District of California, where all three actions have been consolidated for discovery purposes. Lucent recently filed amended complaints against Dell and Gateway, respectively, to assert now the same
patents against each. Through its amendments, Lucent asserted one additional patent against Dell and four additional patents against Gateway. All of the patents added through amendment are at issue in the Microsoft declaratory judgment action. The
three actions, which have been consolidated for all purposes but trial, are currently set for trial in October 2005.



As previously disclosed, Gateway has been responding to an investigation by the Securities and Exchange Commission (SEC) which commenced in
December 2000. In connection with this investigation, we furnished the SEC information primarily related to our fiscal year 2000. Gateway recently reached an agreement with the



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)

(Unaudited)



SEC to resolve the matters covered by the investigation with respect to Gateway. Pursuant to the agreement, Gateway consented, without admitting or denying
any findings, to entry on November 13, 2003 of an administrative cease and desist order prohibiting any future violations of the antifraud, reporting, books and records and internal control provisions of the federal securities laws. In connection
with the settlement, no fines or penalties were assessed against Gateway and no adjustments to Gateways prior financial statements were required.



As also previously disclosed, the U.S. Attorneys office is conducting an inquiry relating to the same time period and subject matter. Gateway is
cooperating fully with this inquiry and does not believe that any current officer is a target of either investigation.



Gateways management believes that the ultimate resolution of pending matters will not have a material adverse impact on Gateways consolidated
condensed financial position, operating results or cash flows. However, such matters are inherently unpredictable and it is possible that our consolidated condensed financial position, results of operations or cash flows could be affected in any
particular period by the resolution of one or more of these contingencies.



|7. |  | Restructuring, Transformation and Other Charges:
|-- |  | ------------------------------------------------



Third Quarter 2003 Plan (Q3 2003 Plan):



During the third quarter of 2003, Gateway approved a restructuring plan to, among other things, reduce our workforce and close certain facilities.
A charge of $54 million ($37 million in cost of goods sold and $17 million in selling, general and administrative expenses) was recorded in the third quarter of 2003 to provide for these actions. The significant restructuring activities related to
this charge were initiated in the third quarter of 2003 and related actions will continue through the second quarter of 2004. In addition to the $54 million charge, we recorded $19 million ($2 million in cost of goods sold and $17 million in
selling, general and administrative expenses) in store remodeling, consulting and other expenses related to our transformation into a branded integrator.



The following table summarizes charges recorded in the third quarter of 2003 for the Q3 2003 Plan (in millions):



|                          |  | Paid |   | AccruedSeptember 30,2003 |   | Asset Write-downs/Losses on Sale |  | AcceleratedDepreciation |    | TotalCharges
|------------------------- |  | ---- | - | ------------------------ | - | -------------------------------- |  | ----------------------- | -- | ------------
|Productivity Initiatives  |  | $    |  |                          | $ | 13                               |  | $                       |   |             
|Facilities/Capital Assets |  |      |  |                          |   | 11                               |  |                         | 23 |             
|                          |  |      |   |                          |   |                                  |  |                         |    |             
|Total                     |  | $    |  |                          | $ | 24                               |  | $                       | 23 |             
|                          |  |      |   |                          |   |                                  |  |                         |    |             



The nature of the
charges related to the Q3 2003 Plan summarized above is as follows:



| |  |  | Productivity Initiatives  Gateway recorded a $13 million charge primarily related to severance benefits to terminated employees in the United States. We notified
approximately 900 employees of termination during the third quarter of 2003, including approximately 400 manufacturing employees, 400 customer service employees and 100 administrative personnel.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Facilities/Capital Assets  Gateway recorded a charge of $41 million related to the closure of certain facilities and outsourcing of certain activities,
including an accrual of approximately $11 million related to the present value of future lease commitments, net of expected recoveries, $13 million related to the write-down of long-lived assets and loss on the sale of certain information technology
assets,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)

(Unaudited)



| | $10 million related to the write-down of inventory resulting from outsourcing activities and $7 million in accelerated deprecation based on a change in
the useful life of certain long-lived assets.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



First Quarter 2003 Plan (Q1 2003 Plan):



During the first quarter of 2003, Gateway approved a restructuring plan to close 76 retail stores (in addition to the four stores previously announced). We also continued our focus on other cost reductions, resulting in a workforce
reduction of approximately 1,900 employees. A charge of $69 million ($8 million in cost of goods sold and $61 million in selling, general and administrative expenses) was recorded in the first quarter of 2003 to provide for these actions. Included
in the $69 million charge is $35 million primarily associated with retail stores that were closed during the quarter. The significant restructuring activities were completed during the first quarter of 2003, however; payments are expected to
continue through 2005. The $69 million charge is in addition to $9 million ($5 million in cost of goods sold and $4 million in selling, general and administrative expenses) of additional charges related to previous restructuring activities. The
total restructuring charges for the first quarter of 2003 were $78 million.



The following table summarizes charges recorded during 2003 for the Q1 2003 Plan (in millions):



|                         |  | Paid |    | AccruedSeptember 30,2003 |   | Asset Write-downs |  | TotalCharges
|------------------------ |  | ---- | -- | ------------------------ | - | ----------------- |  | ------------
|Productivity Initiatives |  | $    | 13 |                          | $ | 4                 |  | $           
|Operating Assets         |  |      | 9  |                          |   | 8                 |  |             
|                         |  |      |    |                          |   |                   |  |             
|Total                    |  | $    | 22 |                          | $ | 12                |  | $           
|                         |  |      |    |                          |   |                   |  |             



The nature of the
charges related to the Q1 2003 Plan summarized above is as follows:



| |  |  | Productivity Initiatives  Gateway recorded an $18 million charge primarily related to severance benefits to terminated employees in the United States. We terminated
approximately 1,900 employees during the first quarter of 2003, including approximately 900 retail store employees, 500 manufacturing employees and 500 administrative personnel.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Operating Assets  Gateway recorded a charge of $51 million related to the closure of 76 retail stores, including an accrual of approximately $13 million related to the
present value of future lease commitments, net of expected recoveries, $4 million in other related expenses and the write-off of $34 million of abandoned fixed assets related to retail stores that were closed.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



First Quarter 2002 Plan (Q1 2002 Plan):



During the first quarter of 2002, Gateway approved a restructuring plan to,
among other things, reduce our workforce and close certain retail stores and other company sites. A pre-tax charge of $109 million ($16 million in cost of goods sold and $93 million in selling, general and administrative expenses) was recorded in
the first quarter of 2002 to provide for these actions. Included in the pretax charge of $109 million is $55 million for asset write-downs related to the impairment of certain long-lived assets that were abandoned during the quarter. The significant
restructuring activities were completed during 2002, however, payments are expected to continue through 2004. During the first quarter of 2003, we recorded an additional $3 million charge, included in cost of goods sold, for further asset
write-downs.



