---

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-K/A

Amendment No. 1



ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the Fiscal Year Ended December 31, 2001



Commission file number 0-22784



GATEWAY, INC.



|Incorporated in Delaware |  | I.R.S. Employer Number
|------------------------ |  | ----------------------
|                         |  | 42-1249184            



14303
Gateway Place, Poway, CA 92064



Telephone
number: (858) 848-3401



Securities registered pursuant to
Section 12(b) of the Act:





|Title of each class                    |  | Name of each exchange on which registered
|-------------------------------------- |  | -----------------------------------------
|Common Stock, par value $.01 per share |  | New York Stock Exchange                  
|Preferred Share Purchase Rights        |  | New York Stock Exchange                  



Securities
registered pursuant to Section 12(g) of the Act:    None



---



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 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 if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. ̈



The aggregate market value of the voting stock held by
non-affiliates of the registrant on January 30, 2002 (based on the last sale price on the New York Stock Exchange as of such date) was approximately $1,130,285,771. At such date, there were 323,972,895 shares of Common Stock outstanding.



---



---



Explanatory Note



This Amendment No. 1 to the Annual Report
of Gateway, Inc. (Gateway or the Company) on Form 10-K/A for the year ended December 31, 2001 includes restated consolidated financial statements as of December 31, 2001 and 2000 and for each of the three years in the period
ended December 31, 2001. Note 2 to the consolidated financial statements summarizes the impact of this restatement on Gateways financial statements for each year in the three year period ended December 31, 2001.



This report is being filed to amend and restate only the
following items contained in our Annual Report on Form 10-K originally filed with the Securities and Exchange Commission on February 12, 2002:



| |  |  | Item 3 (Legal Proceedings);
| | - |  | ---------------------------



| |  |  | Item 6 (Selected Financial Data);
| | - |  | ---------------------------------



| |  |  | Item 7 (Managements Discussion and Analysis of Financial Condition and Results of Operations);
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | Item 8 (Financial Statements and Supplementary Data); and
| | - |  | ---------------------------------------------------------



| |  |  | Item 14 (Exhibits, Financial Statement Schedules, and Reports on Form 8-K).
| | - |  | ---------------------------------------------------------------------------



All information contained in this Amendment No. 1 is subject to updating and supplementing as provided in
Gateways reports filed with the Securities and Exchange Commission, as amended, for periods subsequent to the date of the original filing of the Annual Report on Form 10-K.



The Company did not amend its Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for periods
affected by the restatement that ended prior to December 31, 2001, and the financial statements and related financial information contained in such reports should no longer be relied upon and should be viewed in the context of this report.



Forward-Looking Statements



This Amendment No. 1 to the Annual Report on Form 10-K/A,
contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not materialize or prove incorrect, could cause the results of Gateway to differ materially from those expressed or implied by such
forward-looking statements. All statements, other than statements of historical fact, are statements that could be deemed to be forward-looking statements, including any projections of results of operations, revenues, financial condition or other
financial items; any statements of plans, strategies and objectives of management for future operations; any statements regarding proposed new products, services or developments; any statements regarding future economic conditions, prospects or
performance; statements of belief and any statement of assumptions underlying any of the foregoing.



The forward-looking statements contained herein involve risks and uncertainties including, but not limited to, general conditions in the
personal computing industry, including changes in overall demand and average unit prices, general economic conditions, competitive factors and pricing pressures, including the impact of aggressive pricing cuts by competitors and the Companys
pricing and marketing strategy; shifts from desktops to mobile computing products and information appliances and the impact of new microprocessors and operating software; the ability to transform the Company to a digital technology solutions
provider and restructure its operations and cost structure; component supply shortages; short product cycles; the ability to access new technology; infrastructure requirements; risks related to the shutdown of the Companys company-owned
international operations, including the loss of related net sales and access to international markets; ability to grow in non-PC or beyond-the-box business; risks of minority equity investments; increased inventory costs; risks relating
to new or acquired businesses, joint ventures and strategic alliances; changes in accounting rules, the impact of litigation and government regulation generally; inventory risks due to shifts in market demand;



2



---

changes in product, customer or geographic sales mix; change in credit ratings and the impact of employee lay-offs and management changes. To
learn more about the risks and uncertainties that the Company faces, you should read the risk factors set forth in Gateways Securities and Exchange Commission periodic reports and filings, including but not limited to the items discussed
elsewhere in this Report. The Company assumes no obligation to update these forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made.



Item 3.Legal Proceedings



This Item 3 has been updated for certain events and
developments occurring subsequent to the filing of the original Form 10-K. In addition, this Item 3 has been revised to incorporate certain conforming changes.



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 damages (including enhanced damages), an injunction, prejudgment interest, costs and attorneys fees.



UNOVA, Inc. v. Apple Computer, Inc., et al. is a suit 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 seeks unspecified past damages and other relief. Gateway has answered the complaint denying all allegations
and asserting numerous affirmative defenses.



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



On December 7, 2000, James Burton (Burton) filed a purported class action complaint against Gateway, one of its former officers, and one director, in the United States District Court for the Southern District of
California for alleged violation of federal securities laws. Since December 2000, six similar cases have been filed in the same court by other plaintiffs. The complaints were amended to allege among other things that the defendants misrepresented
Gateways financial performance in securities filings and in statements to the public, and purport to be class actions on behalf of purchasers of Gateways stock between April 14, 2000 and February 28, 2001 (the class period).
The complaints seek damages and attorneys fees. On December 18, 2000, the



3



---

Court entered an Order directing counsel for the lead plaintiffs to file a single consolidated complaint within 60 days after the
Courts designation of a lead plaintiff. On April 23, 2001, plaintiffs counsel filed a Revised Motion to Appoint Perry Capital and Teachers Retirement System of Louisiana as Lead Plaintiff and to Approve Plaintiffs
Choice of Lead Counsel, and this motion was granted by the Court on May 18, 2001. On July 16, 2001, the lead plaintiff filed a consolidated complaint alleging violations of the federal securities laws for the class period against Gateway and
two former officers. On September 13, 2001, defendants filed a motion to dismiss. On February 1, 2002, the court entered an order granting defendants motion to dismiss, but allowed the plaintiffs to file an amended complaint within 60 days.
Subsequently, the parties and insurance carriers reached a settlement in which the Company denied all allegations and did not admit liability. The settlement, which was funded entirely by the Companys insurance carriers, was approved on
September 9, 2002.



Gateway has been responding
to an investigation by the Securities and Exchange Commission (SEC) which commenced in December 2000. We voluntarily restated our results of operations for the first, second and third quarters of 2000 in February 2001, and have since
furnished the SEC information primarily related to our fiscal year 2000. In connection with the investigation, Gateway has received a Wells Notice from the SEC. Under the Wells process established by the SEC, we have been provided an
opportunity to respond in writing before the staff makes a formal recommendation to the SEC regarding any action. Gateway has responded to the Wells Notice and is fully cooperating with the SEC to resolve this matter as promptly as practicable. In
April 2003, Gateway voluntarily restated certain results of operations included in our 2001 Form 10-K. See Note 2 to the consolidated financial statements.



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



Item 6.Selected Consolidated Financial Data



The following historical data were derived from the Companys consolidated financial statements, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. This financial data should be read in conjunction with the consolidated financial statements and notes thereto beginning on page 15 of this Report and in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operations beginning on page 5 of this Report. The information below is not necessarily indicative of the results of future operations. As discussed in Note 2 to the consolidated
financial statements, the Company has restated net sales, cost of goods sold and other income (loss), net, for the years ended December 31, 2001, 2000 and 1999. This restatement did not impact reported results of operations prior to 1999. The $2.9
million is reflected as deferred interest income, net of tax impacts and is included in other current liabilities as of December 31, 2000.



|                                                                                  |  | 2001       |            |   | 2000       |   | 1999       |  | 1998 |           | 1997
|--------------------------------------------------------------------------------- |  | ---------- | ---------- | - | ---------- | - | ---------- |  | ---- | --------- | ----
|                                                                                  |  | (restated) |            |   | (restated) |   | (restated) |  |      |           |     
|Consolidated Statements of Operations Data (in thousands, except per share
data): |  |            |            |   |            |   |            |  |      |           |     
|Net sales                                                                         |  | $          | 5,937,896  |   |            | $ | 9,252,083  |  | $    | 8,956,337 |     
|Net income (loss)                                                                 |  | $          | (1,031,062 | ) |            | $ | 238,630    |  | $    | 427,944   |     
|Net income (loss) per share:                                                      |  |            |            |   |            |   |            |  |      |           |     
|Basic                                                                             |  | $          | (3.19      | ) |            | $ | 0.74       |  | $    | 1.36      |     
|Diluted                                                                           |  | $          | (3.19      | ) |            | $ | 0.72       |  | $    | 1.32      |     
|                                                                                 
|Consolidated Balance Sheet Data:                                                  |  |            |            |   |            |   |            |  |      |           |     
|Total assets                                                                      |  | $          | 2,986,857  |   |            | $ | 4,180,645  |  | $    | 3,954,688 |     
|Long-term obligations, net of current maturities                                  |  | $          |           |   |            | $ | 2,548      |  | $    | 2,998     |     
|Series C redeemable convertible preferred stock                                   |  | $          | 193,109    |   |            | $ |           |  | $    |          |     



4



---



Item
7.Managements Discussion and Analysis of Financial Condition and Results of Operations



The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear
elsewhere in this document.



This Report
includes forward-looking statements made based on current management expectations pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and actual
outcomes may differ materially from what is expressed or forecasted. Factors that could cause future results to differ from the Companys expectations include the factors described on page 2 of this Report under Forward-Looking
Statements as well as under BusinessFactors that May Affect Gateways Business and Future Results beginning on page 9 of Gateways Annual Report on Form 10-K.



During the fourth quarter of 2000, the Company adopted
Securities and Exchange Commission Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. As a result, the Company changed its revenue recognition policy retroactive to January 1, 2000 to recognize
revenue upon delivery rather than shipment of products. The cumulative effect of this accounting change was $11.9 million, net of tax in 2000. The pro forma impact of this accounting change on prior periods is not material.



As discussed in Note 2 to the Consolidated Financial
Statements, Gateway restated 2001, 2000 and 1999 net sales to reduce the amounts of bounty income recognized, and cost of goods sold by the costs incurred for AOL bundled internet service sold to our customers, of $131 million, $337 million and $8
million, respectively. The amounts received from AOL were previously included in net sales and the amounts paid to AOL were previously included in cost of goods sold. The Company also restated 2001, 2000 and 1999 net sales and cost of goods sold to
present the cost incurred for a third-party provider of extended warranty services of $10 million, $6 million and $0.5 million, respectively, as a reduction of net sales. In view of the nature of the relationships which the Company
maintained with the parties described above and its customers, the Company determined that it is more appropriate to present such amounts on a net basis. These revisions had no impact on previously reported gross profit, operating income (loss) or
net income (loss) per share in any period. Gateway also restated the 2001 and 2000 financial statements to account for the excess cash proceeds received on the sale of a portfolio of financing receivables as an adjustment to the yield on a loan that
was made to an affiliate of the purchaser of the portfolio in 2000. The Company originally recorded the excess proceeds as net sales and has revised the accounting to recognize the excess proceeds in other income (loss), net over the period from the
third quarter of 2000 through the fourth quarter of 2001. The impact of this change was to reduce net income in 2000 by approximately $2.9 million and a corresponding reduction in the 2001 net loss by approximately $2.9 million. The
$2.9 million is reflected as deferred interest income, net of tax impacts, and is included in other current liabilities as of December 31, 2000.



Overview



During 2001, Gateway experienced a significant period of transition. In early 2001, management undertook a strategic review of its
business and established the following objectives for the year: simplify the business, reduce the cost structure and return to a path to long-term sustainable profitability. In connection with these objectives, the Company discontinued certain
non-profitable revenue streams beginning in the second quarter of 2001 of approximately $100 million quarterly, exited its international company-owned operations in the third quarter and took significant restructuring and other actions, which served
to reduce costs and align its operation with its digital technology solutions provider strategy resulting in charges in 2001 totaling $1.1 billion. See Note 16 to the Consolidated Financial Statements included herein for further
information.



Critical Accounting Policies and Estimates



Managements Discussion and
Analysis of Financial Condition and Results of Operations discusses Gateways consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these
financial statements 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



5



---

expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgements, including those related to
customer incentives, product returns, bad debts, inventories, investments, intangible assets, income taxes, financing operations, warranty obligations, restructuring costs, retirement benefits, and contingencies and litigation. Management bases its
estimates and judgements on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



Management believes the following critical accounting policies, among others, affect its more significant judgements and estimates used in
the preparation of its consolidated financial statements. Gateway records estimated reductions to revenue for customer incentive offerings. Should a greater proportion of customers redeem incentives than estimated by the Company, additional
reductions to revenue may be required. Gateway maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of Gateways customers were to
deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Gateway provides for the estimated cost of product warranties at the time revenue is recognized. While Gateway engages in extensive
product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, Gateways warranty obligation is affected by product failure rates, material usage and service delivery costs incurred
in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from Gateways estimates, revisions to the estimated warranty liability may be required. Gateway writes down its inventory for
estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are
less favorable than those projected by management, additional inventory write-downs may be required. Gateway holds minority interests in companies having operations or technology in areas within or adjacent to its strategic focus, some of which are
in publicly traded companies whose share prices are highly volatile and some of which are in non-publicly traded companies whose value is difficult to determine. Gateway records an investment impairment charge when it believes an investment has
experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that
may not be reflected in an investments current carrying value, thereby possibly requiring an impairment charge in the future. Gateway records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely
than not to be realized. While Gateway has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event Gateway were to determine that it would not be able
to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should Gateway determine that it would be able to realize
its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made.



6



---



Results of Operations



The following table sets forth, for the
periods indicated, certain data derived from the Companys consolidated income statements (dollars in thousands):



|                                             |  | 2001       |            |    | Increase (Decrease) |     |    | 2000       |   |           | Increase (Decrease) |  |     | 1999       | 
|-------------------------------------------- |  | ---------- | ---------- | -- | ------------------- | --- | -- | ---------- | - | --------- | ------------------- |  | --- | ---------- | 
|                                             |  | (restated) |            |    |                     |     |    | (restated) |   |           |                     |  |     | (restated) | 
|Net sales                                    |  | $          | 5,937,896  |    |                     | (36 | %) |            | $ | 9,252,083 |                     |  | 3   | %          | 
|Gross profit                                 |  | $          | 838,192    |    |                     | (59 | %) |            | $ | 2,052,956 |                     |  | 12  | %          | 
|Percentage of net sales                      |  |            | 14.1       | %  |                     |     |    |            |   | 22.2      | %                   |  |     |            | 
|Selling, general and administrative expenses |  | $          | 2,022,122  |    |                     | 31  | %  |            | $ | 1,547,701 |                     |  | 25  | %          | 
|Percentage of net sales                      |  |            | 34.1       | %  |                     |     |    |            |   | 16.7      | %                   |  |     |            | 
|Operating income (loss)                      |  | $          | (1,183,930 | )  |                     |     |    |            | $ | 505,255   |                     |  | (15 | %)         | 
|Percentage of net sales                      |  |            | (19.9      | %) |                     |     |    |            |   | 5.5       | %                   |  |     |            | 
|Net income (loss)                            |  | $          | (1,031,062 | )  |                     |     |    |            | $ | 238,630   |                     |  | (44 | %)         | 



Net Sales



2001 vs. 2000



Gateways net sales declined 36% in 2001 from 2000. The
Company shipped approximately 3.6 million systems in 2001 compared to 5.0 million systems in 2000, representing a decrease of 28%. Domestic net sales decreased 32% in 2001 from 2000.