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)

(Unaudited)



The following table summarizes charges recorded during 2002 for the Q1 2002 Plan (in millions):



|                          |  | Paid |    | AccruedDecember 31,2002 |   | AssetWrite-downs |  | TotalChargesin 2002
|------------------------- |  | ---- | -- | ----------------------- | - | ---------------- |  | -------------------
|Productivity Initiatives  |  | $    | 28 |                         | $ |                 |  | $                  
|Facilities/Capital Assets |  |      | 7  |                         |   | 9                |  |                    
|Operating Assets          |  |      | 8  |                         |   | 2                |  |                    
|                          |  |      |    |                         |   |                  |  |                    
|Total                     |  | $    | 43 |                         | $ | 11               |  | $                  
|                          |  |      |    |                         |   |                  |  |                    



The amounts charged
against the provision during the first nine months of 2003 were as follows (in millions):



|                          |  | AccruedDecember 31,2002 |    | Paid |   | AccruedSeptember 30,2003
|------------------------- |  | ----------------------- | -- | ---- | - | ------------------------
|Facilities/Capital Assets |  | $                       | 9  |      | $ | 3                       
|Operating Assets          |  |                         | 2  |      |   | 1                       
|                          |  |                         |    |      |   |                         
|Total                     |  | $                       | 11 |      | $ | 4                       
|                          |  |                         |    |      |   |                         



The nature of the
charges related to the Q1 2002 Plan summarized above is as follows:



| |  |  | Productivity Initiatives  Gateway recorded a $30 million charge related to severance benefits to terminated employees in the United States. We terminated approximately
2,400 employees during the first quarter of 2002, including approximately 1,400 employees primarily related to sales and customer service, 600 manufacturing employees and 400 other administrative personnel.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Facilities/Capital Assets Gateway recorded a $59 million charge related to the abandonment of certain capital assets during the first quarter of 2002, including $27
million related to the closure of certain facilities and $16 million primarily related to the abandonment of certain information technology projects in the United States. We recorded charges of approximately $16 million, principally related to
future lease commitments, net of expected recoveries, as a result of closing certain facilities. During the first quarter of 2003, we recorded an additional $3 million charge for further asset write downs.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Operating Assets  Gateway recorded a charge of $20 million related to the closing of 19 retail stores in the United States. In connection with these store closings, we
recorded approximately $10 million in exit costs related to future lease commitments, net of expected recoveries, and $10 million for impairment of store assets that were abandoned during the first quarter of 2002.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Third Quarter 2001 Plan (Q3 2001 Plan):



During the third quarter of 2001, Gateway approved a restructuring plan to,
among other things, reduce our workforce, close certain retail stores, consolidate facilities, redefine our information technology strategy and exit certain other activities, including our company-owned international operations. In the first quarter
of 2002, an adjustment to reduce these charges by $10 million (included in selling, general and administrative expenses) was made due to higher than expected recovery on assets. In the first quarter of 2003, we recorded an additional charge of $2
million, included in cost of goods sold, for further asset write-downs.



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)

(Unaudited)



The amounts charged against the provision during the first nine months of 2003 were as follows (in
millions):



|                            |  | AccruedDecember 31,2002 |    | Paid |   | AccruedSeptember 30,2003
|--------------------------- |  | ----------------------- | -- | ---- | - | ------------------------
|Facilities/Capital Assets   |  | $                       | 2  |      | $ | 1                       
|International Restructuring |  |                         | 33 |      |   | 31                      
|                            |  |                         |    |      |   |                         
|Total                       |  | $                       | 35 |      | $ | 32                      
|                            |  |                         |    |      |   |                         



First Quarter 2001
Plan (Q1 2001 Plan):



During the first quarter
of 2001, Gateway approved a restructuring plan to, among other things, reduce our workforce, close certain retail stores, consolidate facilities, redefine our information technology strategy and exit certain other activities. In the first quarter of
2003, we recorded an additional charge of $4 million, included in selling, general and administrative expenses, for additional lease commitments, net of expected recoveries.



The amounts charged against the provision and additions to the provision during the first nine months of 2003 were as
follows (in millions):



|                          |  | AccruedDecember 31,2002 |   | Additions |   | Paid |  | AccruedSeptember 30,2003
|------------------------- |  | ----------------------- | - | --------- | - | ---- |  | ------------------------
|Facilities/Capital Assets |  | $                       | 2 |           | $ | 4    |  | $                       
|Operating Assets          |  |                         | 6 |           |   |     |  |                         
|                          |  |                         |   |           |   |      |  |                         
|Total                     |  | $                       | 8 |           | $ | 4    |  | $                       
|                          |  |                         |   |           |   |      |  |                         



|8. |  | Segment Data:
|-- |  | -------------



Gateways segments are based on customer class. Customer class segments are consumer and professional. Professional was previously referred to as
business. Gateway evaluates the performance of our consumer and professional segments based on sales and operating income, and does not include segment assets or other income and expense items for management reporting purposes. 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 the restructuring, transformation and other charges discussed in Note 7.



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



|                                                                         |  | Three Months EndedSeptember 30, |          |   | Nine Months EndedSeptember 30, |  
|------------------------------------------------------------------------ |  | ------------------------------- | -------- | - | ------------------------------ | -
|                                                                         |  | 2003                            |          |   | 2002                           |  
|Net sales:                                                               |  |                                 |          |   |                                |  
|Consumer                                                                 |  | $                               | 427,016  |   |                                | $
|Professional                                                             |  |                                 | 456,124  |   |                                |  
|                                                                         |  |                                 |          |   |                                |  
|                                                                         |  | $                               | 883,140  |   |                                | $
|                                                                         |  |                                 |          |   |                                |  
|Operating income (loss):                                                 |  |                                 |          |   |                                |  
|Consumer                                                                 |  | $                               | (20,884  | ) |                                | $
|Professional                                                             |  |                                 | 16,908   |   |                                |  
|                                                                         |  |                                 |          |   |                                |  
|                                                                         |  |                                 | (3,976   | ) |                                |  
|Non-segment expenses and restructuring, transformation and other charges |  |                                 | (137,326 | ) |                                |  
|                                                                         |  |                                 |          |   |                                |  
|Consolidated operating loss                                              |  | $                               | (141,302 | ) |                                | $
|                                                                         |  |                                 |          |   |                                |  



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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 condensed financial statements and the related notes that
appear elsewhere in this document. This Quarterly Report includes forward-looking statements made based on managements current expectations. All statements other than statements of historical fact are statements that could be deemed
forward-looking statements. 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 Gateways business,
consolidated financial position, results of operations, cash flows and such forward-looking statements, including the factors discussed or referenced below. We undertake no obligation to update any forward-looking statement to reflect events or
circumstances after the date of this Quarterly Report.



This
Quarterly Report contains certain non-GAAP financial information, including references to restructuring and transformation expenses. This non-GAAP financial information is provided as supplementary information and is not an alternative to GAAP. This
non-GAAP financial information is used by management to analyze Gateways baseline performance before charges and expenses that are considered by management to be outside of Gateways core operating results, notwithstanding the fact that
such restructuring charges and transformation expenses may be recurring. This non-GAAP information is among the primary indicators management uses as a basis for evaluating Gateways financial performance as well as for forecasting of future
periods. The presentation of this additional information is not meant to be considered in isolation or as a substitute for reported results determined in accordance with GAAP.



Outlook



We currently estimate fourth quarter revenue will be between $925 million and $975 million and a loss in the fourth quarter of between 25 cents and 34
cents per share, including 16 cents to 19 cents of restructuring charges and transformation expenses. This improvement over the third quarter assumes steadily ramping sales of higher margin consumer electronics products; seasonal consumer trends;
improved bundling to simplify the sales up-sell process; continued cost of goods sold reductions; anticipated improvements in component cost trends and reduced distractions from transformation-related activities. At the same time, our loss per share
range for the quarter reflects potential continued pricing pressure in the PC market and the broad range of potential outcomes associated with our aggressive entry into new product categories.



The outsourcing and transformation activities, including retail store
transformation costs, are expected to result in total restructuring charges and transformation expenses of between $180 million to $200 million. This range includes $73 million recorded in the third quarter with an additional $50 million to $60
million expected in the fourth quarter. Savings of approximately $130 million are expected to be realized on an annualized basis.



Finally, we are reaffirming our expectation to exit the year with more than $1 billion in cash and marketable securities. Actual results may vary
depending on our results of operations and other factors, including the risk factors identified elsewhere in this Quarterly Report.



Critical Accounting Policies and Estimates



Managements Discussion and Analysis of Financial Condition and Results of Operations discusses Gateways consolidated condensed financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles and
Gateways discussion and analysis of our financial condition and results of operations requires Gateways management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated condensed financial
statements and accompanying notes. Note 1 to the consolidated condensed financial statements in Item 1 of this Quarterly Report summarizes the significant accounting policies and methods used in the preparation of Gateways consolidated
condensed financial statements.



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Management believes the following to be critical accounting policies whose application has a material
impact on Gateways financial presentation. That is, they are both important to the portrayal of Gateways financial condition and results, and they require management to make judgments and estimates about matters that are inherently
uncertain.



Revenue Recognition



Gateway recognizes revenue pursuant to applicable accounting standards,
including SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101). SAB 101, as amended, summarizes certain of the SEC staffs views in applying generally accepted accounting
principles to revenue recognition in financial statements and provides guidance on revenue recognition issues in the absence of authoritative literature addressing a specific arrangement or a specific industry.



Gateway recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. Revenue from the sale of products is recognized upon delivery of the products to customers. Revenue from services that are rendered by
Gateway, such as extended warranties, is recognized straight-line over the service period, while training revenue is recognized as the services are provided. Other than Internet services, revenue from the sale of services that are rendered by third
parties, such as installation is generally recognized when the associated product is delivered and installed, if applicable. We offer our customers Internet services which are provided by third parties. The revenue associated with these services is
based on the estimated monthly active subscriber counts, which are reported to us by the service providers and is recognized as the services are provided. If the actual subscriber counts or the economics associated with these subscriber counts prove
to be less than originally reported by the service provider, we may be required to adjust revenue associated therewith downward, as occurred in the fourth quarter of 2002. In the fourth quarter of 2002, America Online, Inc. (AOL)
unilaterally recomputed payments it had made in 2001 and the first half of 2002 and withheld the claimed overpayments from amounts currently owed to us. As previously reported, we have disputed AOLs retroactive adjustment to the mutually
agreed and previously paid amounts and have commenced formal dispute resolution proceedings as required by our agreement.



Gateway records reductions in revenue in the current period for estimated future product returns related to current period revenue. Management analyzes
historical returns, current economic trends, changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns allowances in any accounting period. If actual returns exceed estimated returns, we would be
required to record additional reductions to revenue.



Gateway
records reductions to revenue for estimated commitments related to customer incentive programs, including customer rebates and other sales incentives, such as trade-ins and referral credits. Future market conditions and product transitions may
require us to increase customer incentive programs that could result in incremental reductions of revenue at the time such programs are offered. Additionally, certain incentive programs require management to estimate the number of customers who will
actually redeem the incentive based on historical experience and the specific terms and conditions of the particular incentive programs. If a greater than estimated proportion of customers redeem such incentives, we would be required to record
additional reductions to revenue which would affect earnings in the period the adjustments are made.



Allowance for Doubtful Accounts



Gateway maintains an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The
estimate is based on managements assessment of the collectibility of specific customer accounts and includes consideration of the credit worthiness and financial condition of those specific customers. We record an allowance to reduce the
specific receivables to the amount that is reasonably believed to be collectible. We also record an allowance for all other trade receivables based on



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multiple factors including historical experience with bad debts, the general economic environment, the financial condition of our customers and the aging of
such receivables. We do not expect default rates to be greater than 1% of professional segment net sales. If there is a deterioration of a major customers financial condition or we become aware of additional information related to the credit
worthiness of a major customer, or if future actual default rates on trade receivables in general differ from those currently anticipated, we may have to adjust our allowance for doubtful accounts, which would affect earnings in the period the
adjustments are made. Gateway does not have a single customer that accounts for 10% or more of our revenue.



Inventory Valuation



The business environment in which Gateway operates is subject to rapid changes in technology and customer demand. We record write-downs for components and
products which have become obsolete or are in excess of anticipated demand or whose costs are in excess of net realizable value. We perform a detailed assessment of inventory by part each quarter, which includes a review of, among other factors,
inventory on hand and forecast requirements, product life cycle (including end of life product) and development plans, component cost trends, product pricing and quality issues. Based on this analysis, if necessary, we record an adjustment for
excess and obsolete inventory. Gateway may be required to record additional write-downs if actual demand, component costs or product life cycles differ from estimates which would affect earnings in the period the write-downs are made.



Warranty Provision



Gateway provides standard warranties with the sale of products. The
estimated cost of providing the product warranty is recorded at the time revenue is recognized. We maintain product quality programs and processes, including actively monitoring and evaluating the quality of suppliers. Estimated warranty costs are
affected by ongoing product failure rates, specific product class failures outside of experience and material usage and service delivery costs incurred in correcting a product failure or in providing customer support. If actual product failure rates
or material usage or service delivery costs differ from the estimates, revisions to the estimated warranty liability would be required and would affect earnings in the period the adjustments are made.



Taxes on Earnings



Gateway records a tax provision/benefit for the anticipated tax consequences
of our reported results of operations. The provision for income taxes is computed using the liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between
the financial reporting and tax bases of assets and liabilities. In the third quarter and first nine months of 2003, Gateway recorded a deferred tax asset in the amount of $50 million and $149 million, respectively, both of which are equal to 37% of
the loss before income taxes. Gateway also recorded a corresponding valuation allowance in the amount of $50 million and $149 million in the third quarter and first nine months of 2003, respectively. This resulted in no net change in net deferred
tax assets and accordingly no provision/benefit for income taxes was reflected during the third quarter and first nine months of 2003. In the third quarter and first nine months of 2002, Gateway recorded a tax benefit of $28 million and $134
million, respectively, both of which are equal to 37% of the loss before income taxes. Gateway expects to maintain a full valuation allowance on future tax benefits until an appropriate level of profitability is sustained.



As of September 30, 2003 and December 31, 2002, our net deferred tax asset is
approximately $6 million. Gateway records a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. As of September 30, 2003 and December 31, 2002, our valuation allowance was
approximately $276 million and $127 million, respectively. Gateway has considered our ability to carryback losses and future taxable income and feasible tax planning strategies in determining the need for a valuation allowance. In the event that we
determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. Similarly, if we were to later
determine that it is more likely than not that the net deferred tax assets would be realized, the previously provided valuation allowance would be reversed, resulting in a positive adjustment to earnings in the period such determination is made.



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Litigation



Gateway is currently involved in certain legal proceedings. When a loss is probable to occur in connection with litigation
or governmental proceedings and the amount of the loss can be reasonably estimated within a range, we record the minimum estimated liability related to the claim. As additional information becomes available, we assess the potential liability related
to the legal proceedings and revise those estimates. Revisions in estimates of the probable liabilities could materially impact our results of operations in the period of adjustment.



Results of Operations



The following table sets forth, for the periods indicated, certain data derived from Gateways unaudited consolidated condensed statements of
operations and certain of such data expressed as a percentage of net sales (dollars in thousands):



|                                             |  | Three Months EndedSeptember 30, |          |    | Nine Months EndedSeptember 30, |  
|-------------------------------------------- |  | ------------------------------- | -------- | -- | ------------------------------ | -
|                                             |  | 2003                            |          |    | 2002                           |  
|Net sales                                    |  | $                               | 883,140  |    |                                | $
|Gross profit                                 |  |                                 | 88,202   |    |                                |  
|Percentage of net sales                      |  |                                 | 10.0     | %  |                                |  
|Selling, general and administrative expenses |  |                                 | 229,504  |    |                                |  
|Percentage of net sales                      |  |                                 | 26.0     | %  |                                |  
|Operating loss                               |  |                                 | (141,302 | )  |                                |  
|Percentage of net sales                      |  |                                 | (16.0    | )% |                                |  



Net Sales



Gateways consolidated net sales were $883 million and $2.5 billion in
the third quarter and first nine months of 2003, respectively, representing decreases of 21% and 19% over the comparable periods in 2002, respectively. In the third quarter and first nine months of 2003, PC unit shipments decreased over the
comparable periods of 2002 by 24% and 23%, respectively.