The following table summarizes the Companys net sales for the periods indicated by geographic region
(dollars in thousands):



|              |  | 2001       |           | Decrease |     |    | 2000       |   | Increase (Decrease) |  |    | 1999      
|------------- |  | ---------- | --------- | -------- | --- | -- | ---------- | - | ------------------- |  | -- | ----------
|              |  | (restated) |           |          |     |    | (restated) |   |                     |  |    | (restated)
|Net sales:    |  |            |           |          |     |    |            |   |                     |  |    |           
|U.S. Consumer |  | $          | 2,955,747 |          | (42 | %) |            | $ | 5,056,530           |  | 9  | %         
|U.S. Business |  |            | 2,430,815 |          | (14 | %) |            |   | 2,832,936           |  | (6 | %)        
|              |  |            |           |          |     |    |            |   |                     |  |    |           
|Total U.S.    |  | $          | 5,386,562 |          | (32 | %) |            | $ | 7,889,466           |  | 3  | %         
|EMEA          |  |            | 229,026   |          | (61 | %) |            |   | 586,361             |  | 5  | %         
|Asia Pacific  |  |            | 322,308   |          | (58 | %) |            |   | 776,256             |  | 7  | %         
|              |  |            |           |          |     |    |            |   |                     |  |    |           
|Consolidated  |  | $          | 5,937,896 |          | (36 | %) |            | $ | 9,252,083           |  | 3  | %         
|              |  |            |           |          |     |    |            |   |                     |  |    |           



The
Companys net sales were adversely impacted by approximately $100 million per quarter related to a number of strategic actions taken beginning in the second quarter of 2001 to discontinue certain non-profitable revenue streams which included,
among other things, the closure of certain retail locations, restructuring international markets, discontinuing lower quality consumer lending and exiting certain indirect sales activities. During the third quarter of 2001, the Company exited
substantially all of its Company-owned international operations. International net sales were 9% of total Company net sales in 2001.



In the United States, the consumer and business segments represented 50% and 41%, respectively, of total Company net sales in 2001, and
with the exit from substantially all of its Company-owned international operations, will represent all of net sales in 2002. In the United States, consumer segment net sales and unit shipments declined 42% and 36%, respectively, in 2001 from 2000.
Excluding the impact of the strategic actions mentioned above, domestic consumer net sales declined approximately 34% during 2001 from 2000. The Company continued to experience a decline in consumer demand for PC and PC-related products and services
in 2001, which is a continuing trend from the last quarter of 2000. In addition, the Company experienced a significant reduction in demand immediately following the terrorist attacks that took place on September 11,



7



---

2001, which had an adverse impact on net sales for the third and fourth quarters of 2001. In our business segment in the United States, net
sales and unit shipments declined by 14% and 3%, respectively, in 2001 from 2000. Our business segment experienced declines in unit shipments to strategic accounts and governmental customers, respectively, in 2001 compared to 2000. This was
partially offset by continued growth during 2001 in unit shipments to small and medium business, posting a 4% increase over 2000, while unit shipments to education customers were up slightly over 2000.



Digital Technology Solutions and Digital Services, accounted
for $1.04 billion in 2001, or 17% of net sales, compared to $1.5 billion in 2000, or 16% of net sales. Digital Technology Solutions, previously referred to as beyond-the-box revenue including Digital Infrastructure, consists of Internet access and
financing solutions, Digital Solutions, consisting of software and peripherals that are common elements of Gateways Your:)ware bundles, and Digital Services, consists of extended warranties, learning or training and installation offerings.



In 2001, $604 million of beyond-the-box revenue
was sold at the point of sale and $433 million was sold after the point of sale. The decline in beyond-the-box revenue on a year-over-year basis is primarily attributable to the decline in unit shipments as well as the Companys decision to
discontinue certain non-profitable revenue streams mentioned above. During the first quarter of 2001, the Company modified its strategic alliance with America Online, Inc. (AOL) whereby it converted existing gateway.net customers to the AOL-branded
Internet access in order to improve the customer experience and the economic return to the Company for such subscribers. In addition, the Company began to participate earlier in a greater share of recurring income on new prepaid ISP subscribers.



As part of the strategic reviews of the
Companys direct sales policy and in response to the decline in consumer demand, the Company curtailed retail expansion plans in 2001 and closed a number of retail locations. The Company exited 2001 with 296 Gateway stores in the United States
as compared to 327 at the end of 2000, and no store-within-a-store locations as compared to 463 at the end of 2000. As of January 31, 2002, the Company had 277 stores in the United States.



Average selling price (ASP), which includes PC and non-PC products and services sold at the point of sale per
unit, was $1,521 in the fourth quarter of 2001, up from $1,457 in the third quarter of 2001. This increase is significantly better than the earlier 2001 sequential quarterly declines experienced by the Company which is due, in large part, to a
richer system mix and lower discounting in the fourth quarter of 2001. The Company did not report ASP prior to 2001.



Average unit price (AUP) was $1,650 compared to $1,842 in 2000, a decrease of 10%. The Company experienced an aggressive pricing
environment triggered by some large competitors beginning in the fourth quarter of 2000, which resulted in AUP declines in the consumer segment. Management expects that the pricing environment will continue to be challenging for 2002.



2000 vs. 1999



Gateways net sales growth was 3% in 2000 over 1999. The
Company shipped approximately 5.0 million systems in 2000 compared to approximately 4.7 million systems in 1999, representing an increase of 7%. Domestic and international sales grew 3% and 6%, respectively, in 2000 over 1999.



In the United States, the consumer and business segments
represented 55% and 31%, respectively, of total Company sales in 2000. Consumer segment net sales and unit shipments grew 9% and 12%, respectively, in 2000 over 1999. Consumer net sales were strong the first three quarters of 2000 driven by new
marketing initiatives, continued retail expansion and sales of beyond-the-box products and services in addition to PCs. In the fourth quarter, the consumer segment experienced a decline in both net sales and unit shipments of 10% and 9%,
respectively, compared to the fourth quarter of 1999 due to a substantial decline in consumer demand for PC and PC-related products and services.



8



---



Beyond-the-box
revenue including software and peripheral sales, Internet access and portal income, financing, extended warranty and training revenue accounted for $1.5 billion in 2000 sales compared to $.8 billion in 1999, or an increase of 95%. Beyond-the-box
revenue in 2000 was driven in part by the successful delivery of training programs in the store channel as well as on the Internet.



In connection with its continued retail expansion in the United States, the Company opened 93 retail stores in 2000 versus 83 in 1999, as
well as 463 store-within-a-store locations as part of a strategic alliance with a retail partner.



The business segment experienced a decline in net sales of 6% and unit shipments by 4% in 2000 over 1999. The segment was reorganized in
the second half of 2000 in light of its declining performance to focus on small and medium businesses, government and education sectors, and this reorganization and related initiatives led to double-digit business sales gains at the store level in
the fourth quarter of 2000.



Average unit price
(AUP) declined 4% in 2000 compared to 1999. The Company experienced an aggressive pricing environment triggered by some large competitors in the fourth quarter of 2000, which resulted in AUP declines in the consumer segment during the quarter.



During 2000, Europe, Middle East and Africa
(EMEA) net sales and units increased 5% and 21%, respectively, over 1999. The Asia Pacific region net sales increased 7% and units 17% in 2000 over 1999. These increases were principally due to expansion of the number of
store-within-a-store outlets.



Gross profit



2001 vs. 2000



Gross profit in 2001 declined to $0.8 billion, a decrease of
approximately 59% from 2000. As a percentage of sales, gross profit for 2001 decreased to 14.1% from 22.2% in 2000. The decline in 2001 is due in large part to the losses experienced in the first quarter of 2001 on the Companys consumer
financing portfolio and the costs associated with restructuring decisions during the third quarter of 2001 which included, among other things, the exit of substantially all of its Company-owned international operations and the closure and
consolidation of manufacturing facilities, and increased pricing pressures throughout 2001.



The Companys consumer financing operations are reported as net sales in the case of interest and fee income and cost of goods sold in the case of service fees and finance receivable losses. On
February 16, 2001, the Company sold approximately $500 million of finance receivables, consisting of higher rated credits, to its loan-servicing partner at book value. Later in the first quarter of 2001, the Companys remaining consumer
financing operations experienced an increase to the provision for loan losses on financing receivables, resulting in a $75 million operating loss. In addition, while continuing to provide customer financing, the Company made the decision to sell the
substantial balance of its remaining portfolio. As a result of that decision, the Company recorded an additional charge of $100 million in the first quarter of 2001 to reduce the carrying value of those receivables to their estimated net realizable
value. See Other Income (loss), net below for discussion of other impacts from the consumer loan portfolio. Excluding the effects of the consumer financing portfolio on gross profit and the restructuring costs and other special charges of $116
million and $51 million, in 2001 and 2000, respectively, gross profit was $1.13 billion in 2001, or 19.1% of net sales, compared to $2.1 billion or 22.7% of net sales in 2000. Excluding the effects of the consumer financing portfolio and
restructuring costs, the year-over-year comparisons of gross profit percentage are impacted primarily by the competitive pricing environment noted above, the decision to accelerate the sale of international inventory, product line transition costs
in connection with the Companys move to a more simplified hardware product line, as well as additional costs associated with the consolidation and closure of three manufacturing facilities. During 2000, gross margins were favorably impacted by
reductions of contingent liabilities of approximately $7 million. For 2002, the Company has ceased new direct consumer financing activities, relying primarily on third-party partners.



9



---



2000 vs.
1999



Gross profit in 2000 rose to $2.1
billion, an increase of approximately 12% from 1999. As a percentage of sales, gross profit for 2000 increased to 22.2% from 20.5% in 1999. Year-over-year improved margins were driven principally by the continued diversification of the revenue
stream from the sale of non-PC services and products and active supplier management.



The Companys gross finance receivables increased from $299 million at the end of 1999 to $779 million at December 31, 2000. The Company continually assesses the allowance for losses on a regular
basis with corresponding adjustments made based upon managements periodic review of historical experience, the nature and volume of the portfolio, adverse situations that may affect the customers ability to repay and general economic
conditions. The Company significantly increased its allowance during the course of 2000 from $3.6 million at December 31, 1999 to $75 million at December 31, 2000 primarily due to the increased participation of the Company in finance receivables and
the expansion of the consumer finance program to higher risk categories.



Selling, General and Administrative Expenses



2001 vs. 2000



Selling, general and administrative expenses (SG&A) totaled $2.0 billion in 2001 compared to $1.5 billion in 2000. During 2001, the Company approved restructuring plans which, among other things, have led to the
closure of substantially all of its Company-owned international operations, reduction of its workforce, closure of certain store locations, consolidation of facilities, redefinition of its information technology strategy, and the exit from certain
other activities. Pre-tax charges of $759 million were recorded to SG&A to provide for these actions and other related items. During 2000, the Company recorded special charges totaling $43 million, including the impairment of goodwill, severance
costs and asset write-downs. See Note 16 to the Consolidated Financial Statements included herein for further information.



Excluding the restructuring and other special charges noted above, SG&A expense would have been $1.3 billion or 21.3% of net sales in
2001 compared to the $1.5 billion or 16.3% of net sales in 2000. This decline in SG&A expense in 2001 compared to 2000 is the result of a combination of the restructuring decisions made in 2001 and variable cost declines associated with lower
sales volume, as well as other cost reduction efforts. The increase in SG&A as a percentage of net sales is due, primarily, to the de-leveraging of expenses during the time frame of significant revenue reductions as described above, and to
incremental costs resulting from the execution of the Companys restructuring plans in 2001.



In July 2001, the Company announced that it was accelerating the implementation of its strategy that involved transforming the Company
from a traditional manufacturer of PCs to a leading provider of personalized technology solutions by better leveraging Gateways existing retail footprint, its brand position and its beyond-the-box solutions leadership. This acceleration
consolidated the Companys U.S. Consumer and Business operating units into one sales organization and included the formation of a new solutions group. As part of this shift, Gateway is turning its U.S. retail locations into local technology
resource centers, serving as hubs for cross-functional sales, service and marketing teams that will provide customers with unparalleled personalization and local service and support. In August 2001, the Company announced plans to further align its
operations and cost structure with this strategy including, among other things, the consolidation and closure of certain manufacturing and call center operations in the United States and the closure of substantially all of its Company-owned
international operations.



2000 vs. 1999



SG&A expenses totaled $1.5 billion in
2000 compared to $1.2 billion in 1999. In 2000, the Company continued to open retail stores, added sales personnel in other channels, experienced an increased depreciation charge due to the capitalization of systems infrastructure, and increased
marketing in all segments. As a percentage of net sales, SG&A expenses were 16.7% in 2000, up from 13.9% in 1999.



10



---



Operating Income (Loss)



2001 vs. 2000



Operating loss for 2001 totaled $1.2 billion compared to
operating income of $505 million in 2000. The operating loss in 2001 resulted principally from the restructuring and other special charges and the $75 million loss from the consumer financing operations noted above. Excluding the restructuring and
other special charges and the $75 million loss from the consumer financing operations described above, the Company had an operating loss of approximately $133 million in 2001 compared to the operating income of $600 million in 2000.



Operating income in 2001 for the consumer segment was $15
million compared to $618 million in 2000. Business segment operating income in 2001 was $220 million and represented a decrease of 43% from 2000. The declines in operating income in the consumer and business segments in 2001 were due to net sales
softness and de-leveraging of fixed expenses noted earlier. Internationally, the Company had an operating loss of $91 million prior to its exit from substantially all of its Company-owned international operations in 2001 and $50 million in 2000.
Non-segment expenses for 2001 totaled $1.3 billion compared to $445 million in 2000. This increase is primarily the result of an increase in restructuring and other special charges described above. 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 and other special charges.



2000 vs. 1999



Operating income for 2000 was $505.3 million compared to
$595.7 in 1999. Operating income in 2000 for the consumer segment was $618 million and represented an increase of 31% over 1999 due to successful expansion of the beyond-the-box strategy. Business segment operating income in 2000 was $383 million
and declined 19% over 1999, in line with the net sales softness and de-leveraging of fixed expenses noted earlier. Internationally, the Company had an operating loss of $50 million in 2000 compared to an operating income of $24 million in 1999 due
to a challenging competitive environment. Non-segment expenses for 2000 totaled $445 million compared to $376 million in 1999.



Other Income (Loss), Net



Other income (loss), 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 and losses. Other income (loss), net resulted in a loss of $102 million in 2001 including charges totaling $184 million to write down the carrying value of the
Companys investments and long-term receivables associated with a strategic restructuring decision, partially offset by income of $34 million associated with the consumer financing portfolio which was sold during the third quarter. Other income
(loss), net resulted in a loss of $101 million in 2000, including a charge of $152 million due to other than temporary declines in the Companys investment portfolio. Excluding these items, other income (loss), net was $48 million, $51 million
and $68 million in 2001, 2000 and 1999, respectively. The decrease in other income (loss), net from 1999 was due to higher interest expense in 2001 and gains on investments in 1999 with no significant corresponding gains in 2000 and 2001.



Income Taxes



The Company recorded a tax benefit of $274 million or 21.3%
of the Companys loss before income taxes, extraordinary gain, and cumulative change in accounting principle for the year ended December 31, 2001. This tax benefit for 2001 differs from the federal income tax rate of 35% principally due to
losses related to the Companys foreign operations, certain restructuring and other special charges and the establishment of a valuation allowance against deferred tax assets related to unrealized capital losses associated with the investment
impairments. Excluding these items, the effective tax rate for the year 2001 would have been 37% compared to



11



---

38% for 2000 and 35.5% for 1999. The effective tax rate for 1999 was favorably impacted by shifts in the geographic distribution of the
Companys earnings to tax advantaged international jurisdictions from the United States.



Liquidity and Capital Resources



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



|                                     |  | 2001                   |           |   | 2000 |   |         | 1999 | 
|------------------------------------ |  | ---------------------- | --------- | - | ---- | - | ------- | ---- | 
|                                     |  | (dollars in thousands) |          
|Cash and marketable securities       |  | $                      | 1,166,054 |   |      | $ | 614,070 |      | 
|Days of sales in accounts receivable |  |                        | 17        |   |      |   | 21      |      | 
|Days inventory on hand               |  |                        | 12        |   |      |   | 15      |      | 
|Days in accounts payable             |  |                        | 34        |   |      |   | 38      |      | 
|Cash conversion cycle                |  |                        | (5        | ) |      |   | (2      | )    | 



At
December 31, 2001, the Company had approximately $1.2 billion in cash and marketable securities. At December 31, 2001, and presently, no amounts were outstanding under the Companys unsecured $300 million revolving line of credit and the
Company had no long-term debt. As a result of the Companys losses in 2001, which included significant restructuring and other special charges, borrowing availability under the credit facility will be limited from time to time during the term
of the facility. The Company does not have any plans to borrow under the credit facility at this time. Despite declining market conditions and restructuring activities undertaken in 2001, the current ratio improved from 1.4 in 2000 to 1.9 in 2001
and the cash conversion cycle improved from minus 2 days in 2000 to minus 5 days in 2001.