The
following table summarizes Gateways net sales, for the periods indicated, by customer class (dollars in thousands):



|             |  | Three Months EndedSeptember 30, |         | Nine Months EndedSeptember 30,
|------------ |  | ------------------------------- | ------- | ------------------------------
|             |  | 2003                            |         | 2002                          
|Net sales:   |  |                                 |         |                               
|Consumer     |  | $                               | 427,016 |                               
|Professional |  |                                 | 456,124 |                               
|             |  |                                 |         |                               
|Consolidated |  | $                               | 883,140 |                               
|             |  |                                 |         |                               



Consumer net sales
declined 33% and 29% in the third quarter and first nine months of 2003, respectively, while related PC unit shipments declined 42% and 38% compared to the same periods in 2002, respectively. This decline in the consumer segment was driven primarily
by decreases in desktop PC market share as well as the closure of retail stores in the first quarter of 2003. The decrease in desktop PC market share is partly related to our strategy of offering higher margin, fully-configured systems, which meet
our customers needs for more powerful computers with digital convergence capability. Our intent with this strategy is to focus on quality, service, support and total system value, not solely the lowest price. Notwithstanding our focus on these
value-for-the-money offerings, Gateway recognizes the importance of having an increased low-end PC market presence and therefore brought a new low- end PC strategy to market during the third quarter of 2003. Consumer net sales



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increased from $359 million in the second quarter to $427 million in the third quarter of 2003, representing an 19% increase over the second quarter of 2003.
Future growth in the consumer segment will be driven by the new CE/non-PC product introductions, retail store transformation, the new low-end PC strategy and our branded integrator strategy.



Professional net sales, which was previously referred to as business net
sales, declined 6% in both the third quarter and first nine months of 2003, respectively, compared to the same periods last year while PC unit shipments declined 2% and 7%, respectively. The declines in professional segment net sales and related PC
unit shipments are attributable to a decrease in PC market share and lower average selling prices. However, Gateway continues to maintain a professional segment operating profit and Gateway expects to make further investments during the fourth
quarter in new professional products, services and support.



CE/non-PC sales accounted for $251 million or 28% of net sales and $678 million or 27% of net sales in the third quarter and first nine months of 2003, respectively, compared to $176 million or 16% of net sales and $563 million or 18%
of net sales in the third quarter and first nine months of 2002, respectively. This compares to $222 million or 28% of net sales in the second quarter of 2003.



During the first nine months of 2003, Gateway closed 82 retail stores and exited the third quarter with 190 retail stores in the United States.
The store closures have and will continue to negatively impact total net sales in 2003. We are continuing to evaluate the retail stores and their locations to improve store traffic and profit characteristics in terms of contribution to multiple
sales channels and financial results. This could result in the decision to close or relocate certain retail stores in the future. During the third quarter of 2003, we refurbished 180 retail stores and remodeled five pilot retail stores to better
accommodate our broader product line and customer focused sales approach. This initiative resulted in approximately $15 million in transformation expenses. If Gateway chooses to close additional individual stores, we could incur substantial costs.
Such costs could adversely affect our results of operations and financial condition.



Average unit price (AUP) is calculated using total net sales divided by total PC units. Total net sales include all revenue from both PC and CE/non-PC products and services. AUP was $1,583 in the third
quarter of 2003 which was slightly below the second quarter of 2003 of $1,632 and slightly higher than the third quarter of 2002 of $1,533. The increased AUP in the third quarter of 2003 from the prior year is the result of the increase in CE/non-PC
sales described above, partially offset by lower PC prices. PC average unit price (PC AUP) is calculated using total PC net sales divided by total PC units. PC AUP was $1,133 in the third quarter of 2003 compared to $1,180 in the second
quarter of 2003 and $1,292 in the third quarter of 2002. The decrease in PC AUP is primarily the result of competitive pricing pressures.



Gross Profit



Gross profit for the third quarter and first nine months of 2003 was $88 million and $332 million, respectively, representing decreases of 47% and 24%
over the comparable periods in 2002, respectively. As a percentage of net sales, gross profit for the third quarter and first nine months of 2003 decreased to 10.0% and 13.1%, respectively, from 15.0% and 14.0% during the same periods in 2002,
respectively. CE/non-PC sales accounted for approximately 117% and 85% of gross profit during the third quarter and first nine months of 2003, respectively, compared to 40% and 58% during the same periods in 2002, respectively. This reflects the
fact that restructuring charges in the first and third quarters of 2003 were attributed only to our PCs cost of goods sold. During the third quarter of 2003, Gateway recorded a $39 million charge or 4.4% of net sales in cost of goods sold
related to the closure of certain sites, severance obligations and transformation activities. During the first nine months of 2003 and 2002, Gateway recorded charges of $52 million or 2.1% of net sales and $16 million or 0.5% of net sales,
respectively, in cost of goods sold related to the closure of certain sites, severance obligations and transformation activities.



The decrease in gross profit as a percentage of net sales in the third quarter of 2003 compared to the same period in 2002 is due to very competitive low
to mid-range PC industry pricing, including aggressive pricing on



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certain large deals and lower PC unit volume, partially offset by accelerated cost of goods sold savings, increased sales of CE/non-PC products and services
and approximately $4 million related to reductions in loss contingency reserves. The decrease in gross profit as a percentage of net sales in the first nine months of 2003 as compared to the same period in 2002 is primarily due to the increase in
cost of goods sold in restructuring and transformation expenses related to the closure of certain sites, severance obligations and transformation activities, partially offset by cost of goods savings including warranty cost reductions and increased
sales of CE/non-PC products and services. In addition, gross margin decreased from 17.2% in the second quarter of 2003 to 10% in the third quarter of 2003, taking into account restructuring and transformation related costs in the third quarter, due
to the factors mentioned above and increased memory and flat panel costs. We currently anticipate additional cost of goods sold savings this year from component cost reductions, supply chain efficiencies, reduced warranty costs and manufacturing
productivity. We expect to exceed by approximately $30 million the cost of goods sold reduction target of $200 million in 2003, before consideration of restructuring and business transformation costs in the fourth quarter of 2003. Certain of these
cost of goods sold savings are expected to be passed through into reduced prices in the fourth quarter to maintain or increase our PC competitiveness.



Selling, General and Administrative Expenses



Selling, general and administrative (SG&A) expenses totaled $230 million or 26% of net sales and $750 million or 30% of net sales in
the third quarter and first nine months of 2003, respectively, compared to $249 million or 22% of net sales and $828 million or 27% of net sales in the third quarter and first nine months of 2002, respectively. The decrease in SG&A in the third
quarter of 2003 compared to the same period in 2002 is primarily the result of $36 million in savings due to the first quarter of 2003 retail store closures, headcount reductions and marketing efficiencies, $17 million in other non-labor
SG&A expense reductions and reductions of loss contingency liabilities, offset by $34 million in restructuring and transformation expenses. We expect to exceed by $15 to $20 million the SG&A expense reduction target of $125 million in 2003
($200 million on an annualized basis), before consideration of restructuring and business transformation costs in the fourth quarter of 2003.



The decrease in SG&A for the first nine months of 2003 as compared to the same period in 2002 is primarily the result of $74 million in savings due to
the first quarter of 2003 retail store closures, headcount reductions and marketing efficiencies and $20 million of other non-labor SG&A expense reductions, offset by a $16 million increase in restructuring expenses in the first nine months of
2003 compared to the same period in 2002. During the first nine months of 2003, Gateway recorded $99 million in SG&A charges primarily related to workforce reductions of approximately 2,800 employees, the closure of 76 retail stores, store
transformations and outsourcing related activities. During the first nine months of 2002, Gateway recorded $83 million in SG&A charges primarily related to a reduction of our workforce of approximately 2,400 employees, the closure of 19 retail
stores, a consolidation of manufacturing facilities, a redefinition of our information technology strategy and the exit of certain other activities.



Restructuring and Transformation Activities



2003:



During the third quarter of 2003, Gateway approved a restructuring plan to, among other things, reduce our workforce and close certain facilities. A
charge of $54 million ($37 million in cost of goods sold and $17 million in selling, general and administrative expenses) was recorded in the third quarter of 2003 to provide for these actions. The significant restructuring activities related to
this charge were initiated in the third quarter of 2003 and related actions will continue through the second quarter of 2004. In addition to the $54 million charge, we recorded $19 million ($2 million in cost of goods sold and $17 million in
selling, general and administrative expenses) in store remodeling, consulting and other expenses related to our transformation into a branded integrator.



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The nature of the restructuring charges summarized above is as follows:



| |  |  | Productivity Initiatives  Gateway recorded a $13 million charge primarily related to severance benefits to terminated employees in the United States. We notified
approximately 900 employees of termination during the third quarter of 2003, including approximately 400 manufacturing employees, 400 customer service employees and 100 administrative personnel.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Facilities/Capital Assets  Gateway recorded a charge of $41 million related to the closure of certain facilities and outsourcing of activities, including an accrual of
approximately $11 million related to the present value of future lease commitments, net of expected recoveries, $13 million related to the write-down of long-lived assets and loss on the sale of certain information technology assets, $10 million
related to the write-down on inventory resulting from outsourcing activities and $7 million in accelerated deprecation based on a change in the useful life of certain long-lived assets.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During the first quarter of 2003, Gateway approved a restructuring plan to
close 76 retail stores (in addition to the four stores previously announced). We also continued our focus on other cost reductions, resulting in a workforce reduction of approximately 1,900 employees. A charge of $69 million ($8 million in cost of
goods sold and $61 million in selling, general and administrative expenses) was recorded in the first quarter of 2003 to provide for these actions. Included in the $69 million charge is $35 million primarily associated with retail stores that were
closed during the quarter. The significant restructuring activities were completed during the first quarter of 2003; however, payments are expected to continue through 2005.



The nature of the charges summarized above is as follows:



| |  |  | Productivity Initiatives  Gateway recorded an $18 million charge primarily related to severance benefits to terminated employees in the United States. We terminated
approximately 1,900 employees during the first quarter of 2003, including approximately 900 retail store employees, 500 manufacturing employees and 500 administrative personnel.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Operating Assets  Gateway recorded a charge of $51 million related to the closure of 76 retail stores, including an accrual of approximately $13 million related to the
present value of future lease commitments, net of expected recoveries, $4 million in other related expenses and the write off of $34 million of abandoned fixed assets related to retail stores that were closed.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition to the $69 million described above, Gateway recorded an
additional $9 million in expenses ($5 million in cost of goods sold and $4 million in selling, general and administrative expenses) for adjustments to previous restructuring plans. See Note 7 to the consolidated condensed financial statements
for further details.



2002:



During the first quarter of 2002, Gateway approved a restructuring plan to,
among other things, reduce our workforce and close certain retail stores and other company sites. A pre-tax charge of $109 million ($16 million in cost of goods sold and $93 million in selling, general and administrative expenses) was recorded in
the first quarter of 2002 to provide for these actions. Included in the pretax charge of $109 million is $55 million for asset write-downs related to the impairment of certain long-lived assets that were abandoned during the quarter. The significant
restructuring activities were completed during 2002, however, payments are expected to continue through 2004. During the first quarter of 2003, we recorded an additional $3 million charge, included in cost of goods sold, for further asset
write-downs.



The nature of the charges summarized above is as
follows:



| |  |  | Productivity Initiatives  Gateway recorded a $30 million charge related to severance benefits to terminated employees in the United States. We terminated approximately
2,400 employees during the first quarter of 2002, including approximately 1,400 employees primarily related to sales and customer service, 600 manufacturing employees and 400 other administrative personnel.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Facilities/Capital Assets  Gateway recorded a $59 million charge related to the abandonment of certain capital assets during the first quarter of 2002, including $27
million related to the closure of certain facilities and $16 million primarily related to the abandonment of certain information technology projects in the United States. We recorded charges of approximately $16 million, principally related to
future lease commitments, net of expected recoveries, as a result of closing certain facilities. During the first quarter of 2003, we recorded an additional $3 million charge for further asset write-downs.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Operating Assets  Gateway recorded a charge of $20 million related to the closing of 19 retail stores in the United States. In connection with these store closings, we
recorded approximately $10 million in exit costs related to future lease commitments, net of expected recoveries, and $10 million for impairment of store assets that were abandoned during the first quarter of 2002.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, we recorded an adjustment to reduce previously recorded charges
pursuant to the Q3 2001 Plan by $10 million during the first quarter of 2002, primarily due to a higher than expected recovery on assets.



Operating Loss



Operating loss for the third quarter and first nine months of 2003 was $141 million and $418 million, respectively, compared to an operating loss of $81
million and $393 million for the same periods in 2002, respectively. The operating losses for 2003 and 2002 resulted from the relatively low PC unit volumes compared to the fixed cost base and restructuring charges. The increase in operating loss in
the third quarter of 2003 compared to the same period in 2002 is primarily due to $73 million in restructuring and transformation related costs in 2003 with no comparable amount in 2002, partially offset by lower SG&A expenses. The increase in
the operating loss for the first nine months of 2003 as compared to the same period in 2002 is primarily due to $151 million in restructuring and transformation costs in 2003 compared to $99 million in restructuring costs in 2002, partially
offset by lower SG&A expenses in 2003.



For the third
quarter and first nine months of 2003 the consumer segment had an operating loss of $21 million and $126 million, respectively, compared to an operating loss of $41 million and $116 million in the same periods in 2002, respectively. The
improvement in the operating loss in the third quarter of 2003 compared to the same period in 2002 is a result of significantly lower SG&A costs and better margin performance. The increase in consumer segment operating loss in the first nine
months of 2003 compared to the same period in 2002 was driven primarily by a decrease in sales partially offset by improved margin performance related to increased sales of CE/non-PC products and services and lower SG&A expenses, including
compensation related costs. Professional segment operating income was $17 million and $84 million in the third quarter and first nine months of 2003, respectively, compared to $40 million and $82 million in the third quarter and first nine months of
2002, respectively. The decrease in professional segment operating income in the third quarter of 2003 compared to the same period in 2002 was driven by margin pressure from price competition. The increase in professional segment operating income in
the first nine months of 2003 compared to the same period in 2002 was driven by cost reduction efforts and a more selective pricing strategy designed to target higher margin customers, partially offset by the items noted in the third quarter trend
above.



Non-segment operating losses for the third quarter and
first nine months of 2003 were $137 million and $377 million, respectively, compared to $80 million and $358 million for the same periods in 2002, respectively, largely reflecting higher restructuring charges in the first nine months of 2003
compared to the first nine months of 2002. 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, including restructuring charges and transformation expenses.



Other Income, Net



Other income, net, includes
primarily 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



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and losses. Other income, net, was $5 million and $14 million of income in the third quarter and first nine months of 2003, respectively, compared to income
of $7 million and $30 million during the same periods in 2002, respectively. The decrease in other income, net, in the third quarter of 2003 compared to the same period in 2002 is primarily due to lower rates of return on invested cash balances in
2003. The decrease in other income, net, in the first nine months of 2003 compared to the same period in 2002 is primarily due to the favorable renegotiation and settlement of an acquisition liability and gains on the disposition of certain equity
portfolio holdings, partially offset by write-downs of strategic investments in 2002 and a write-down of a strategic investment in the second quarter of 2003.



Income Taxes



Gateway did not record an income tax benefit for the third quarter and first nine months of 2003. In the third quarter and first nine months of 2002,
Gateway recorded a tax benefit of $28 million and $134 million, respectively, both of which are equal to 37% of the loss before income taxes. Gateway does not expect to record an income tax benefit for 2003 as we expect to provide a full valuation
allowance against deferred tax benefits, including net operating loss carryforwards, generated during 2003.



Liquidity and Capital Resources



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



|                                     |  | September 30,          |          
|------------------------------------ |  | ---------------------- | ---------
|                                     |  | 2003                   |          
|                                     |  | (dollars in thousands) |          
|Cash and marketable securities       |  | $                      | 1,096,988
|Days of sales in accounts receivable |  |                        | 22       
|Days inventory on hand               |  |                        | 11       
|Days in accounts payable             |  |                        | 39       
|Cash conversion cycle                |  |                        | (6       



Gateway generated $71
million in cash from operations during the first nine months of 2003, reflecting a $287 million income tax refund, partially offset by $198 million of net loss adjusted for non-cash items. Other significant factors affecting cash provided from
operations include a net decrease in accounts receivable, inventory and other current assets (excluding the $287 million income tax refund) of $2 million, offset by a net decrease in accounts payable, accrued liabilities, accrued royalties and other
current liabilities of $20 million. Gateway also used approximately $58 million for capital expenditures and $84 million to purchase marketable securities, net.