The Company used $270 million in cash from operations during 2001, including $215 million of net loss adjusted for non-cash items. Significant factors impacting cash used in operating activities
include decreases in accounts payable and other liabilities of $574 million offset by decreases in accounts receivable of $302 million and inventory levels of $195 million. Cash proceeds from the sale, purchase and collection of financing and notes
receivables of $591 million, $196 million from the issuance of a note payable, which was later extinguished in December 2001 as discussed below, net of payments and $200 million from the issuance of preferred stock were the primary cash inflows. The
principal uses of cash include $199 million for capital expenditures and $283 million to purchase available-for-sale securities.



The Company generated $289 million in cash from operations during 2000, including $548 million of net income adjusted for non-cash items.
Significant factors impacting cash provided by operating activities include an increase in inventory levels of $123 million, an increase in other assets of $131 million, a decrease in accounts payable and other liabilities of $81 million, and a
decrease in accounts receivable of $76 million. The adoption of SAB 101 increased inventory by $52 million and decreased receivables by $64 million as of December 31, 2000. Additionally, component inventory increased due to the decline in fourth
quarter demand in 2000. The principal uses of cash included approximately $472 million to purchase notes and financing receivables net of proceeds received for repayment, $315 million for capital expenditures and $247 million to purchase investments
in unconsolidated affiliates. Cash proceeds from the sale of marketable securities were $79 million, net of purchases of securities.



The Company generated $731 million in cash from operations during 1999, including $590 million of net income adjusted for non-cash items.
Other significant factors impacting cash provided by operating activities include an increase in accounts payable and other liabilities of $466 million, partially offset by an increase in accounts receivable of $116 million, inventory of $24 million
and other assets of $185 million. The Company used approximately $338 million for capital expenditures, $50 million to purchase investments in marketable securities, net of proceeds of securities sold, $315 million to purchase financing receivables,
net of proceeds received for repayment and $127 million to purchase investments in unconsolidated affiliates.



12



---



In December
2001, the Company extinguished its convertible note to AOL through the issuance of 50,000 shares of Series C Redeemable Convertible Preferred Stock (the Series C Preferred Stock), resulting in an extraordinary gain of $4.3 million, net
of tax. The Series C Preferred Stock bears a 1.5% annual dividend, paid semi-annually. The third and final funding of Companys investment agreement with AOL occurred in December 2001 when the Company issued $200 million of Series A Convertible
Preferred Stock, bearing an annual dividend of 2.92% paid quarterly. The Series A Preferred Stock and the Series C Preferred Stock are subject to certain limitations on transfer and certain registration rights. See Note 8 to the Consolidated
Financial Statements included herein for further information.



Due to the Companys significant loss in 2001, an income tax refund in excess of $200 million is expected in early 2002.



As a result of the restructuring plans described in the Note 16 and 17 to the accompanying Consolidated Financial Statements, the Company
expects future cash outlays of approximately $176 million primarily for the exit of its international operations. The total cash outlay is expected to be funded from existing cash balances and internally generated cash flows from operations. In
addition, the Company expects cash inflows totaling approximately $50 million over the next several quarters as a result of the sale of certain assets in connection with the Companys restructuring plan. Execution of the restructuring plan is
anticipated to be substantially complete by the first quarter of 2003.



The following represents contractual commitments associated with operating leases, royalty and licensing agreements and expected cash flow impacts from the restructurings announced in 2001 and 2002:



|                             |  | Payments due by Period (in millions)
|---------------------------- |  | ------------------------------------
|                             |  | Within 1 Year                       
|Operating leases             |  | $                                   
|Royalty/Licensing agreements |  |                                     
|Restructuring, net           |  |                                     
|                             |  |                                     
|Total                        |  | $                                   
|                             |  |                                     



The
Company also had Standby Letters of Credit and Guarantees outstanding at December 31, 2001, amounting to $2.6 million.



The Company has an arrangement whereby it shares in the loss experience of a third-party financing partner on certain purchases of Gateway
products and services. The Companys maximum exposure under this loss sharing arrangement is approximately $30 million. Financing originations under this arrangement ended in the second quarter of 2001. The estimated losses are provided
for in the Companys financial statements; however, if the actual losses prove to be greater than estimated it could affect the Companys future results of operations. The Company believes that the actual results of this loss sharing
arrangement will not materially affect liquidity.



Management believes that the Companys current sources of working capital, including its expected income tax refund, will provide adequate flexibility for the Companys financial needs for at least the next twelve months.
However, any projections of future financial needs and sources of working capital are subject to uncertainty. See Forward Looking Statements and BusinessFactors that May Affect Gateways Business and Future Results
as well as Outlook that could affect the Companys estimates of future financial needs and sources of working capital.



The Company continually evaluates the opportunity to sell additional equity and debt securities, restructure current debt arrangements or
otherwise improve its financial position. The sale of additional equity, convertible debt or equity securities could have dilutive effects on stockholders. The Company will also consider the acquisition of or investment in complementary businesses,
products, services and technologies which might



13



---

affect its liquidity profile or the level of its equity and debt securities. In the event that the Company desires to engage in any of these
activities, there can be no assurances that financing will be available in amounts or terms that are acceptable.



New Accounting Pronouncements



In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 Business Combinations (FAS 141) and Statement of Financial Accounting
Standards No. 142 Goodwill and Other Intangible Assets (FAS 142). FAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their
useful lives (but with no maximum life). The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is
required to adopt FAS 142 effective January 1, 2002. The adoption of this new accounting pronouncement is not expected to have a material impact on the Companys consolidated financial position or results of operations.



In August 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), which supersedes both Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121) and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of OperationsReporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). FAS 144 retains the fundamental provisions
in FAS 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with FAS 121. For example, FAS 144
provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be
disposed of other than by sale. FAS 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a
business). Unlike FAS 121, an impairment assessment under FAS 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under FAS No. 142, Goodwill and Other Intangible Assets.



The Company is required to adopt FAS 144 no later than its
first fiscal year beginning after December 15, 2001. Management does not expect the adoption of FAS 144 for long-lived assets held for use to have a material impact on the Companys financial statements because the impairment assessment under
FAS 144 is largely unchanged from FAS 121. The provisions of this statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities and therefore,
will depend on future actions initiated by management. As a result, management cannot determine the potential effects that adoption of FAS 144 will have on the Companys financial statements with respect to future disposal decisions. See Note
17 to the Consolidated Financial Statements included herein for discussion of decisions made in early 2002.



14



---



Item
8.Financial Statements and Supplementary Data



The restated consolidated financial statements and supplementary data, including the notes to the restated consolidated financial statements, set forth in this Item 8 have been revised to reflect
the restatement and with respect to Note 6 and Note 17 of the Notes to the Consolidated Financial Statements, certain events occurring subsequent to the filing of the original Form 10-K.



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
(RESTATED)



|Financial Statements:                                                                                                                               |  |   
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|                                                                                                                                                   
|Report of Independent Accountants                                                                                                                   |  | 16
|                                                                                                                                                   
|Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and
1999 (restated)                                               |  | 17
|                                                                                                                                                   
|Consolidated Balance Sheets at December 31, 2001 and 2000 (restated)                                                                                |  | 18
|                                                                                                                                                   
|Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and
1999 (restated)                                               |  | 19
|                                                                                                                                                   
|Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income
for the years ended December 31, 2001, 2000 and 1999 (restated) |  | 20
|                                                                                                                                                   
|Notes to Consolidated Financial Statements (restated)                                                                                               |  | 21
|                                                                                                                                                   
|Financial Statement Schedule:                                                                                                                       |  |   
|                                                                                                                                                   
|Schedule IIValuation and Qualifying Accounts                                                                                                       |  | 45



15



---



Report of
Independent Accountants



To the Stockholders and Board of
Directors of Gateway, Inc.



In our opinion, the
restated consolidated financial statements listed in the accompanying index present fairly, in all material respects, the restated financial position of Gateway, Inc. and its subsidiaries at December 31, 2001 and 2000, and the results of their
operations and their cash flows as restated for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and
the financial statement schedule are the responsibility of the Companys management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



As discussed in Note 2, the Company has restated its previously issued financial statements.



As discussed in Note 1, effective January 1, 2001, the Company
adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. As discussed in Note 1, effective January 1, 2000, the Company changed its revenue recognition policy relating to product
shipments.



/s/    PRICEWATERHOUSECOOPERS LLP



PricewaterhouseCoopers LLP



San Diego, California

January 24, 2002, except for Notes 2 and 6,

as to which the
date is April 14, 2003



16



---

GATEWAY, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, 2001, 2000 and 1999

(in thousands, except per share amounts)



|                                                                                                              |  | 2001       |            |   | 2000       |   |           | 1999      
|------------------------------------------------------------------------------------------------------------- |  | ---------- | ---------- | - | ---------- | - | --------- | ----------
|                                                                                                              |  | (restated) |            |   | (restated) |   |           | (restated)
|Net sales                                                                                                     |  | $          | 5,937,896  |   |            | $ | 9,252,083 |           
|Cost of goods sold                                                                                            |  |            | 5,099,704  |   |            |   | 7,199,127 |           
|                                                                                                              |  |            |            |   |            |   |           |           
|Gross profit                                                                                                  |  |            | 838,192    |   |            |   | 2,052,956 |           
|Selling, general and Administrative expenses                                                                  |  |            | 2,022,122  |   |            |   | 1,547,701 |           
|                                                                                                              |  |            |            |   |            |   |           |           
|Operating income (loss)                                                                                       |  |            | (1,183,930 | ) |            |   | 505,255   |           
|Other income (loss), net                                                                                      |  |            | (101,854   | ) |            |   | (101,184  | )         
|                                                                                                              |  |            |            |   |            |   |           |           
|Income (loss) before income taxes, extraordinary item and cumulative effect of change in
accounting principle |  |            | (1,285,784 | ) |            |   | 404,071   |           
|Provision (benefit) for income taxes                                                                          |  |            | (274,232   | ) |            |   | 153,590   |           
|                                                                                                              |  |            |            |   |            |   |           |           
|Income (loss) before extraordinary item and cumulative effect of change in accounting
principle               |  |            | (1,011,552 | ) |            |   | 250,481   |           
|Extraordinary gain on early extinguishment of debt, net of tax                                                |  |            | 4,341      |   |            |   |          |           
|Cumulative effect of change in accounting principle, net of tax                                               |  |            | (23,851    | ) |            |   | (11,851   | )         
|                                                                                                              |  |            |            |   |            |   |           |           
|Net income (loss)                                                                                             |  | $          | (1,031,062 | ) |            | $ | 238,630   |           
|                                                                                                              |  |            |            |   |            |   |           |           
|Basic net income (loss) per share:                                                                            |  |            |            |   |            |   |           |           
|Income (loss) per share before extraordinary item and cumulative effect of change in
accounting principle     |  | $          | (3.13      | ) |            | $ | 0.78      |           
|Extraordinary item                                                                                            |  |            | 0.01       |   |            |   |          |           
|Cumulative effect of change in accounting principle                                                           |  |            | (0.07      | ) |            |   | (0.04     | )         
|                                                                                                              |  |            |            |   |            |   |           |           
|Net income (loss) per basic share                                                                             |  | $          | (3.19      | ) |            | $ | 0.74      |           
|                                                                                                              |  |            |            |   |            |   |           |           
|Diluted net income (loss) per share:                                                                          |  |            |            |   |            |   |           |           
|Income (loss) per share before extraordinary item and cumulative effect of change in
accounting principle     |  | $          | (3.13      | ) |            | $ | 0.75      |           
|Extraordinary item                                                                                            |  |            | 0.01       |   |            |   |          |           
|Cumulative effect of change in accounting principle                                                           |  |            | (0.07      | ) |            |   | (0.03     | )         
|                                                                                                              |  |            |            |   |            |   |           |           
|Net income (loss) per diluted share                                                                           |  | $          | (3.19      | ) |            | $ | 0.72      |           
|                                                                                                              |  |            |            |   |            |   |           |           
|Weighted average shares outstanding:                                                                          |  |            |            |   |            |   |           |           
|Basic                                                                                                         |  |            | 323,289    |   |            |   | 321,742   |           
|                                                                                                              |  |            |            |   |            |   |           |           
|Diluted                                                                                                       |  |            | 323,289    |   |            |   | 331,320   |           
|                                                                                                              |  |            |            |   |            |   |           |           





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



17



---

GATEWAY, INC.



CONSOLIDATED BALANCE SHEETS

December 31, 2001 and 2000

(in thousands, except per share amounts)



|                                                                                                                                                  |  | 2001 |           | 2000       |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---------- | -
|                                                                                                                                                  |  |      |           | (restated) |  
|ASSETS                                                                                                                                            |  |      |           |            |  
|Current assets:                                                                                                                                   |  |      |           |            |  
|Cash and cash equivalents                                                                                                                         |  | $    | 730,999   |            | $
|Marketable securities                                                                                                                             |  |      | 435,055   |            |  
|Accounts receivable, net                                                                                                                          |  |      | 219,974   |            |  
|Inventory                                                                                                                                         |  |      | 120,270   |            |  
|Other, net                                                                                                                                        |  |      | 616,626   |            |  
|                                                                                                                                                  |  |      |           |            |  
|Total current assets                                                                                                                              |  |      | 2,122,924 |            |  
|Property, plant and equipment, net                                                                                                                |  |      | 608,429   |            |  
|Intangibles, net                                                                                                                                  |  |      | 36,304    |            |  
|Other assets, net                                                                                                                                 |  |      | 219,200   |            |  
|                                                                                                                                                  |  |      |           |            |  
|                                                                                                                                                  |  | $    | 2,986,857 |            | $
|                                                                                                                                                  |  |      |           |            |  
|LIABILITIES AND EQUITY                                                                                                                            |  |      |           |            |  
|Current liabilities:                                                                                                                              |  |      |           |            |  
|Accounts payable                                                                                                                                  |  | $    | 341,122   |            | $
|Accrued liabilities                                                                                                                               |  |      | 468,609   |            |  
|Accrued royalties                                                                                                                                 |  |      | 135,698   |            |  
|Other current liabilities                                                                                                                         |  |      | 200,599   |            |  
|                                                                                                                                                  |  |      |           |            |  
|Total current liabilities                                                                                                                         |  |      | 1,146,028 |            |  
|Other long-term liabilities                                                                                                                       |  |      | 82,636    |            |  
|                                                                                                                                                  |  |      |           |            |  
|Total liabilities                                                                                                                                 |  |      | 1,228,664 |            |  
|                                                                                                                                                  |  |      |           |            |  
|                                                                                                                                                 
|Commitments and contingencies (Note 6)                                                                                                            |  |      |           |            |  
|                                                                                                                                                 
|Series C redeemable convertible preferred stock, $.01 par value, $200,000 liquidation
value, 50 shares authorized, issued and outstanding in 2001 |  |      | 193,109   |            |  
|                                                                                                                                                  |  |      |           |            |  
|Stockholders equity:                                                                                                                             |  |      |           |            |  
|Series A convertible preferred stock, $.01 par value, $200,000 liquidation value, 50
shares authorized, issued and outstanding in 2001            |  |      | 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; 323,973 shares and 323,955
shares issued in 2001 and 2000, respectively                |  |      | 3,239     |            |  
|Additional paid-in capital                                                                                                                        |  |      | 731,623   |            |  
|Common stock in treasury, at cost, 552 shares in 2000                                                                                             |  |      |          |            |  
|Retained earnings                                                                                                                                 |  |      | 616,420   |            |  
|Accumulated other comprehensive income                                                                                                            |  |      | 13,802    |            |  
|                                                                                                                                                  |  |      |           |            |  
|Total stockholders equity                                                                                                                        |  |      | 1,565,084 |            |  
|                                                                                                                                                  |  |      |           |            |  
|                                                                                                                                                  |  | $    | 2,986,857 |            | $
|                                                                                                                                                  |  |      |           |            |  



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



18



---

GATEWAY, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2001, 2000 and 1999

(in thousands)



|                                                                                                   |  | 2001       |            |   | 2000       |   |           | 1999 | 
|-------------------------------------------------------------------------------------------------- |  | ---------- | ---------- | - | ---------- | - | --------- | ---- | 
|                                                                                                   |  | (restated) |            |   | (restated) |   |           |      | 
|Cash flows from operating activities:                                                              |  |            |            |   |            |   |           |      | 
|Net income (loss)                                                                                  |  | $          | (1,031,062 | ) |            | $ | 238,630   |      | 
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities: |  |            |            |   |            |   |           |      | 
|Depreciation and amortization                                                                      |  |            | 199,976    |   |            |   | 189,084   |      | 
|Provision for uncollectible accounts receivable                                                    |  |            | 23,151     |   |            |   | 25,453    |      | 
|Deferred income taxes                                                                              |  |            | (29,831    | ) |            |   | (82,818   | )    | 
|Loss on investments                                                                                |  |            | 186,745    |   |            |   | 151,694   |      | 
|Write-down of long-lived assets                                                                    |  |            | 418,304    |   |            |   | 19,085    |      | 
|Cumulative effect of change in accounting principle                                                |  |            | 23,851     |   |            |   | 11,851    |      | 
|Extraordinary gain on extinguishment of debt                                                       |  |            | (4,341     | ) |            |   |          |      | 
|Other, net                                                                                         |  |            | (1,707     | ) |            |   | (4,795    | )    | 
|Changes in operating assets and liabilities:                                                       |  |            |            |   |            |   |           |      | 
|Accounts receivable                                                                                |  |            | 301,630    |   |            |   | 76,191    |      | 
|Inventory                                                                                          |  |            | 194,799    |   |            |   | (123,196  | )    | 
|Other assets                                                                                       |  |            | 21,729     |   |            |   | (131,126  | )    | 
|Accounts payable                                                                                   |  |            | (442,312   | ) |            |   | (113,800  | )    | 
|Accrued liabilities                                                                                |  |            | (87,714    | ) |            |   | (55,201   | )    | 
|Accrued royalties                                                                                  |  |            | (2,747     | ) |            |   | (15,395   | )    | 
|Other liabilities                                                                                  |  |            | (40,810    | ) |            |   | 103,115   |      | 
|                                                                                                   |  |            |            |   |            |   |           |      | 
|Net cash provided by (used in) operating activities                                                |  |            | (270,339   | ) |            |   | 288,772   |      | 
|                                                                                                   |  |            |            |   |            |   |           |      | 
|Cash flows from investing activities:                                                              |  |            |            |   |            |   |           |      | 
|Capital expenditures                                                                               |  |            | (199,493   | ) |            |   | (314,804  | )    | 
|Investments in other long-term investments                                                         |  |            |           |   |            |   | (246,900  | )    | 
|(Purchases) sales of available-for-sale securities, net                                            |  |            | (282,798   | ) |            |   | 78,988    |      | 
|Proceeds from the sale of financing receivables                                                    |  |            | 569,579    |   |            |   | 54,090    |      | 
|Purchase of financing receivables, net of repayments                                               |  |            | (28,476    | ) |            |   | (463,693  | )    | 
|Proceeds from (purchases of) notes receivable                                                      |  |            | 50,000     |   |            |   | (62,500   | )    | 
|Other, net                                                                                         |  |            | 189        |   |            |   | 1,539     |      | 
|                                                                                                   |  |            |            |   |            |   |           |      | 
|Net cash provided by (used in) investing activities                                                |  |            | 109,001    |   |            |   | (953,280  | )    | 
|                                                                                                   |  |            |            |   |            |   |           |      | 
|Cash flows from financing activities:                                                              |  |            |            |   |            |   |           |      | 
|Proceeds from issuances of notes payable                                                           |  |            | 200,000    |   |            |   | 3,000     |      | 
|Principal payments on long-term obligations and notes payable                                      |  |            | (3,984     | ) |            |   | (8,934    | )    | 
|Purchase of treasury stock                                                                         |  |            |           |   |            |   | (58,992   | )    | 
|Proceeds from stock issuance                                                                       |  |            | 200,000    |   |            |   | 1,775     |      | 
|Stock options exercised                                                                            |  |            | 9,431      |   |            |   | 83,346    |      | 
|                                                                                                   |  |            |            |   |            |   |           |      | 
|Net cash provided by financing activities                                                          |  |            | 405,447    |   |            |   | 20,195    |      | 
|                                                                                                   |  |            |            |   |            |   |           |      | 
|Foreign exchange effect on cash and cash equivalents                                               |  |            | 2,893      |   |            |   | 656       |      | 
|                                                                                                   |  |            |            |   |            |   |           |      | 
|Net increase (decrease) in cash and cash equivalents                                               |  |            | 247,002    |   |            |   | (643,657  | )    | 
|Cash and cash equivalents, beginning of year                                                       |  |            | 483,997    |   |            |   | 1,127,654 |      | 
|                                                                                                   |  |            |            |   |            |   |           |      | 
|Cash and cash equivalents, end of year                                                             |  | $          | 730,999    |   |            | $ | 483,997   |      | 
|                                                                                                   |  |            |            |   |            |   |           |      | 



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



19



---



Gateway,
Inc.



CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME

For the years ended December 31, 2001, 2000 and 1999

(in thousands)



|                                                                                                                                  |  | 2001    |   |  | 2000   |            |   | 1999   |        
|--------------------------------------------------------------------------------------------------------------------------------- |  | ------- | - |  | ------ | ---------- | - | ------ | -------
|                                                                                                                                  |  | Shares  |   |  | Amount |            |   | Shares |        
|Series A preferred stock:                                                                                                         |  |         |   |  |        | (restated) |   |        |        
|Balance, beginning of year                                                                                                        |  |        |   |  | $      |           |   |        |       
|Issuance of preferred stock                                                                                                       |  | 50      |   |  |        | 200,000    |   |        |        
|                                                                                                                                  |  |         |   |  |        |            |   |        |        
|Balance, end of year                                                                                                              |  | 50      |   |  | $      | 200,000    |   |        |       
|                                                                                                                                  |  |         |   |  |        |            |   |        |        
|Common stock:                                                                                                                     |  |         |   |  |        |            |   |        |        
|Balance, beginning of year                                                                                                        |  | 323,955 |   |  | $      | 3,239      |   |        | 320,016
|Stock issuances under employee plans                                                                                              |  | 18      |   |  |        |           |   |        | 3,371  
|Issuance of common stock and warrants                                                                                             |  |        |   |  |        |           |   |        | 568    
|                                                                                                                                  |  |         |   |  |        |            |   |        |        
|Balance, end of year                                                                                                              |  | 323,973 |   |  | $      | 3,239      |   |        | 323,955
|                                                                                                                                  |  |         |   |  |        |            |   |        |        
|Additional paid-in capital:                                                                                                       |  |         |   |  |        |            |   |        |        
|Balance, beginning of year                                                                                                        |  |         |   |  | $      | 741,646    |   |        |        
|Stock issuances under employee plans, including tax benefit of $1,120, $56,105, and
$79,961 in 2001, 2000, and 1999, respectively |  |         |   |  |        | (11,397    | ) |        |        
|Issuance of common stock and warrants                                                                                             |  |         |   |  |        | 1,374      |   |        |        
|                                                                                                                                  |  |         |   |  |        |            |   |        |        
|Balance, end of year                                                                                                              |  |         |   |  | $      | 731,623    |   |        |        
|                                                                                                                                  |  |         |   |  |        |            |   |        |        
|Treasury stock, at cost:                                                                                                          |  |         |   |  |        |            |   |        |        
|Balance, beginning of year                                                                                                        |  | 552     |   |  | $      | (21,948    | ) |        | 730    
|Common stock purchased                                                                                                            |  |         |   |  |        |           |   |        | 1,165  
|Stock issuances under employee plans                                                                                              |  | (552    | ) |  |        | 21,948     |   |        | (1,343 
|                                                                                                                                  |  |         |   |  |        |            |   |        |        
|Balance, end of year                                                                                                              |  |        |   |  | $      |           |   |        | 552    
|                                                                                                                                  |  |         |   |  |        |            |   |        |        
|Retained earnings:                                                                                                                |  |         |   |  |        |            |   |        |        
|Balance, beginning of year                                                                                                        |  |         |   |  | $      | 1,647,482  |   |        |        
|Net income (loss)                                                                                                                 |  |         |   |  |        | (1,031,062 | ) |        |        
|                                                                                                                                  |  |         |   |  |        |            |   |        |        
|Balance, end of year                                                                                                              |  |         |   |  | $      | 616,420    |   |        |        
|                                                                                                                                  |  |         |   |  |        |            |   |        |        
|Accumulated other comprehensive income (loss):                                                                                    |  |         |   |  |        |            |   |        |        
|Balance, beginning of year                                                                                                        |  |         |   |  | $      | 7,067      |   |        |        
|Foreign currency translation                                                                                                      |  |         |   |  |        | (3,165     | ) |        |        
|Unrealized gain (loss) on available-for-sale securities                                                                           |  |         |   |  |        | 9,900      |   |        |        
|                                                                                                                                  |  |         |   |  |        |            |   |        |        
|Balance, end of year                                                                                                              |  |         |   |  | $      | 13,802     |   |        |        
|                                                                                                                                  |  |         |   |  |        |            |   |        |        
|Total stockholders equity                                                                                                        |  |         |   |  | $      | 1,565,084  |   |        |        
|                                                                                                                                  |  |         |   |  |        |            |   |        |        



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



20



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.    Summary of Significant Accounting Policies:



Gateway, Inc. (the Company) is a direct marketer
of personal computers (PCs) and PC-related products and services. The Company develops, manufactures, markets and supports a broad line of desktop and portable PCs, servers, and PC-related products used by individuals, families,
businesses, government agencies and educational institutions. The Company also offers and supports PC-related services including training, financing and Internet service.



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



(a)    Basis of Presentation:



The consolidated financial statements include the accounts of the Company and its 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 income 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:



The Company 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. 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. Marketable securities are classified
as available-for-sale and are adjusted to their fair market value using quoted market prices. Investments in public companies with restrictions related to the Companys ability to dispose of the investment within one year are classified as
available-for-sale and are adjusted to their fair value based on one of the following methods: (i) quoted market prices; (ii) current rates for similar issues; (iii) recent transactions for similar issues; or (iv) present value of expected cash
flows. 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 (loss), net. Held-to-maturity securities are recorded at amortized cost. Amortization of related discounts or premiums is included in the
determination of other income (loss), net.



21



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





(e)    Finance Receivables:



During 2001, the Company made the decision to discontinue substantially all of its own financing of consumer receivables. See Note 3 for further information.



Finance receivables, included in other current assets and other assets, consist of receivables due from
customer installment purchases of the Companys products and services net of allowance for losses. Finance charges on the receivables are recognized using the interest method. Finance charge accruals are generally suspended on accounts when
they become 60 days contractually delinquent. Receivable origination and commitment fees are deferred and amortized as a component of finance charges over the life of the related receivable.



The Company maintains an allowance for losses on finance
receivables at an amount that it believes is sufficient to provide for losses in its existing receivables portfolio and that portion of a third-partys receivables that is subject to a loss sharing arrangement. The Company has an arrangement
whereby it shares in the loss experience of a third-party financing partner on certain purchases of Gateway products and services. The allowance is assessed on a regular basis by management and is based upon managements periodic review of the
collectibility of the receivables with respect to historical experience, the nature and volume of the portfolio, adverse situations that may affect the customers ability to repay and general economic conditions. Finance receivables are charged
to the allowance for losses when they are deemed to be uncollectible, generally when the receivable becomes 180 days delinquent.



(f)    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. On a quarterly basis, the Company compares on a part by part basis, the amount of the inventory on hand and under commitment with its latest forecasted requirements to determine whether write-downs for excess or obsolete inventory
are required. Although the writedowns for excess or obsolete inventory reflected in the Companys consolidated balance sheet at December 31, 2001 and 2000 are considered adequate by the Companys management, there can be no assurance that
these writedowns will prove to be adequate over time to cover ultimate losses in connection with the Companys inventory.



(g)    Property, Plant and Equipment:



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



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



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 income (loss).



22



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





(h)    Intangible Assets:



Intangible assets are amortized on a straight-line basis over four to ten years. During 2001 and 2000, the Company recorded charges of $140.0 million and $19.1 million, respectively, related to impairment of goodwill and
related intangibles based on an assessment of the related future net cash flows.



(i)Long-lived Assets:



The Company 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.



(j)    Royalties:



The Company has royalty-bearing license agreements that allow the Company to sell certain hardware and software which is protected by
patent, copyright or license. Royalty costs are accrued and included in cost of goods sold when products are shipped or amortized over the period of benefit when the license terms are not specifically related to the units shipped.



(k)    Warranty:



The Company provides currently for the estimated costs that
may be incurred under its standard warranty obligations.



(l)    Revenue Recognition:



The Company recognizes revenue from product sales upon delivery of the product to its customers. Revenue from services that are rendered by the Company, such as extended warranty, training and Internet service, is recognized as the
services are provided. Revenue from the sale of services that are rendered by third parties are generally recognized at the time of sale. For sales involving multiple elements, revenue is allocated to each element based on fair value. Discounts
related to coupons and mail-in rebates are recorded as a reduction of revenue at the time of sale. Estimates of future product returns are recorded as a reduction to revenue at the time of sale based on historical experience.



During the fourth quarter of 2000, the Company adopted
Securities and Exchange Commission Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognized in Financial Statements. As a result, the Company changed its revenue recognition policy effective January 1, 2000 to recognize revenue
upon delivery rather than shipment of products. The cumulative effect of this accounting change was $11.9 million, net of tax.



(m)    Advertising Costs:



Advertising costs are charged to expense as incurred. Advertising expenses were $239.6 million, $328.0 million, and $256.8 million for
2001, 2000 and 1999, respectively.



(n)    Income Taxes:



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. 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.



23



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





(o)    Net Income (Loss) Per Share (in thousands):



Basic earnings per common share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed using the combination of
dilutive common stock equivalents and the weighted average number of common shares outstanding during the period. Diluted shares for the year ended December 31, 2001, exclude 2,703 weighted average incremental shares related to employee and director
common stock options, Series A convertible preferred stock and non-employee warrants. The Series C Redeemable Convertible Preferred Stock is contingently convertible and therefore is not included in calculating earnings per share as the contingency
has not been met as of December 31, 2001. The number of weighted average incremental shares related to employee and director common stock options excluded from the dilutive calculation for the year ended December 31, 2000 and 1999 were 14,077 and
1,549, respectively. These shares have been excluded from the calculation as their effect is antidilutive.



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



|                                                       |  | 2001    |  | 2000    |  | 1999   
|------------------------------------------------------ |  | ------- |  | ------- |  | -------
|Weighted average shares for basic Earnings per share   |  | 323,289 |  | 321,742 |  | 313,974
|Dilutive effect of stock options                       |  |        |  | 9,578   |  | 10,447 
|                                                       |  |         |  |         |  |        
|Weighted average shares for diluted Earnings per share |  | 323,289 |  | 331,320 |  | 324,421
|                                                       |  |         |  |         |  |        



(p)    Stock-based Compensation:



The Company measures compensation expense for its 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.



(q)    Derivative Instruments, Hedging Activities and Foreign Currency:



The Company considers the U.S. dollar to be its functional currency for certain of its 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 U.S. 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 (loss), net.