Due to our significant loss in 2002 and our ability to carryback that loss to offset taxable income in prior years, an income tax refund of $287
million was received in the first quarter of 2003. Additional tax refunds in 2003 and 2004 will be limited and we do not expect them to exceed a total of approximately $5 million and $13 million, respectively. As a result of the restructuring
plans described in Note 7 of the consolidated condensed financial statements, Gateway expects future cash outlays of $51 million through 2005 related to prior restructuring plans and the expenses recorded in the third quarter of 2003 pursuant to the
Q3 2003 Plan. This does not include the cash impact of additional restructuring charges and transformation expenses in the fourth quarter of 2003 and beyond as discussed in Outlook. In addition, we expect future cash outlays of approximately
$10 million in connection with liabilities related to international operations accrued prior to the restructuring decisions. The total cash outlay is expected to be funded from existing cash balances and internally generated cash flows from
operations with payments related to restructuring activities expected to continue through at least 2005.



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At September 30, 2003, Gateway had cash and cash equivalents of $410 million and marketable securities of
$687 million. Approximately $38 million was restricted at September 30, 2003, to provide for certain commitments and contingencies including $16 million in Standby Letters of Credit and Guarantees. During the first quarter of 2003, we terminated our
$300 million bank credit facility under which no loans were outstanding, in order to reduce commitment fees payable under this unused facility. We had not previously had any loans outstanding under this credit facility, and given our substantial
liquidity position, we did not foresee any need to borrow under the facility during its remaining term.



In the fourth quarter of 2002, Gateway expanded our in-store cash and carry program with the introduction of consumer electronics products. Our current
product line-up includes digital televisions, digital cameras, MP3 players, digital video gear, software, printers and accessories. Inventory associated with our in-store cash and carry program was approximately $44 million at September 30, 2003 and
will continue to be tightly monitored in the fourth quarter of 2003 in connection with the introduction of additional CE/non-PC products, but is expected to increase.



Gateway has an arrangement whereby we share in the actual loss experience of a third-party financing partner with respect to
certain consumers past purchases of Gateway products and services. Gateways maximum exposure under this loss sharing arrangement is $8 million. Additional financing under this loss sharing arrangement ended in the second quarter of 2001.
The estimated losses as of September 30, 2003 are provided for in our consolidated condensed financial statements; however, if the actual losses prove to be greater than estimated it could affect our future results of operations. We believe that the
actual results of this loss sharing arrangement will not materially affect liquidity.



We believe that our current sources of working capital will provide adequate flexibility for Gateways financial needs for at least the next twelve months. We also expect to exit 2003 with more than $1 billion in
cash and marketable securities.



However, any projections of
future financial needs and sources of working capital are subject to uncertainty. See Factors that May Affect Future Results as well as Outlook for factors that could affect Gateways estimates of future financial needs
and sources of working capital.



We continually evaluate the
opportunity to sell additional equity and debt securities, restructure preferred stock arrangements or otherwise improve our financial position. The sale of additional equity, convertible debt or convertible equity securities could have dilutive
effects on stockholders. We have also given consideration to share repurchases from time to time, which could have an anti-dilutive effect on stockholders and impact overall cash resources. We will also consider the acquisition of, or investment in
complementary businesses, products, services and technologies which might affect our liquidity profile or the level of our equity and debt securities. In the event that we desire to engage in any of these activities, there can be no assurances that
any required financing will be available in amounts or terms that are acceptable.



New Accounting Pronouncements



In December
2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based CompensationTransition and Disclosurean amendment of SFAS 123
(SFAS 148). This statement amends SFAS 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based
compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures both in annual and interim financial statements about the method of accounting for stock-based compensation and the effect of
the method used on reported results. As provided for in SFAS 148, we have elected to continue to apply the intrinsic value method of accounting, and have adopted the disclosure requirements of SFAS 148.



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In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46). FIN 46 clarifies the application of Accounting Research Bulletin No. 51 and applied immediately to any variable interest entities created or acquired after January 31, 2003 and to variable interest entities
in which an interest was obtained after that date. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 will be applied at the end of the quarter ended December 31, 2003. The adoption of this
statement in the fourth quarter is not expected to have any impact on our results of operations, financial position or cash flow.



Factors That May Affect Gateways Business and Future Results



In addition to other information contained in this Quarterly Report, the following factors could affect our future business, results of operations, cash
flows or financial position, and could cause future results to differ materially from those expressed in any of the forward-looking statements contained in this Quarterly Report.



General Economic and Business Conditions and Current Political Uncertainty. Weak economic conditions in the United
States since 2001 have adversely affected our product sales. If general economic and industry conditions fail to improve or deteriorate, demand for our products could continue to be adversely affected, as could the financial health of Gateways
suppliers and resellers. Reductions in state and federal budgets as a result of current economic conditions have adversely affected our sales to many of our customers in the public sector. In addition, war and the related political and economic
uncertainties, terrorist attacks, national and international responses to terrorist attacks, and other acts of war or hostility could materially adversely affect our future operating results and financial condition.



Declining Net Sales of Gateways Computers. Our revenue growth
and profitability depend significantly on the overall demand for PCs and related products and services. Since late 2000, the rate of general growth in demand for PCs and related products has slowed as a result of market maturation and deteriorating
economic conditions. The slowing rate of growth, market maturation and resulting competitive pressures has resulted in lower average selling prices for many of our PC products and has adversely impacted demand for our PC products and services to a
greater extent than it has impacted some of our PC competitors. In this environment of declining average sales prices, our revenues and operating results have declined and may continue to decline. Continued uncertainty about future economic
conditions has also made it increasingly difficult to forecast future operating results and continued deterioration in our PC unit sales would materially adversely affect Gateways future results of operations and financial condition.



Competitive Market Conditions.The PC and consumer
electronics industries are characterized by aggressive pricing by several large branded and numerous generic competitors, short product life cycles, and price sensitivity by customers. We also compete with consumer electronics retailers and
manufacturers with respect to our CE/non-PC products and services. Many of our competitors in the PC and consumer electronics industries have greater financial, marketing, manufacturing and technological resources. Consolidation in the PC industry
has resulted in larger and stronger competitors in many of our markets and we have experienced increased competition in the PC industry. We compete primarily on the basis of customer satisfaction, value, technology, product offerings with new
performance features, operational efficiency, quality, reliability, brand, our retail network and their locations, customer service and support and by maintaining supplier relationships to enable us to bring products quickly to market. Gateway from
time to time has lost market share in the competitive PC market. In addition, we compete in the consumer electronics industry in part by offering new technology at lower than prevailing market prices. To the extent we are unable to compete
successfully in the PC and consumer electronics markets, our revenues and business prospects would be affected adversely. We expect these competitive pressures to continue for the rest of 2003 and 2004. We also expect that average sales prices for
PCs will continue to decline. We introduced in the third quarter of 2003 a new low-end desktop computer product line to drive greater PC unit sales and to have an increased low-end PC market presence. The sales prices of this new line will likely
contribute to Gateways downward PC price trend and reduced gross margins. If we continue to reduce PC prices in response to competition, we may be unable to maintain or improve gross margins through cost reductions or offsetting sales of
higher margin consumer electronics products.



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Product Mix.Our product mix significantly impacts our profitability. Our plans to improve gross
margins depend substantially on increasing our sales of higher margin consumer electronics products and services as a percentage of our net sales. While we have plans to increase sales of consumer electronics products by more than double in the
fourth quarter of 2003 compared to the third quarter of 2003 by expanding our product offering and increasing our marketing of such products, we have limited experience with these products and cannot predict customer acceptance with accuracy. If we
are unable to increase sales of higher margin consumer electronics products and services, or if margins decline in the CE/non-PC products we sell, our plan to return to profitability will likely be adversely impacted.



Limited Consumer Electronics Sales History.Our consumer electronics
sales strategy was significantly expanded in 2003. Our limited experience selling high volumes of consumer electronics products may adversely impact our ability to forecast results, estimate related reserves and value inventory.



Selling, General and Administrative Costs. As a result of costs
associated with selling and marketing our products and particularly in our retail stores, Gateway incurs higher selling, general and administrative costs as a percent of revenue, than many of our competitors. While we are on track to reduce SG&A
expenses by more than $125 million in 2003 ($200 million on an annualized basis), before consideration of restructuring and business transformation costs in the fourth quarter of 2003, unanticipated transformation or other expenses could increase
our SG&A expense and could negatively impact our future results of operations and financial condition. In addition, if Gateway is unable to develop and/or sell innovative new products with attractive gross margins, our results of operations
would be materially adversely affected by our SG&A cost structure.



Gateways Retail Operations.Our retail operations and infrastructure require substantial investment in leasehold improvements, equipment, information systems, inventory, and personnel. Gateway has also entered into substantial
operating lease commitments for retail space and a relatively high proportion of each stores costs are fixed because of depreciation on store leasehold improvement costs and lease expenses. As a result, if we are unable to improve the
performance of our retail stores, particularly through CE/non-PC products revenue and gross margins, our retail operations objectives may not be achieved.



During 2002 and the first nine months of 2003, we expanded the product offering in our retail stores beyond PCs, peripheral products and software, to
include CE/non-PC products. We have limited experience as a major retailer of CE/non-PC products and if we are unable to compete profitably in these highly competitive retail markets, our results of operations and financial condition could be
materially adversely affected. In addition, our changed business model requires additional inventory of products in our retail stores which increases our exposure to the risks of excess inventory or too little inventory if we are unable to forecast
product demand accurately. We are also increasingly exposed to other inventory risks described below in Inventory Risks.



During our third quarter 2003, we remodeled five pilot retail stores to better accommodate our broader product line and customer focused sales approach.
The rest of our retail network has been refurbished in time for the holiday selling season. This initiative has required substantial investments in furniture, fixtures and equipment, but there is no assurance that the remodeling investment will
result in substantially increased sales. If Gateway chooses to terminate a number of individual stores, we could incur substantial costs. Such costs could adversely affect our results of operations and financial condition.



Retail operations present many other risks and uncertainties, some of which
are beyond Gateways control. For instance, our retail operations are subject to the risk of macro-economic factors that could have a negative impact on general retail activity; consumer acceptance of Gateways retail approach; our
potential inability to sell third-party products and services at adequate margins; our potential inability to manage relationships with existing retail channel partners; our lack of experience in managing retail operations; the costs associated with
unanticipated fluctuations in the value of Gateway-branded and third-party retail inventory; and our potential inability to obtain and retain quality retail locations at reasonable costs.



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Corporate Restructuring and Infrastructure Requirements.We plan to transform Gateway into a
leading branded integrator of personalized technology products and solutions by leveraging our existing retail stores, our brand and our CE/non-PC products and services. Many of our Gateway branded products and all of our non-Gateway branded
products are manufactured by third-parties. We have multiple business transformation efforts planned and underway for the remainder of 2003. Some of our transformation activities depend on restructuring and outsourcing of a substantial portion of
our manufacturing and of various support functions together with the implementation of new IT systems. Although we are partnering with major vendors to accomplish the implementation of these activities and systems, there are no assurances that we
will avoid business interruptions in connection with the implementation of these activities or the possibility that the systems will not scale to meet the needs of our business. In addition, while great care is being taken to ensure the successful
completion of our overall transformation activities, we cannot be certain that these can be completed without some interruption in our business operations or can be completed at all, which could have an adverse financial impact. Cost-cutting efforts
have recently been implemented and are contemplated in the future. Our ability to motivate employees and maintain employee morale during our restructuring and transformation may be adversely impacted by workforce reductions and general
uncertainties. There can be no assurance that our strategy of focusing on our core domestic markets, reducing costs and diversifying sales of CE/non-PC products and services will be successful in the event of sustained adverse economic and industry
conditions or at all. Moreover, our business creates ongoing demands for personnel, facilities, information and internal control systems and other infrastructure requirements. If we are unable to maintain and develop our infrastructure while
reducing costs, we could experience disruptions in operations, which could have an adverse financial impact.



Suppliers. We require a high volume of quality products and components for our PC and CE/non-PC offerings, substantially all of which we obtain
from outside suppliers. While we attempt to have multiple suppliers for such products and components, in some circumstances we maintain single-source supplier relationships, such as with Microsoft for Windows products. If the supply of a key
material product or component is delayed or curtailed, our ability to ship the related product or solution in desired quantities and in a timely and cost-effective manner could be adversely affected. We seek to mitigate a portion of these risks by
generally requiring our suppliers to protect themselves with adequate insurance and we also purchase insurance to protect ourselves against loss of profits due to a suppliers inability to perform due to an insurable property loss. In addition,
we seek to mitigate such risks by having dual sources of supply where appropriate. In cases where we need to switch to another supplier and alternative sources of supply are available, qualification of the sources and establishment of reliable
supplies could result in delays and possible reduction in net sales. In the event that the financial condition of our third-party suppliers for key products or components were to erode, the delay or curtailment of deliveries of key material products
or components could occur.



As part of our transformation, we
are increasingly dependent on third-party providers of products and services. During the last several quarters, we have closed manufacturing operations at one facility and have outsourced a substantial portion of our manufacturing operations and a
number of administrative services to third-party providers under contract. If we are unable to properly manage these outsourcing providers, our revenues and gross margins may be adversely affected. Similarly, if our third-party providers do not
comply with their contractual obligations, our results of operations could be adversely impacted. In addition, our reliance on third party suppliers for the provision of employees could expose us to various legal claims relating to their employment
status.



Our reliance on third-party suppliers of key material
products and components exposes us to potential product quality issues that could affect the reliability and performance of our products and solutions. In addition, many of Gateways products are manufactured in whole or in part by third-party
manufacturers and we rely upon a principal logistics partner. While such outsourcing arrangements may lower the fixed cost of operations, they also reduce our direct control over production and distribution. If we are unable to ship our products and
solutions in desired quantities and in a timely manner due to a delay or curtailment of the supply of material products or components, or product quality issues due to faulty products or components manufactured by third-party suppliers, the market
for our products or solutions could be adversely affected with a resulting reduction in



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revenues. In many instances we rely on offshore suppliers, particularly from Asia, for product assembly and manufacturing, and risks associated with
transportation and other natural or human factors may disrupt the flow of product. Any new outbreak of Severe Acute Respiratory Syndrome (SARS) in Asia may disrupt the manufacturing of such goods and our ability to purchase from suppliers in Asia.
If for any reason manufacturing or logistics in any of these locations is disrupted by regional economic, business, environmental, political, medical, or military conditions or events, Gateways results of operations and financial condition
could be adversely affected.



Consumer Financing.
Reduced availability of financing generally or additional tightening in consumer credit policies from our third-party financial partners could materially and adversely affect our operations and financial results. For the first nine months of 2003,
third-party financial institutions provided financing of approximately 26% of our consumer net sales. The consumer financing is on a non-recourse basis to Gateway. In 2001, we participated in a loss sharing arrangement with one lender that at
September 30, 2003 had a maximum exposure of $8 million. Additional financing under this arrangement ended in the second quarter of 2001.



Beginning in the fourth quarter of 2002, our primary third-party financing partner adopted a more conservative credit policy. At the same time, this
partner also established termination provisions that give this lender the right to provide us with 60 days written notice of its intent to terminate further customer financing in the event of a change in control at Gateway or if Gateway does not
meet certain financial liquidity conditions. We have diversified the business among our two consumer financing partners, which has been expanded to three partners in the beginning of the fourth quarter of 2003. The objective of these efforts is to
expand the customer financing alternatives available through our existing partners and any additional financing partners to reduce or eliminate the risk associated with any termination of any one agreement. If one or more of our third-party lending
arrangements are terminated or reduced, without replacement or an increase in the amount of financing provided by the remaining lenders, we would experience a decrease in consumer net sales from levels we might otherwise achieve.