During the third quarter of 2001, the Company made the decision to exit substantially all of its company-owned international operations.
Prior to this decision, the Company used foreign currency forward contracts to hedge foreign currency transactions and probable anticipated foreign currency transactions. These forward contracts were designated as a hedge of international sales by
U.S. dollar functional currency entities and intercompany purchases by certain foreign subsidiaries. The principal currencies hedged were the British Pound, Japanese Yen, French Franc, Australian Dollar, Singapore Dollar and the Deutsche Mark over
periods ranging from one to six months. Forward contracts were accounted for on a mark-to-market basis, with realized and unrealized gains or losses recognized currently. Gains or losses arising from forward contracts which were effective as a hedge
were included in the basis of the designated transactions. The related receivable or liability with counterparties to the forward contracts was recorded in the consolidated balance sheet. Cash flows from settlements of forward contracts are included
in operating activities in the consolidated statements of cash flows. Aggregate transaction gains and losses included in the determination of net income (loss) are not material for any



24



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



period presented. As of December 31, 2001, the Company did not hold any forward contracts. Forward contracts designated to hedge foreign
currency transaction exposure of $228 million were outstanding at December 31, 2000. The estimated fair value of these forward contracts at December 31, 2000 was $227 million based on quoted market prices.



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



The Company uses foreign currency forward contracts to hedge foreign currency transactions. These forward contracts are designated as cash flow hedges and generally have three to six month terms. Additionally, the Company holds
warrants as investments in connection with certain strategic relationships. On January 1, 2001, the Companys financial statements were adjusted by $37 million, of which $4 million related to the Companys hedges and warrants mentioned
above, to record the cumulative effect of adopting this accounting principle.



(r)    Segment Data:



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



(s)    New Accounting Pronouncements:



In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 Business Combinations (FAS 141) and Statement of Financial Accounting
Standards No. 142 Goodwill and Other Intangible Assets (FAS 142). FAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their
useful lives (but with no maximum life). The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is
required to adopt FAS 142 effective January 1, 2002. The adoption of this new accounting pronouncement is not expected to have a material impact on the Companys consolidated financial position or results of operations.



In August 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), which supersedes both Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121) and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of OperationsReporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). FAS 144 retains the fundamental provisions
in FAS 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation



25



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



issues associated with FAS 121. For example, FAS 144 provides guidance on how a long-lived asset that is used as part of a group should be
evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. FAS 144 retains the basic provisions of Opinion 30 on
how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike FAS 121, an impairment assessment under FAS 144 will never result in
a write-down of goodwill. Rather, goodwill is evaluated for impairment under FAS No. 142, Goodwill and Other Intangible Assets.



The Company is required to adopt FAS 144 no later than its first fiscal year beginning after December 15, 2001. Management does not
expect the adoption of FAS 144 for long-lived assets held for use to have a material impact on the Companys consolidated financial position or results of operations because the impairment assessment under FAS 144 is largely unchanged from FAS
121. The provisions of this statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities and therefore, will depend on future actions, if any,
initiated by management. As a result, management cannot determine the potential effects that adoption of FAS 144 will have on the Companys consolidated financial position or results of operations with respect to future disposal decisions. See
Note 17 for a discussion of decisions made in early 2002.



2.    Restatement of Previously Issued Financial Statements:



Gateway restated 2001, 2000 and 1999 net sales to reduce the amounts of bounty income recognized, and cost of goods sold by the costs
incurred for AOL bundled internet service sold to our customers, of $131 million, $337 million and $8 million, respectively. The amounts received from AOL were previously included in net sales and the amounts paid to AOL were previously
included in cost of goods sold. The Company also restated 2001, 2000 and 1999 net sales and cost of goods sold to present the cost incurred for a third-party provider of extended warranty services of $10 million, $6 million and $0.5 million,
respectively, as a reduction of net sales. In view of the nature of the relationships which the Company maintained with the parties described above and its customers, the Company determined that it is more appropriate to present such amounts on a
net basis. These revisions had no impact on previously reported gross profit, operating income (loss) or net income (loss) per share in any period. Gateway also restated the 2001 and 2000 financial statements to account for the excess cash proceeds
received on the sale of a portfolio of financing receivables as an adjustment to the yield on a loan that was made to an affiliate of the purchaser of the portfolio. The Company originally recorded the excess proceeds as net sales and has revised
the accounting to recognize the difference in other income (loss), net, over the period from the third quarter of 2000 through the fourth quarter of 2001. The impact of this change was to reduce net income in 2000 by approximately $2.9 million and a
corresponding reduction in the 2001 net loss by approximately $2.9 million. The $2.9 million is reflected as deferred interest income, net of tax impacts, and is included in other current liabilities as of December 31, 2000.



26



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
impacts are as follows (in thousands)



|                                                                |  | 2001 |           |   | 2000 |   |           | 1999 | 
|--------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- | 
|Net sales, as previously reported                               |  | $    | 6,079,524 |   |      | $ | 9,600,600 |      | 
|Adjustments:                                                    |  |      |           |   |      |   |           |      | 
|Reporting sales of bundled internet service on a net basis      |  |      | (131,352  | ) |      |   | (336,640  | )    | 
|Reporting sales of third party extended warranty on a net basis |  |      | (10,276   | ) |      |   | (5,839    | )    | 
|Deferral of the gain on the sale of financing receivables       |  |      |          |   |      |   | (6,038    | )    | 
|                                                                |  |      |           |   |      |   |           |      | 
|Net sales, as restated                                          |  | $    | 5,937,896 |   |      | $ | 9,252,083 |      | 
|                                                                |  |      |           |   |      |   |           |      | 
|Cost of goods sold, as previously reported                      |  | $    | 5,241,332 |   |      | $ | 7,541,606 |      | 
|Adjustments:                                                    |  |      |           |   |      |   |           |      | 
|Reporting sales of bundled internet service on a net basis      |  |      | (131,352  | ) |      |   | (336,640  | )    | 
|Reporting sales of third party extended warranty on a net basis |  |      | (10,276   | ) |      |   | (5,839    | )    | 
|                                                                |  |      |           |   |      |   |           |      | 
|Cost of goods sold, as restated                                 |  | $    | 5,099,704 |   |      | $ | 7,199,127 |      | 
|                                                                |  |      |           |   |      |   |           |      | 
|Other income (loss), net, as previously reported                |  | $    | (106,383  | ) |      | $ | (102,693  | )    | 
|Recognition of the gain on the sale of financing receivables    |  |      | 4,529     |   |      |   | 1,509     |      | 
|                                                                |  |      |           |   |      |   |           |      | 
|Other income (loss), net, as restated                           |  | $    | (101,854  | ) |      | $ | (101,184  | )    | 
|                                                                |  |      |           |   |      |   |           |      | 
|Provision (benefit) for income tax, as previously reported      |  | $    | (275,908  | ) |      | $ | 155,266   |      | 
|Adjustment                                                      |  |      | 1,676     |   |      |   | (1,676    | )    | 
|                                                                |  |      |           |   |      |   |           |      | 
|Provision (benefit) for income tax, as restated                 |  | $    | (274,232  | ) |      | $ | 153,590   |      | 
|                                                                |  |      |           |   |      |   |           |      | 



3.    Finance Receivables:



Finance receivables, included in other current assets and other assets, consist of receivables due from customer installment purchases of the Companys products and services net of allowance for losses. In
February 2001, the Company sold approximately $500 million of financing receivables to a third party at book value with no recourse. Subsequently, management decided that, while it will continue to offer customer financing, it discontinued providing
customer financing to lesser quality credits. In March 2001, management made the further decision to sell the substantial balance of its remaining financing receivables portfolio consisting of such lesser quality credits. As a result of this
decision, in the first quarter the Company recorded an additional charge of $100 million, included in cost of goods sold, to reduce the carrying value of these receivables to their estimated net realizable value. From the date of the decision to
sell to completion of the sale, the Company recorded $34 million of income in other income (loss), net related to the portfolio.



At December 31, the components of net finance receivables were as follows (in thousands):



|                                |  | 2001 |       | 2000 |  
|------------------------------- |  | ---- | ----- | ---- | -
|Gross Finance Receivables       |  | $    | 9,907 |      | $
|Unearned Income                 |  |      |      |      |  
|                                |  |      |       |      |  
|Finance Receivables, net        |  |      | 9,907 |      |  
|                                |  |      |       |      |  
|Less current portion            |  |      | 9,907 |      |  
|                                |  |      |       |      |  
|Amounts due after one year, net |  | $    |      |      | $
|                                |  |      |       |      |  



27



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





4.    Financing Arrangements:



The Company maintains an unsecured credit facility with certain banks aggregating $300 million, consisting of a revolving line of credit facility and a sub-facility for letters of credit which expires in October 2004. As of
December 31, 2001 and 2000, the revolving line of credit facility had no amounts outstanding. The Company has not had any loans outstanding under this credit facility. Borrowings under the credit facility are available subject to compliance with
certain covenants. As a result of the Companys losses in 2001, which include significant restructuring and other special charges, borrowing availability under the credit facility will be limited from time to time during the term of the
facility. The Company does not have any plans to borrow under the credit facility at this time.



5.    Marketable Securities and Long-Term Investments:



At December 31, 2001 and 2000, the carrying value of the Companys short-term and long-term investments is as follows (in thousands):



|                                   |  | 2001
|---------------------------------- |  | ----
|                                   |  | Cost
|Equity                             |  | $   
|State and municipal                |  |     
|Mortgage-backed securities         |  |     
|US Government and agencies         |  |     
|Corporate securities               |  |     
|                                   |  |     
|Total marketable securities        |  | $   
|                                   |  |     
|Publicly traded equity investments |  | $   
|Other long-term investments        |  |     
|                                   |  |     
|Total long-term investments        |  | $   
|                                   |  |     



|                                   |  | 2000
|---------------------------------- |  | ----
|                                   |  | Cost
|Equity                             |  | $   
|Mutual funds                       |  |     
|US Government and agencies         |  |     
|Corporate securities               |  |     
|                                   |  |     
|Total marketable securities        |  | $   
|                                   |  |     
|Publicly traded equity investments |  | $   
|Other long-term investments        |  |     
|                                   |  |     
|Total long-term investments        |  | $   
|                                   |  |     



28



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
Companys investments in debt securities consist of state and municipal securities, US Government and agencies and corporate securities. The following table summarizes debt maturities at December 31, 2001 (in thousands):



|                   |  | Amortized Cost |         | Carrying Value
|------------------ |  | -------------- | ------- | --------------
|Less than one year |  | $              | 110,742 |               
|Due in 1-2 years   |  |                | 225,480 |               
|Due in 2-5 years   |  |                | 5,492   |               
|                   |  |                |         |               
|                   |  | $              | 341,714 |               
|                   |  |                |         |               



Due to
other than temporary declines in the market value of its investment portfolio, the Company recorded a pre-tax charge of $134 million and $152 million in 2001 and 2000, respectively. As discussed in Note 1, on January 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities. As a result of this adoption, the Companys financial statements were adjusted by $37 million, of which $33 million
related to the Companys long-term investments, to record the cumulative effect of this statement.



6.    Commitments, Contingencies and Concentrations:



Commitments:



The Company leases certain operating facilities and equipment under noncancelable operating leases expiring at various dates through 2027.
Rent expense was approximately $84 million, $89 million and $53 million for 2001, 2000 and 1999, respectively.



Future minimum lease and royalty payments under terms of operating leases and royalty agreements as of December 31, 2001 are as follows
(in thousands):



|           |  | Operating Leases |         | Royalty Agreements
|---------- |  | ---------------- | ------- | ------------------
|2002       |  | $                | 65,127  |                   
|2003       |  |                  | 55,057  |                   
|2004       |  |                  | 36,247  |                   
|2005       |  |                  | 22,693  |                   
|2006       |  |                  | 17,370  |                   
|Thereafter |  |                  | 84,786  |                   
|           |  |                  |         |                   
|Total      |  | $                | 281,280 |                   
|           |  |                  |         |                   



Total
future minimum operating lease commitments and royalty payments at December 31, 2000 were approximately $390 million and $230 million, respectively.



The Company has entered into licensing and royalty agreements that allow it to use certain hardware and software intellectual properties
in its products. Total royalty expense is expected to be greater than this minimum amount for these periods.



The Company has an arrangement whereby it shares in the loss experience of a third-party financing partner on certain purchases of Gateway
products and services. The Companys maximum exposure under this loss sharing arrangement is approximately $30 million. The estimated losses are provided for in the Companys



29



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



financial statements; however, if the actual losses prove to be greater than estimated it could affect the Companys future results of
operations.



Contingencies:



The Company had Standby Letters of Credit and Guarantees
outstanding at December 31, 2001, amounting to $2.6 million.



Gateway is a party to various lawsuits, claims, investigations and administrative proceedings that arise in connection with our business, including those identified below, which have been updated for events and developments occurring
subsequent to the filing of the original Form 10-K.



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 damages (including enhanced damages), an injunction, prejudgment interest, costs and attorneys fees.



UNOVA, Inc. v. Apple Computer, Inc., et al. is a suit 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 seeks unspecified past damages and other relief. Gateway has answered the complaint
denying all allegations and asserting numerous affirmative defenses.



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



On December 7, 2000, James Burton (Burton) filed a purported class action complaint against Gateway, one of its former officers, and one director, in the United States District Court for the Southern District of
California for alleged violation of federal securities laws. Since December 2000, six similar cases have been filed in the same court by other plaintiffs. The complaints were amended to allege among other things that the defendants misrepresented
Gateways financial performance in securities filings and in statements to the public,



30



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



and purport to be class actions on behalf of purchasers of Gateways stock between April 14, 2000 and February 28, 2001 (the
class period). The complaints seek damages and attorneys fees. On December 18, 2000, the Court entered an Order directing counsel for the lead plaintiffs to file a single consolidated complaint within 60 days after the
Courts designation of a lead plaintiff. On April 23, 2001, plaintiffs counsel filed a Revised Motion to Appoint Perry Capital and Teachers Retirement System of Louisiana as Lead Plaintiff and to Approve Plaintiffs
Choice of Lead Counsel, and this motion was granted by the Court on May 18, 2001. On July 16, 2001, the lead plaintiff filed a consolidated complaint alleging violations of the federal securities laws for the class period against Gateway and
two former officers. On September 13, 2001, defendants filed a motion to dismiss. On February 1, 2002, the court entered an order granting defendants motion to dismiss, but allowed the plaintiffs to file an amended complaint within 60 days.
Subsequently, the parties and insurance carriers reached a settlement in which the Company denied all allegations and did not admit liability. The settlement, which was funded entirely by the Companys insurance carriers, was approved on
September 9, 2002.



Gateway has been responding
to an investigation by the Securities and Exchange Commission (SEC) which commenced in December 2000. Gateway voluntarily restated our results of operations for the first, second and third quarters of 2000 in February 2001 and has since
furnished the SEC information primarily related to our fiscal year 2000. In connection with the investigation, Gateway has received a Wells Notice from the SEC. Under the Wells process established by the SEC, Gateway has been provided an
opportunity to respond in writing before the staff makes a formal recommendation to the SEC regarding any action. Gateway has responded to the Wells Notice and is fully cooperating with the SEC to resolve this matter as promptly as practicable. In
April 2003, Gateway voluntarily restated certain results of operations included in our 2001 Form 10-K. See Note 2 for further discussion.



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



Concentrations:



Gateway participates in the PC and related products and services industries that are characterized by aggressive pricing practices, continually changing customer demand patterns and rapid technological developments. Gateways
operating results could be adversely affected should the Company be unable to successfully anticipate customer demand accurately; manage its product transitions, inventory levels and manufacturing process efficiently; distribute its product and
solutions quickly in response to customer demand; differentiate its products and solutions from those of its competitors or compete successfully in the markets for its new products and solutions.



Gateway depends on many third-party suppliers for key
components contained in its product and solutions offerings. For some of these components, Gateway may only use a single source supplier, in part due to the lack of alternative sources of supply. If the supply of a key material component is delayed
or curtailed, Gateways ability to ship the related product or solution in desired quantities and in a timely manner could be adversely affected possibly resulting in reductions in net sales. In cases where 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 Gateways third-party suppliers for key components was to
erode, the delay or curtailment of deliveries of key material components could occur. Additionally, Gateways reliance on third-party suppliers of key material components exposes the Company to potential product quality



31



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



issues that could affect the reliability and performance of its products and solutions. Any lesser ability to ship its products and solutions
in desired quantities and in a timely manner due to a delay or curtailment of the supply of material components, or product quality issues arising from faulty components manufactured by third-party suppliers, could adversely affect the market for
the Companys products or solutions and lead to a reduction in the Companys net sales.



7.    Income Taxes:



The components of the provision for income taxes are as follows (in thousands):



|                              |  | 2001       |          |   | 2000       |   |         | 1999 | 
|----------------------------- |  | ---------- | -------- | - | ---------- | - | ------- | ---- | 
|                              |  | (restated) |          |   | (restated) |   |         |      | 
|Current:                      |  |            |          |   |            |   |         |      | 
|United States                 |  | $          | (274,193 | ) |            | $ | 240,200 |      | 
|Foreign                       |  |            | 15,964   |   |            |   | (3,792  | )    | 
|Deferred:                     |  |            |          |   |            |   |         |      | 
|United States                 |  |            | (166,329 | ) |            |   | (73,295 | )    | 
|Foreign                       |  |            | 42,589   |   |            |   | (9,523  | )    | 
|Change in valuation allowance |  |            | 107,737  |   |            |   |        |      | 
|                              |  |            |          |   |            |   |         |      | 
|                              |  | $          | (274,232 | ) |            | $ | 153,590 |      | 
|                              |  |            |          |   |            |   |         |      | 



A
reconciliation of the provision for income taxes and the amount computed by applying the federal statutory income tax rate to income (loss) before income taxes is as follows (in thousands):



|                                         |  | 2001       |          |   | 2000       |   | 1999    | 
|---------------------------------------- |  | ---------- | -------- | - | ---------- | - | ------- | 
|                                         |  | (restated) |          |   | (restated) |   |         | 
|Federal income tax at statutory rate     |  | $          | (449,934 | ) |            | $ | 141,334 | 
|Losses from foreign operations           |  |            | 123,935  |   |            |   |        | 
|Increase in valuation allowance          |  |            | 107,737  |   |            |   |        | 
|State income tax, net of federal benefit |  |            | (26,423  | ) |            |   | 9,854   | 
|Other, net                               |  |            | (29,547  | ) |            |   | 2,402   | 
|                                         |  |            |          |   |            |   |         | 
|Provision for income taxes               |  | $          | (274,232 | ) |            | $ | 153,590 | 
|                                         |  |            |          |   |            |   |         | 



32



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Deferred
tax assets and deferred tax liabilities result from temporary differences in the following accounts (in thousands):



|                               |  | 2001 |          |   | 2000
|------------------------------ |  | ---- | -------- | - | ----
|U.S. deferred tax assets:      |  |      |          |   |     
|Inventory                      |  | $    | 10,995   |   |     
|Accounts receivable            |  |      | 6,899    |   |     
|Accrued liabilities            |  |      | 102,236  |   |     
|Other liabilities              |  |      | 38,556   |   |     
|Other assets                   |  |      | 36,887   |   |     
|Operating loss carryforwards   |  |      | 24,394   |   |     
|Property, plant and equipment  |  |      | 31,106   |   |     
|Investments                    |  |      | 115,316  |   |     
|Other                          |  |      | 9,906    |   |     
|                               |  |      |          |   |     
|Total U.S.                     |  |      | 376,295  |   |     
|Foreign deferred tax assets:   |  |      |          |   |     
|Operating loss carryforwards   |  |      |         |   |     
|Other                          |  |      |         |   |     
|                               |  |      |          |   |     
|Total foreign                  |  |      |         |   |     
|                               |  |      |          |   |     
|Total deferred tax assets      |  |      | 376,295  |   |     
|                               |  |      |          |   |     
|U.S. deferred tax liabilities: |  |      |          |   |     
|Intangible assets              |  |      |         |   |     
|Property, plant & equipment    |  |      |         |   |     
|Other                          |  |      | 5,386    |   |     
|                               |  |      |          |   |     
|Total deferred tax liabilities |  |      | 5,386    |   |     
|Valuation allowance            |  |      | (107,737 | ) |     
|                               |  |      |          |   |     
|Net deferred tax assets        |  | $    | 263,172  |   |     
|                               |  |      |          |   |     



The
Company has a federal net operating loss carryforward of $25 million that expires after 2021 and state net operating loss carryforwards of $339 million that expire between 2006 and 2021, depending on each states law. Although realization of
the net deferred tax assets is not assured, management believes that it is more likely than not that the net deferred tax assets recorded will be realized.



The Company has established a valuation allowance for certain deferred tax assets resulting from unrealized investment losses. Management
believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of these assets. The realization of these deferred tax assets is dependent upon the Companys ability to
recover these investment losses or generate future capital gains.



8.    Preferred Stock and Preferred Share Purchase Rights Plan:



The Company has 5,000,000 shares of preferred stock authorized for issuance in one or more series, at a par value of $.01 per share. In
conjunction with the distribution of Preferred Share Purchase Rights, the Companys Board of Directors designated 1,000,000 shares of preferred stock as Series B Junior Participating Preferred Stock and reserved such shares for issuance upon
exercise of the Preferred Share Purchase Rights. At December 31, 2001 no shares of Series B Junior Participating Preferred Stock were outstanding.



33



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





On January
19, 2000, the Board of Directors implemented a Preferred Share Purchase Rights Plan (Rights Plan) to protect stockholders rights in the event of a proposed non-consensual takeover of the Company believed not to be in the stockholders
best interests. Under the Rights Plan, the Company declared a dividend of one preferred share purchase right (a Right) for each share of the Companys common stock outstanding. Pursuant to the Rights Plan, each Right entitles the registered
holder to purchase from the Company a one one-thousandth share of Series B Junior Participating Preferred Stock, $0.01 par value per share, at a purchase price of $350. In general, with certain exceptions, the Rights are exercisable only if a person
or group (an Acquiring Person) acquires beneficial ownership of 15% or more of the Companys outstanding shares of common stock. Upon exercise, holders, other than Acquiring Person, will have the right, subject to termination, to receive the
Companys common stock or other securities, cash or other assets having a market value, as defined, equal to twice such purchase price. The Rights, which expire on January 18, 2010, are redeemable in whole, but not in part, at the
Companys option for a price of $0.001 per Right.



During 1999, the Company entered into a strategic relationship with America Online, Inc. (AOL) to leverage certain of the companies sales and distribution channels and capabilities. As a part of the agreement, AOL
agreed to invest $800 million in the Company over a three-year period. In December 1999, the Company sold $200 million of common stock to AOL for cash and shares of AOL as the first closing.



On February 2, 2001, the Company received $200 million in
exchange for a convertible note due December 22, 2020 in connection with the second closing of the investment agreement with 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 which resulted in an extraordinary gain of $7 million or $4.3 million,
net of taxes. The fair value of $193 million will be accreted to the face value of $200 million through 2004 using the interest method. This accretion will be taken into account in determining net income (loss) attributable to common stockholders
for the purposes of computing earnings per share. 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 the Company in December 2004, 2009 and 2014 at face value
and the Company can satisfy this put option in cash or registered common stock at its option. The holder can convert the Series C Preferred Stock to 5,938,948 shares of common stock at anytime prior to December 2014, provided the Companys
common stock trades over $33.68 for 5 consecutive days. In addition, the Company can redeem the Series C Preferred Stock at any time after December 2004 for the face value plus accrued and unpaid dividends.



The Company issued 50,000 shares of non-voting 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 the Company on the third anniversary of its issuance at a conversion rate between $8.99 and $10.07 per share based on the fair
value of the Companys common stock at the date of conversion. The preferred stock is convertible earlier than the third anniversary of issuance 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.



9.    Stock Option Plans, Employee Stock Purchase Plan and Warrant:



The Company maintains various stock option plans for its employees. Employee options are generally granted at the fair market value of the
related common stock at the date of grant. These options generally vest over a four-year period from the date of grant. In addition, these options generally expire, if not exercised, ten years from the date of grant. The Company also maintains
option plans for non-employee directors. Option grants to non-employee directors generally have an exercise price equal to the fair market value of the related



34



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



common stock on the date of grant. These options generally vest over one to three-year periods and generally expire, if not exercised, ten
years from the date of grant.



For all of the
Companys stock option plans, options for 29,125,000; 11,351,000 and 5,544,000 shares of common stock were exercisable at December 31, 2001, 2000 and 1999, respectively, with a weighted-average exercise price of $41.89; $23.35 and $12.67,
respectively. In addition, options for 61,000; 61,000 and 126,000 shares of Class A common stock were exercisable at December 31, 2001, 2000 and 1999, respectively, with a weighted average exercise price of $0.93; $0.93 and $0.94, respectively.
Class A common stock may be converted into an equal number of shares of common stock at any time. There were 9,797,000; 10,889,000 and 4,504,000 shares of common stock reserved and available for grant under the plans at December 31, 2001, 2000 and
1999, respectively.



The following table
summarizes activity under the stock option plans for 2001, 2000 and 1999 (in thousands, except per share amounts):



|                               |  | Common Stock |   |  | Weighted-Average Price |       | Class A Common Stock |      |   | Weighted-Average Price
|------------------------------ |  | ------------ | - |  | ---------------------- | ----- | -------------------- | ---- | - | ----------------------
|Outstanding, December 31, 1998 |  | 24,654       |   |  | $                      | 17.10 |                      | 560  |   |                       
|Granted                        |  | 20,850       |   |  |                        | 37.17 |                      |     |   |                       
|Exercised                      |  | (5,884       | ) |  |                        | 14.12 |                      | (434 | ) |                       
|Forfeited                      |  | (2,824       | ) |  |                        | 25.14 |                      |     |   |                       
|                               |  |              |   |  |                        |       |                      |      |   |                       
|Outstanding, December 31, 1999 |  | 36,796       |   |  | $                      | 28.60 |                      | 126  |   |                       
|                               |  |              |   |  |                        |       |                      |      |   |                       
|Granted                        |  | 19,312       |   |  |                        | 61.65 |                      |     |   |                       
|Exercised                      |  | (4,089       | ) |  |                        | 20.48 |                      | (65  | ) |                       
|Forfeited                      |  | (3,379       | ) |  |                        | 35.70 |                      |     |   |                       
|                               |  |              |   |  |                        |       |                      |      |   |                       
|Outstanding, December 31, 2000 |  | 48,640       |   |  | $                      | 41.80 |                      | 61   |   |                       
|                               |  |              |   |  |                        |       |                      |      |   |                       
|Granted                        |  | 35,144       |   |  |                        | 13.59 |                      |     |   |                       
|Exercised                      |  | (570         | ) |  |                        | 15.95 |                      |     |   |                       
|Forfeited                      |  | (19,405      | ) |  |                        | 38.81 |                      |     |   |                       
|                               |  |              |   |  |                        |       |                      |      |   |                       
|Outstanding, December 31, 2001 |  | 63,809       |   |  | $                      | 27.78 |                      | 61   |   |                       
|                               |  |              |   |  |                        |       |                      |      |   |                       



The
following table summarizes information about the Companys Common Stock options outstanding at December 31, 2001 (in thousands, except per share amounts):





|                         |  | Options Outstanding            |  | Options Exercisable                        
|------------------------ |  | ------------------------------ |  | -------------------------------------------
|Range of Exercise Prices |  | Number Outstanding at 12/31/01 |  | Weighted-Average Remaining Contractual Life
|$    .93-  9.85          |  | 16,055                         |  | 9.04                                       
|9.93-20.23               |  | 20,988                         |  | 8.35                                       
|20.28-56.88              |  | 18,106                         |  | 7.47                                       
|57.00-82.50              |  | 8,721                          |  | 8.33                                       



The
weighted-average fair value per share of options granted during 2001, 2000 and 1999 was $8.09, $36.76, and $22.51, respectively. The fair value of these options was estimated on the date of grant using the



35



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Black-Scholes option pricing model with the following weighted-average assumptions used for all grants in 2001, 2000, and 1999: dividend
yield of zero percent; risk-free interest rates ranging from 2.2 to 6.6 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 73 percent in
2001 and 60 percent in 2000 and 1999.



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 income (loss) and net income (loss) per share would have resulted in the pro forma amounts indicated
below (in thousands, except per share amounts):



|                                        |  | 2001       |            |   | 2000       |   |         | 1999
|--------------------------------------- |  | ---------- | ---------- | - | ---------- | - | ------- | ----
|                                        |  | (restated) |            |   | (restated) |   |         |     
|Net income (loss)as reported           |  | $          | (1,031,062 | ) |            | $ | 238,630 |     
|Net income (loss)pro forma             |  |            | (1,103,523 | ) |            |   | (56,528 | )   
|Net income (loss) per shareas reported |  |            |            |   |            |   |         |     
|Basic                                   |  | $          | (3.19      | ) |            | $ | 0.74    |     
|Diluted                                 |  | $          | (3.19      | ) |            | $ | 0.72    |     
|Net income (loss) per sharepro forma   |  |            |            |   |            |   |         |     
|Basic                                   |  | $          | (3.41      | ) |            | $ | (0.18   | )   
|Diluted                                 |  | $          | (3.41      | ) |            | $ | (0.18   | )   



The pro
forma effect on net income (loss) for 2001, 2000 and 1999 is not fully representative of the pro forma effect on net income (loss) in future years because it does not take into consideration pro forma compensation expense related to the vesting of
grants made prior to 1997.



The Company also
offers eligible employees the opportunity to acquire shares under an employee stock purchase plan. Under the plan, shares of the Companys common stock may be purchased at 85% of the lower of the fair market value on the first or last business
day of each month. Employees may purchase shares having a value up to 20% of their salary, subject to certain statutory limits. Total shares purchased for participating employees under the plan were 472,000; 110,000 and 50,000 in 2001, 2000 and
1999, respectively.



During 2001, the Company
issued a warrant to purchase 624,750 shares of common stock in exchange for certain consulting services. As of December 31, 2001, the warrant is outstanding and exercisable. The exercise price of the warrant is $8.92 per share and it expires on
September 4, 2005.



10.    Retirement
Savings Plan:



The Company has a 401(k)
defined contribution plan, which covers employees who have attained 18 years of age and have been employed by the Company for at least six months. Participants may contribute up to 20% of their compensation in any plan year and receive a 50%
matching employer contribution of up to 6% of their annual eligible compensation. The Company contributed $7.8 million, $8.1 million and $6.4 million, to the Plan during 2001, 2000, and 1999, respectively.



11.    Acquisition:



During the first quarter of 1999, the Company paid $77.7
million for a 19.9% interest and an option to acquire the remaining 80.1% interest in NECX Direct, LLC, an on-line e-commerce computer peripheral retailer. The Company subsequently sold half of that interest to a third party. During the first
quarter of 2000, the Company issued 537,554 shares of common stock to exercise its option to purchase the remaining 80.1% interest



36



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(resulting in a 90% ownership interest) and entered into an agreement to make annual payments totaling approximately $20 million ratably over
ten years beginning in April 2002. The transaction was accounted for as a purchase business combination. The aggregate purchase price of approximately $155 million, which includes the cost basis of the original investment and liabilities assumed,
has been allocated primarily to goodwill that was being amortized over a ten year period. In 2001, the Company decided to abandon the business and technology related to the acquisition of NECX Direct, LLC, and recorded a $140 million impairment
charge based on its revised estimate of future cash flows associated with the business. Pro forma statements of operations reflecting the acquisition of NECX are not shown as such amounts would not differ materially from reported results.