Product Introductions and Short Product Cycles. Our business model
depends on bringing new products to market quickly. The success of our product introductions depends on many factors including the availability of new products, successful quality control and launch readiness efforts, our ability to forecast
successfully product demand, training of sales and support personnel, and customer acceptance of new technology. If we are unable to forecast successfully demand for new products, we may not properly manage our inventory levels and may have
increased exposure to the risks of supply described above in Suppliers.



Short product life cycles resulting from rapid changes in technology and consumer preferences and declining product prices characterize the PC and consumer electronics industries. Our internal engineering personnel work closely with
component suppliers and other technology developers to evaluate the latest developments in PC and CE/non-PC products. There is no assurance that we will continue to have access to or the right to use new technology or will be successful in
incorporating such new technology in our products in a timely manner.



Third Party Patents and Intellectual Property.There is no assurance that we will continue to have access to existing or new third-party technology for use in our products. While it may be necessary in the future to seek or renew
licenses relating to various aspects of our products and business methods, Gateway believes that based upon past experience and industry practice, such licenses generally can be obtained on commercially reasonable terms. However, there is no
assurance that the necessary licenses would be available on acceptable terms. If we or our suppliers are unable to obtain such licenses, we may be forced to market products without certain desirable technological features. We could also incur
substantial costs to redesign our products around other parties protected technology.



Because of technological changes in the PC and consumer electronics industries current extensive patent coverage, and the rapid rate of issuance of new patents, it is possible certain components of Gateways
products



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and business methods may unknowingly infringe existing patents of others. Responding to such claims, regardless of their merit, can be time consuming, result
in significant expenses, and cause the diversion of management and technical personnel. In addition, we may not be able to rely on our outside suppliers to adequately defend any patent infringement claims against Gateway-branded consumer electronics
products. If any outside suppliers of these Gateway-branded products is unable to uphold its contractual agreement to indemnify us from claims that Gateway is infringing patents of others, our future operating results and financial condition could
be materially adversely affected.



Inventory Risks. By
distributing products directly to our customers, we have historically been able to avoid the need to maintain high levels of finished goods inventory. This has minimized costs and allowed us to respond more quickly to changing customer demands,
reducing our exposure to the risk of product obsolescence. We have expanded the level of finished goods inventory of PCs and CE/non-PC products in our retail stores based on our expectations for demand. We expect to increase our inventory levels of
CE/non-PC products, which will likely be offset partially by reduced PC component parts inventory levels. If we are not successful in forecasting product demand, we could have excess or insufficient inventory of certain products. In addition, we
maintain certain component products in inventory. A decrease in market demand or a decision to increase supply, among other factors, could result in higher finished goods and component inventory levels, and a decrease in value of this inventory
could have a negative effect on our results of operations. In addition, continued declines in PC prices may decrease the value of any PC inventory in our retail stores.



Key Personnel.Our success depends in large part on our ability to attract and retain key personnel, including our
Chairman and Chief Executive Officer, Theodore W. Waitt. There can also be no assurance that we will continue to successfully attract and retain the management talent we need. The inability to attract or retain such key personnel could materially
adversely affect our future operating results and financial condition.



Risks of Minority Investments. We hold a limited number of and may consider additional minority investments in companies having operations or technology in areas within or ancillary to our strategic focus. Some of these investments
have been in early stage companies where operations are not yet sufficient to establish them as profitable concerns. Certain of these investments are in publicly traded companies whose share prices are highly volatile. Adverse changes in market
conditions such as has occurred since late 2000 and poor operating results of certain of these underlying investments have resulted, and may in the future result, in our incurring losses or an inability to recover the original carrying value of our
investment.



Risks of Acquisitions, Joint Ventures and
Strategic Alliances. We have entered into certain strategic alliances and acquired certain businesses that we believe are complementary to our operations. In addition, we may make acquisitions and enter into joint ventures in the future. While
we believe we will effectively integrate such businesses, joint ventures, or strategic alliances with our own, we may be unable to successfully do so and may be unable to realize expected cost savings and/or sales growth. In the case of certain
strategic alliances involving services by third-parties to Gateway, we may be dependent upon the financial reporting methodology selected by our strategic partners for the calculation of payments to Gateway. In addition, in the case of acquisitions,
we may be unable to smoothly integrate the acquired companies marketing, production, development, distribution and management systems resulting in our inability to realize hoped for cost savings and/or sales growth. Our operating results could
be adversely affected by any problems arising during or from acquisitions or from modifications or termination of joint ventures and strategic alliances or the inability to effectively integrate any future acquisitions.



Environmental Regulations. Production and marketing of products in
certain states and countries may subject Gateway to environmental and other regulations. Although Gateway does not anticipate any material adverse effects in the future based on the nature of our operations and the thrust of such laws, there is no
assurance that such existing laws or future laws will not have a material adverse effect on Gateway.



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Customer Sales Mix. Our profits vary by customer segment. As a result, our results of operations
and profitability for a particular period will depend, in part, on the corresponding mix of customers including increasing sales to professional customers and sales of CE/non-PC products to consumers. Government contracts are subject to the right of
the government to terminate for convenience or subject to vendor suspension or disbarment in the event of certain violations of legal and regulatory requirements.



|ITEM  3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- |  | ----------------------------------------------------------



For quantitative and qualitative disclosures about market risk affecting Gateway, see item 7A Quantitative and Qualitative Disclosures About Market
Risk of our Annual Report on Form 10-K for the year ended December 31, 2002. Our exposure to market risks has not changed materially since December 31, 2002.



|ITEM 4. |  | CONTROLS AND PROCEDURES
|------- |  | -----------------------



Disclosure Controls and Procedures; Internal Controls.



Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in
our reports filed under the Securities Exchange Act of 1934 (Exchange Act), such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC rules. Internal controls are procedures which
are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and
reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles. However, any control system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.



Evaluation of Disclosure Controls and Procedures.



An evaluation as of the end of the period covered by this report was carried out under the supervision and with the participation of Gateways management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of Gateways disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that those disclosure controls and
procedures were adequate to ensure that information required to be disclosed by Gateway in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules.



Changes in Internal Controls



There were no significant changes in Gateways internal controls over
financial reporting or, to our knowledge, in other factors during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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II.    OTHER INFORMATION



|ITEM 1. |  | LEGAL PROCEEDINGS
|------- |  | -----------------



The information set forth under Note 6 to the unaudited consolidated condensed financial statements of this Quarterly Report on Form 10-Q is incorporated
herein by reference.



|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K
|------- |  | --------------------------------



| | (a) |  | Exhibits:
| | --- |  | ---------



|ExhibitNo. |  | Description of Exhibits                                                                                                                 
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|           | 
|10.16      |  | Letter Agreement between Gateway, Inc. and Jocelyne Attal dated August 22, 2003, including a supplemental letter dated August 25, 2003.*
|           | 
|31.1       |  | Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.     
|           | 
|31.2       |  | Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.     
|           | 
|32.1       |  | Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.          
|           | 
|32.2       |  | Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.          

---

|* |  | Indicates a management contract.
|- |  | --------------------------------



| | (b) |  | Reports on Form 8-K:
| | --- |  | --------------------



On July 24, 2003, Gateway filed a report on Form 8-K, which reported under Items 7 and 9 the issuance of a press release, entitled Gateway Reports
2003 Second Quarter Results. The press release was filed as an exhibit to the Form 8-K and included financial statements and other information for the fiscal quarter ended June 30, 2003.



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SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                        |  |  |  | GATEWAY, INC.
|----------------------- |  |  |  | -------------
|                        |  |  | 
|Date: November 14, 2003 |  |  |  | By:          
|                        |  |  |  |              

|                        |  |  | 
|----------------------- |  |  | 
|Date: November 14, 2003 |  |  | 
|                        |  |  | 



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