37



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



12.    Selected Balance Sheet Information and Comprehensive Income (Loss) (in
thousands):



|                                                 |  | 2001 |           |   | 2000       |  
|------------------------------------------------ |  | ---- | --------- | - | ---------- | -
|                                                 |  |      |           |   | (restated) |  
|Accounts receivable, net:                        |  |      |           |   |            |  
|Accounts receivable                              |  | $    | 224,443   |   |            | $
|Allowance for uncollectible accounts             |  |      | (4,469    | ) |            |  
|                                                 |  |      |           |   |            |  
|                                                 |  | $    | 219,974   |   |            | $
|                                                 |  |      |           |   |            |  
|Inventory:                                       |  |      |           |   |            |  
|Components and subassemblies                     |  | $    | 92,669    |   |            | $
|Finished goods                                   |  |      | 27,601    |   |            |  
|                                                 |  |      |           |   |            |  
|                                                 |  | $    | 120,270   |   |            | $
|                                                 |  |      |           |   |            |  
|Property, plant and equipment, net:              |  |      |           |   |            |  
|Land                                             |  | $    | 12,649    |   |            | $
|Leasehold improvements                           |  |      | 170,210   |   |            |  
|Buildings                                        |  |      | 103,730   |   |            |  
|Construction in progress                         |  |      | 71,870    |   |            |  
|Internal use software                            |  |      | 215,497   |   |            |  
|Office and production equipment                  |  |      | 365,127   |   |            |  
|Furniture and fixtures                           |  |      | 108,680   |   |            |  
|Vehicles                                         |  |      | 657       |   |            |  
|                                                 |  |      |           |   |            |  
|                                                 |  |      | 1,048,420 |   |            |  
|Accumulated depreciation and amortization        |  |      | (439,991  | ) |            |  
|                                                 |  |      |           |   |            |  
|                                                 |  | $    | 608,429   |   |            | $
|                                                 |  |      |           |   |            |  
|Intangibles:                                     |  |      |           |   |            |  
|Intangibles                                      |  | $    | 50,550    |   |            | $
|Accumulated amortization                         |  |      | (14,246   | ) |            |  
|                                                 |  |      |           |   |            |  
|                                                 |  | $    | 36,304    |   |            | $
|                                                 |  |      |           |   |            |  
|Other current assets:                            |  |      |           |   |            |  
|Finance receivables, net                         |  | $    | 6,744     |   |            | $
|Income taxes receivable                          |  |      | 274,727   |   |            |  
|Deferred income taxes                            |  |      | 139,383   |   |            |  
|Other                                            |  |      | 195,772   |   |            |  
|                                                 |  |      |           |   |            |  
|                                                 |  | $    | 616,626   |   |            | $
|                                                 |  |      |           |   |            |  
|Other assets:                                    |  |      |           |   |            |  
|Finance receivables, net                         |  | $    |          |   |            | $
|Long-term investments                            |  |      | 88,170    |   |            |  
|Other                                            |  |      | 131,030   |   |            |  
|                                                 |  |      |           |   |            |  
|                                                 |  | $    | 219,200   |   |            | $
|                                                 |  |      |           |   |            |  
|Accrued liabilities:                             |  |      |           |   |            |  
|Warranty                                         |  | $    | 84,024    |   |            | $
|Restructuring                                    |  |      | 126,439   |   |            |  
|Other                                            |  |      | 258,146   |   |            |  
|                                                 |  |      |           |   |            |  
|                                                 |  | $    | 468,609   |   |            | $
|                                                 |  |      |           |   |            |  
|Other current liabilities:                       |  |      |           |   |            |  
|Deferred revenue                                 |  | $    | 72,202    |   |            | $
|Other                                            |  |      | 128,397   |   |            |  
|                                                 |  |      |           |   |            |  
|                                                 |  | $    | 200,599   |   |            | $
|                                                 |  |      |           |   |            |  
|Other long-term liabilities:                     |  |      |           |   |            |  
|Deferred revenue                                 |  | $    | 42,124    |   |            | $
|Warranty                                         |  |      | 18,682    |   |            |  
|Other                                            |  |      | 21,830    |   |            |  
|                                                 |  |      |           |   |            |  
|                                                 |  | $    | 82,636    |   |            | $
|                                                 |  |      |           |   |            |  
|Accumulated other comprehensive income:          |  |      |           |   |            |  
|Foreign currency translation                     |  | $    | (2,911    | ) |            | $
|Unrealized loss on available-for-sale securities |  |      | 16,713    |   |            |  
|                                                 |  |      |           |   |            |  
|                                                 |  | $    | 13,802    |   |            | $
|                                                 |  |      |           |   |            |  



38



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





|                                                        |  | 2001       |            |   | 2000       |   |         | 1999 | 
|------------------------------------------------------- |  | ---------- | ---------- | - | ---------- | - | ------- | ---- | 
|                                                        |  | (restated) |            |   | (restated) |   |         |      | 
|Other comprehensive income (loss):                      |  |            |            |   |            |   |         |      | 
|Net income (loss)                                       |  | $          | (1,031,062 | ) |            | $ | 238,630 |      | 
|Foreign currency translation                            |  |            | (3,165     | ) |            |   | (732    | )    | 
|Unrealized gain (loss) on available-for-sale securities |  |            | 9,900      |   |            |   | 7,807   |      | 
|                                                        |  |            |            |   |            |   |         |      | 
|Total comprehensive income (loss)                       |  | $          | (1,024,327 | ) |            | $ | 245,705 |      | 
|                                                        |  |            |            |   |            |   |         |      | 



13.    Supplemental Statements of Cash Flows Information (in thousands):



|                                                                                               |  | 2001 |         | 2000 |   | 1999   
|---------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|Supplemental disclosure of cash flow information:                                              |  |      |         |      |   |        
|Cash paid during the year for interest                                                         |  | $    | 7,962   |      | $ | 2,256  
|Cash paid during the year for income taxes                                                     |  | $    |        |      | $ | 209,371
|Supplemental schedule of noncash investing and financing activities:                           |  |      |         |      |   |        
|Extinguishment of note payable and issuance of Series C Redeemable Convertible Preferred
Stock |  | $    | 193,109 |      | $ |       
|Acquisitions                                                                                   |  |      |         |      |   |        
|Fair value of assets acquired                                                                  |  | $    |        |      | $ | 4,962  
|Less: Liabilities assumed                                                                      |  |      |        |      |   | 37,391 
|                                                                                               |  |      |         |      |   |        
|Common stock issued for acquisitions                                                           |  | $    |        |      | $ | 32,429 
|Common stock issued in exchange for common stock of investee                                   |  | $    |        |      | $ |       



14.    Segment Data:



The Companys segments are based on geography and, in the United States (U.S.), by customer class. Geographic segments include the U.S.; Europe, Middle East, Africa (EMEA); and Asia Pacific (A-P). During the third quarter of
2001, the Company exited substantially all of its company-owned international operations. Customer class segments in the U.S. are Consumer and Business. The Company evaluates the performance of its Consumer and Business segments based on sales and
operating income, and does not include segment assets or other income and expense items for management reporting purposes. Management evaluates net sales by customer class based on units shipped in the period. Segment operating income includes
selling, general and administrative expenses and other overhead charges directly attributable to the segment and excludes certain expenses managed outside the reporting segment. Costs excluded from the segments primarily consist of general and
administrative expenses that are managed on a corporate-wide basis and, for the year ended December 31, 2001 and 2000, include restructuring and other special charges discussed in Note 16.



39



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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



|                              |  | 2001       |           |   | 2000       |   |           | 1999       | 
|----------------------------- |  | ---------- | --------- | - | ---------- | - | --------- | ---------- | 
|                              |  | (restated) |           |   | (restated) |   |           | (restated) | 
|The Americas:                 |  |            |           |   |            |   |           |            | 
|Net sales:                    |  |            |           |   |            |   |           |            | 
|Consumer                      |  | $          | 2,955,747 |   |            | $ | 5,056,530 |            | 
|Business                      |  |            | 2,430,815 |   |            |   | 2,832,936 |            | 
|                              |  |            |           |   |            |   |           |            | 
|                              |  | $          | 5,386,562 |   |            | $ | 7,889,466 |            | 
|                              |  |            |           |   |            |   |           |            | 
|Operating income:             |  |            |           |   |            |   |           |            | 
|Consumer                      |  | $          | 15,303    |   |            | $ | 618,111   |            | 
|Business                      |  |            | 219,773   |   |            |   | 382,512   |            | 
|                              |  |            |           |   |            |   |           |            | 
|                              |  | $          | 235,076   |   |            | $ | 1,000,623 |            | 
|Income tax expense (benefit)  |  |            | (292,643  | ) |            |   | 164,149   |            | 
|Depreciation and amortization |  |            | 185,739   |   |            |   | 169,602   |            | 
|Segment assets                |  |            | 2,930,953 |   |            |   | 3,695,002 |            | 
|Long-lived assets             |  |            | 740,143   |   |            |   | 1,742,015 |            | 
|EMEA                          |  |            |           |   |            |   |           |            | 
|Net sales                     |  | $          | 229,026   |   |            | $ | 586,361   |            | 
|Operating loss                |  |            | (53,493   | ) |            |   | (55,126   | )          | 
|Income tax expense (benefit)  |  |            | 8,034     |   |            |   | (2,689    | )          | 
|Depreciation and amortization |  |            | 8,118     |   |            |   | 10,974    |            | 
|Segment assets                |  |            | 34,944    |   |            |   | 243,917   |            | 
|Long-lived assets             |  |            |          |   |            |   | 60,489    |            | 
|A-P                           |  |            |           |   |            |   |           |            | 
|Net sales                     |  | $          | 322,308   |   |            | $ | 776,256   |            | 
|Operating income (loss)       |  |            | (37,548   | ) |            |   | 4,799     |            | 
|Income tax expense (benefit)  |  |            | 10,377    |   |            |   | (7,870    | )          | 
|Depreciation and amortization |  |            | 6,119     |   |            |   | 8,508     |            | 
|Segment assets                |  |            | 20,960    |   |            |   | 241,726   |            | 
|Long-lived assets             |  |            |          |   |            |   | 40,564    |            | 



A
reconciliation of the segments operating income (loss) is as follows:



|Operating income (loss):                     |  |   |            |   |  |   |          |   |  |   |          |  
|-------------------------------------------- |  | - | ---------- | - |  | - | -------- | - |  | - | -------- | -
|Segment operating income                     |  | $ | 144,035    |   |  | $ | 950,296  |   |  | $ | 971,965  |  
|Non-segment operating expenses:              |  |   |            |   |  |   |          |   |  |   |          |  
|Restructuring and other special charges:     |  |   |            |   |  |   |          |   |  |   |          |  
|Cost of goods sold                           |  |   | (216,327   | ) |  |   | (51,369  | ) |  |   |         |  
|Selling, general and administrative expenses |  |   | (759,170   | ) |  |   | (43,368  | ) |  |   |         |  
|Other non segment operating expenses         |  |   | (352,468   | ) |  |   | (350,304 | ) |  |   | (376,295 | )
|                                             |  |   |            |   |  |   |          |   |  |   |          |  
|Total operating income (loss)                |  | $ | (1,183,930 | ) |  | $ | 505,255  |   |  | $ | 595,670  |  
|                                             |  |   |            |   |  |   |          |   |  |   |          |  



As
described in Note 2, we have restated net sales and cost of goods sold for the years ended December 31, 2001, 2000 and 1999. Substantially all of the changes related to the consumer segment.



40



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





15.    Selected Quarterly Financial Data (Unaudited):



As discussed in Note 2, the Company has restated net sales, cost of goods sold and other income (loss), for the years ended December 31,
2001 and 2000.



The following tables contain
selected unaudited consolidated quarterly financial data for the Company (in thousands, except per share data):



|2001:                                                                                                          |  | 1st Quarter (Restated) |           |   | 2nd Quarter (Restated) |   |           | 3rd Quarter (Restated) |  |   | 4th Quarter (Restated)
|-------------------------------------------------------------------------------------------------------------- |  | ---------------------- | --------- | - | ---------------------- | - | --------- | ---------------------- |  | - | ----------------------
|Net sales                                                                                                      |  | $                      | 1,900,347 |   |                        | $ | 1,498,985 |                        |  | $ | 1,407,579             
|Gross profit                                                                                                   |  |                        | 197,305   |   |                        |   | 280,106   |                        |  |   | 120,060               
|Operating income (loss)                                                                                        |  |                        | (575,955  | ) |                        |   | (53,440   | )                      |  |   | (555,251              
|Income (loss) before extraordinary item and cumulative effect of change in accounting
principle                |  |                        | (478,578  | ) |                        |   | (20,311   | )                      |  |   | (519,187              
|Net income (loss)                                                                                              |  | $                      | (502,429  | ) |                        | $ | (20,311   | )                      |  | $ | (519,187              
|Net income (loss) per share before extraordinary item and cumulative effect of change in
accounting principle: |  |                        |           |   |                        |   |           |                        |  |   |                       
|Basic                                                                                                          |  | $                      | (1.48     | ) |                        | $ | (0.06     | )                      |  | $ | (1.61                 
|Diluted                                                                                                        |  | $                      | (1.48     | ) |                        | $ | (0.06     | )                      |  | $ | (1.61                 
|Net income per share:                                                                                          |  |                        |           |   |                        |   |           |                        |  |   |                       
|Basic                                                                                                          |  | $                      | (1.56     | ) |                        | $ | (0.06     | )                      |  | $ | (1.61                 
|Diluted                                                                                                        |  | $                      | (1.56     | ) |                        | $ | (0.06     | )                      |  | $ | (1.61                 
|Basic weighted average shares outstanding                                                                      |  |                        | 322,868   |   |                        |   | 323,014   |                        |  |   | 323,296               
|Diluted weighted average shares outstanding                                                                    |  |                        | 322,868   |   |                        |   | 323,014   |                        |  |   | 323,296               



|(Previously reported)                                                                                          |  | 1st Quarter |           |   | 2nd Quarter |   |           | 3rd Quarter |  |   | 4th Quarter
|-------------------------------------------------------------------------------------------------------------- |  | ----------- | --------- | - | ----------- | - | --------- | ----------- |  | - | -----------
|Net sales                                                                                                      |  | $           | 2,033,510 |   |             | $ | 1,500,875 |             |  | $ | 1,409,759  
|Gross profit                                                                                                   |  |             | 197,305   |   |             |   | 280,106   |             |  |   | 120,060    
|Operating income (loss)                                                                                        |  |             | (575,955  | ) |             |   | (53,440   | )           |  |   | (555,251   
|Income (loss) before extraordinary item and cumulative effect of change in accounting
principle                |  |             | (479,053  | ) |             |   | (20,786   | )           |  |   | (519,662   
|Net income (loss)                                                                                              |  | $           | (502,904  | ) |             | $ | (20,786   | )           |  | $ | (519,662   
|Net income (loss) per share before extraordinary item and cumulative effect of change in
accounting principle: |  |             |           |   |             |   |           |             |  |   |            
|Basic                                                                                                          |  | $           | (1.48     | ) |             | $ | (0.06     | )           |  | $ | (1.61      
|Diluted                                                                                                        |  | $           | (1.48     | ) |             | $ | (0.06     | )           |  | $ | (1.61      
|Net income per share:                                                                                          |  |             |           |   |             |   |           |             |  |   |            
|Basic                                                                                                          |  | $           | (1.56     | ) |             | $ | (0.06     | )           |  | $ | (1.61      
|Diluted                                                                                                        |  | $           | (1.56     | ) |             | $ | (0.06     | )           |  | $ | (1.61      
|Basic weighted average shares outstanding                                                                      |  |             | 322,868   |   |             |   | 323,014   |             |  |   | 323,296    
|Diluted weighted average shares outstanding                                                                    |  |             | 322,868   |   |             |   | 323,014   |             |  |   | 323,296    



41



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





|2000:                                                                                                          |  | 1st Quarter (Restated) |           | 2nd Quarter (Restated) |   | 3rd Quarter (Restated) |  | 4th Quarter (Restated) |          
|-------------------------------------------------------------------------------------------------------------- |  | ---------------------- | --------- | ---------------------- | - | ---------------------- |  | ---------------------- | ---------
|Net sales                                                                                                      |  | $                      | 2,386,383 |                        | $ | 2,158,365              |  | $                      | 2,406,024
|Gross profit                                                                                                   |  |                        | 518,502   |                        |   | 493,333                |  |                        | 578,697  
|Operating income (loss)                                                                                        |  |                        | 186,264   |                        |   | 157,551                |  |                        | 186,692  
|Income (loss) before extraordinary item and cumulative effect of change in accounting
principle                |  |                        | 131,491   |                        |   | 114,374                |  |                        | 132,313  
|Net income (loss)                                                                                              |  | $                      | 119,640   |                        | $ | 114,374                |  | $                      | 132,313  
|Net income (loss) per share before extraordinary item and cumulative effect of change in
accounting principle: |  |                        |           |                        |   |                        |  |                        |          
|Basic                                                                                                          |  | $                      | 0.41      |                        | $ | 0.36                   |  | $                      | 0.41     
|Diluted                                                                                                        |  | $                      | 0.40      |                        | $ | 0.34                   |  | $                      | 0.40     
|Net income per share:                                                                                          |  |                        |           |                        |   |                        |  |                        |          
|Basic                                                                                                          |  | $                      | 0.37      |                        | $ | 0.36                   |  | $                      | 0.41     
|Diluted                                                                                                        |  | $                      | 0.36      |                        | $ | 0.34                   |  | $                      | 0.40     
|Basic weighted average shares outstanding                                                                      |  |                        | 320,013   |                        |   | 321,265                |  |                        | 322,408  
|Diluted weighted average shares outstanding                                                                    |  |                        | 332,541   |                        |   | 331,727                |  |                        | 333,681  



|(Previously reported)                                                                                          |  | 1st Quarter |           | 2nd Quarter |   | 3rd Quarter |  | 4th Quarter |          
|-------------------------------------------------------------------------------------------------------------- |  | ----------- | --------- | ----------- | - | ----------- |  | ----------- | ---------
|Net sales                                                                                                      |  | $           | 2,398,950 |             | $ | 2,207,017   |  | $           | 2,548,290
|Gross profit                                                                                                   |  |             | 518,502   |             |   | 499,371     |  |             | 578,697  
|Operating income (loss)                                                                                        |  |             | 186,264   |             |   | 163,589     |  |             | 186,692  
|Income (loss) before extraordinary item and cumulative effect of change in accounting
principle                |  |             | 131,491   |             |   | 118,178     |  |             | 131,838  
|Net income (loss)                                                                                              |  | $           | 119,640   |             | $ | 118,178     |  | $           | 131,838  
|Net income (loss) per share before extraordinary item and cumulative effect of change in
accounting principle: |  |             |           |             |   |             |  |             |          
|Basic                                                                                                          |  | $           | 0.41      |             | $ | 0.37        |  | $           | 0.41     
|Diluted                                                                                                        |  | $           | 0.40      |             | $ | 0.36        |  | $           | 0.40     
|Net income per share:                                                                                          |  |             |           |             |   |             |  |             |          
|Basic                                                                                                          |  | $           | 0.37      |             | $ | 0.37        |  | $           | 0.41     
|Diluted                                                                                                        |  | $           | 0.36      |             | $ | 0.36        |  | $           | 0.40     
|Basic weighted average shares outstanding                                                                      |  |             | 320,013   |             |   | 321,265     |  |             | 322,408  
|Diluted weighted average shares outstanding                                                                    |  |             | 332,541   |             |   | 331,727     |  |             | 333,681  



16.    Restructuring and Other Special Charges:



During 2001, the Company approved restructuring plans to, among other things, reduce its workforce, close certain retail locations, consolidate facilities, redefine its information technology strategy,
and exit certain other activities, including substantially all of its company-owned international operations. Pre-tax charges of $876 million, including non-cash charges of $535 million, were recorded in 2001 to provide for these actions and other
related items. The charges are included in cost of goods sold, selling, general and administrative expenses and other income (loss), net.



42



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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



|                                               |  | Exit Activities                        |     | Asset Write-downs            |   | Additional Depreciation Expense |  | Total Charges 2001
|---------------------------------------------- |  | -------------------------------------- | --- | ---------------------------- | - | ------------------------------- |  | ------------------
|                                               |  | Amount Paid Prior to December 31, 2001 |     | Accrued at December 31, 2001 |   |                                 | 
|Productivity Initiatives                       |  | $                                      | 63  |                              | $ | 7                               |  | $                 
|Facilities/Capital Assets                      |  |                                        | 9   |                              |   | 9                               |  |                   
|Operating Assets                               |  |                                        | 18  |                              |   | 12                              |  |                   
|International Restructuring                    |  |                                        | 108 |                              |   | 89                              |  |                   
|Impairment of goodwill and related intangibles |  |                                        |    |                              |   |                                |  |                   
|Other                                          |  |                                        | 17  |                              |   | 9                               |  |                   
|                                               |  |                                        |     |                              |   |                                 |  |                   
|Total                                          |  | $                                      | 215 |                              | $ | 126                             |  | $                 
|                                               |  |                                        |     |                              |   |                                 |  |                   



The
nature of the charges recorded during the year ended December 31, 2001 is as follows:



| |  |  | Productivity InitiativesThe Company recorded a $72 million charge related to severance benefits to terminated employees in the United States and Canada.
The Company terminated approximately 5,000 employees during the year, including approximately 1,700 employees related to retail store closings, 1,150 employees primarily related to sales and customer service, 1,000 manufacturing employees, 700 call
center employees and 450 other administrative personnel.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Facilities/Capital AssetsThe Company recorded a $192 million charge related to the abandonment of certain capital assets, including $144 million
primarily related to the abandonment of certain information technology projects in the United States. The Company incurred charges of approximately $18 million, principally related to future lease commitments, net of expected recoveries, as a result
of consolidating certain of the Companys facilities. The Company also reduced its estimate of the useful lives of assets related to facilities that had not yet been vacated and recorded an additional $13 million of depreciation expense during
2001.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Operating AssetsThe Company recorded a charge of $86 million related to the closing of 33 stores in the U.S. and 11 stores in Canada and the exit of all
of its store-within-a-store locations. In connection with these store closings, the Company incurred charges of approximately $30 million during 2001 in exit costs related to future lease commitments, net of expected recoveries and $44 million for
impairment of store assets that were abandoned during 2001. The Company also reduced its estimate of the useful lives of assets related to stores that had not yet been closed and recorded an additional $12 million of depreciation expense in 2001.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | International RestructuringThe Company recorded a charge of $349 million related to its international restructuring and exit from substantially all of
its company-owned international operations, including $26 million for lease commitments associated with the closing of its facilities, $147 million for impairment of assets at closed facilities, $88 million related to severance for 1,520 employees
in Europe and 1,710 employees in Asia Pacific, $68 million associated with the settlement of contractual obligations and $15 million of other charges. The Company also reduced its estimate of useful lives of assets related to facilities that had not
yet been closed and recorded an additional $5 million of depreciation expense.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



43



---

GATEWAY, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





| |  |  | Impairment of goodwill and related intangiblesThe Company decided to abandon the business and technology related to the acquisition of NECX Direct, LLC.
As a result of this decision, the Companys revised estimate of future cash flows associated with this business was significantly reduced, resulting in a $140 million impairment charge.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | OtherOther exit activities charged totaled $37 million and related to the settlement of certain contractual obligations and the impairment of assets.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



During 2001, the Company recorded
total restructuring and other special charges of $1.1 billion. Included in this amount is the $876 million described above, a charge to other income (loss), net, of $50 million to write-down the carrying value of securities and long-term receivables
associated with a strategic restructuring decision, a charge of $134 million to other income (loss), net relating to managements determination that a number of the Companys investments and long-term receivables were impaired on an
other-than-temporary basis and a $100 million charge to reduce the carrying value of the Companys consumer financing receivables, partially offset by $34 million in income associated with the consumer financing portfolio which was ultimately
sold during the third quarter as described in Note 3.



During 2000, the Company recorded special charges totaling $246 million, including $152 million related to managements determination that a number of the Companys investments were impaired on an
other-than-temporary basis and the remainder consisting of the impairment of goodwill, severance costs and asset write-downs.



17.    Subsequent Event:



The Company committed to a plan in early 2002 to close select sites and take other restructuring actions as it continued to focus
on cost reduction and aligning its operation with its digital technology solutions strategy. The Company recorded a charge in the first quarter of 2002 of approximately $99 million associated with these actions. The plan was completed in the first
quarter of 2003.



44



---



Gateway,
Inc.

SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

For the years ended December 31, 1999, 2000 and 2001

(in thousands)



|                                                |  | Balance at Beginning of Period |        | Additions Charged to Expense |   | Deductions from Allowance |  | Balance at End of Period
|----------------------------------------------- |  | ------------------------------ | ------ | ---------------------------- | - | ------------------------- |  | ------------------------
|Year ended December 31, 1999:                   |  |                                |        |                              |   |                           |  |                         
|Allowance for uncollectible accounts receivable |  | $                              | 14,948 |                              | $ | 28,334                    |  | $                       
|                                                |  |                                |        |                              |   |                           |  |                         
|Allowance for losses on finance receivables     |  | $                              |       |                              | $ | 4,728                     |  | $                       
|                                                |  |                                |        |                              |   |                           |  |                         
|Year ended December 31, 2000:                   |  |                                |        |                              |   |                           |  |                         
|Allowance for uncollectible accounts receivable |  | $                              | 16,472 |                              | $ | 25,453                    |  | $                       
|                                                |  |                                |        |                              |   |                           |  |                         
|Allowance for losses on finance receivables     |  | $                              | 3,635  |                              | $ | 121,856                   |  | $                       
|                                                |  |                                |        |                              |   |                           |  |                         
|Year ended December 31, 2001:                   |  |                                |        |                              |   |                           |  |                         
|Allowance for uncollectible accounts receivable |  | $                              | 12,724 |                              | $ | 23,151                    |  | $                       
|                                                |  |                                |        |                              |   |                           |  |                         
|Allowance for losses on finance receivables     |  | $                              | 75,107 |                              | $ | 190,240                   |  | $                       
|                                                |  |                                |        |                              |   |                           |  |                         



|* |  | Includes $100 million charge to reduce the carrying value of finance receivables to their net estimated realizable value.
|- |  | -------------------------------------------------------------------------------------------------------------------------



45



---

PART IV



Item 14.Exhibits, Financial Schedules and Reports on Form 8-K



(a)    The following
documents are filed as a part of this Report:



(1) Financial Statements and Financial Statement Schedule. See Index to Consolidated Financial Statements and Financial Statement Schedule at Item 8 on Page 15 of this Report.



(2) Exhibits. Exhibits identified in
parentheses below as on file with the Securities and Exchange Commission are incorporated herein by reference as exhibits hereto.



|Exhibit No. |  | Description of Exhibits                                                                                                                                                                                                                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           
|3.1         |  | Restated Certificate of Incorporation of Gateway, Inc., as amended (filed
herewith)                                                                                                                                                                                                                                                                                  
|           
|3.2         |  | Amended and Restated Bylaws of Gateway, Inc. (Exhibit No. 3.1 to Form 10-Q for the
period ended March 31, 2000)                                                                                                                                                                                                                                                      
|           
|3.3         |  | Rights Agreement, dated as of January 19, 2000, between Gateway, Inc. and UMB Bank,
N.A., as Rights Agent, including all exhibits thereto. (Exhibit 1.0 to Form 8-A dated February 4, 2000)                                                                                                                                                                          
|           
|10.2        |  | Indemnification Agreement dated as of December 6, 1993 between Gateway, Inc. and
Theodore W. Waitt. (Exhibit No. 10.2 to 10-K for 1995)*                                                                                                                                                                                                                             
|           
|10.3        |  | Registration Agreement dated February 22, 1991 between Gateway, Inc., Theodore W.
Waitt and Norman W. Waitt, Jr. as the sole trustee and sole beneficiary of the Norman W. Waitt, Jr. S Corp. Trust, together with Amendment No. 1 to the Registration Agreement dated as of October 19, 1993 (Exhibit 10.11 to Registration Statement No.
33-70618 (the Form S-1)*
|           
|10.4        |  | Gateway, Inc. 1992 Stock Option Plan. (Exhibit No. 10.4 to the Form
S-1)*                                                                                                                                                                                                                                                                                            
|           
|10.5        |  | Gateway, Inc. 1993 Stock Option Plan for Executives and Key Employees. (Exhibit No.
10.6 to the Form S-1)*                                                                                                                                                                                                                                                           
|           
|10.6        |  | Gateway, Inc. 1993 Non-Employee Director Stock Option Plan and Form of Option Grant
Letter (Exhibit No. 10.8 to the Form S-1)*                                                                                                                                                                                                                                       
|           
|10.7        |  | Gateway, Inc. 1996 Long-Term Incentive Equity Plan, as amended and restated (Exhibit
No. 10.7 to Form 10-K for 2001)*                                                                                                                                                                                                                                                
|           
|10.8        |  | Gateway, Inc. 2000 Equity Incentive Equity Plan, as amended and restated (Exhibit No.
10.18 to Form 10-Q for the period ended June 30, 2000)*                                                                                                                                                                                                                        
|           
|10.9        |  | Gateway, Inc. 1996 Non-Employee Directors Stock Option Plan as amended. (Exhibit No.
10.20 to Form 10-Q for the period ended June 30, 1998)*                                                                                                                                                                                                                         
|           
|10.10       |  | Gateway, Inc. Management Incentive Plan, as amended (Exhibit 10.10 to the Form 10-Q
for the period ended June 30, 2001)*                                                                                                                                                                                                                                             
|           
|10.11       |  | Gateway, Inc. Deferred Compensation Plan, as amended (Exhibit 10.11 to the Form 10-K
for 1998)*                                                                                                                                                                                                                                                                      
|           
|10.12       |  | Gateway, Inc. Retirement Savings Plan (Exhibit No. 10.16 to Form 10-K for
1995)*                                                                                                                                                                                                                                                                                     
|           
|10.13       |  | Gateway, Inc. 1995 Employee Stock Purchase Plan, as amended (Exhibit 10.19 to Form
10-Q for period ended June 30, 1999)*                                                                                                                                                                                                                                             
|           
|10.14       |  | Change in Control Compensation Plan (Exhibit No. 10.14 to Form 10-K for
2001)*                                                                                                                                                                                                                                                                                       
|           
|10.15       |  | Employment Agreement between Gateway, Inc. and Susan B. Parks dated as of August 1,
2000 (Exhibit No. 10.15 to Form 10-K for 2001)*                                                                                                                                                                                                                                  
|           
|10.16       |  | Agreement and General Release between Gateway, Inc. and Susan B. Parks dated November
29, 2001 (Exhibit No. 10.16 to Form 10-K for 2001)*                                                                                                                                                                                                                            



46



---

|Exhibit No. |  | Description of Exhibits                                                                                                                       
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|           
|10.17       |  | Letter Agreement between Gateway, Inc. and Susan B. Parks dated November 29, 2001
(Exhibit No. 10.17 to Form 10-K for 2001)*                  
|           
|21.1        |  | List of subsidiaries (Exhibit No. 21.1 to Form 10-K for 2001)                                                                                 
|           
|23.1        |  | Consent of PricewaterhouseCoopers LLP (filed herewith)                                                                                        
|           
|99.1        |  | Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
|           
|99.2        |  | Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

---

|* |  | Indicates a management contract or compensatory plan.
|- |  | -----------------------------------------------------



Gateway will furnish upon request any exhibit described above upon payment of Gateways reasonable expenses for furnishing such
exhibit.



(b)    Reports on
Form 8-K.



No reports on
form 8-K were filed by Gateway during the quarter ended December 31, 2001.



This Report contains the following trademarks and service marks of Gateway, many of which are registered: Gateway, Your:)Ware, the BLACK AND WHITE SPOT Design, Gateway Profile, Gateway
Country, Gateway.net, Solo, and Youve Got a Friend in the Business. The following trademarks of other companies also appear in this Report: Intel, AMD, Microsoft and Pentium. These and any other product or brand names contained
herein are trademarks or registered trademarks of their respective owners.



47



---

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 14, 2003.



GATEWAY, INC.By:

/s/    RODERICK M. SHERWOOD
IIIRoderick M. Sherwood III Executive Vice President and Chief Financial Officer (authorized officer and chief financial officer)




By:

/s/    JEFFREY A. PACEJeffrey A. Pace Vice President and Controller (principal
accounting officer)




Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on the dates indicated below:



|Date           |  | Signature                                               |  | Title                                                                             
|-------------- |  | ------------------------------------------------------- |  | ----------------------------------------------------------------------------------
|              
|April 14, 2003 |  | /s/    THEODORE W.
WAITTTheodore W. Waitt               |  | Chairman of the Board and Chief Executive Officer (Principal Executive
Officer)   
|              
|April 14, 2003 |  | /s/    RODERICK M. SHERWOOD
IIIRoderick M. Sherwood
III |  | Executive Vice President and Chief Financial Officer (Principal Financial
Officer)
|              
|April 14, 2003 |  | /s/    JEFFREY A.
PACEJeffrey A. Pace                   |  | Vice President and Controller (Principal Accounting Officer)                      
|              
|April 14, 2003 |  | *Charles G. Carey                                       |  | Director                                                                          
|              
|April 14, 2003 |  | *George H. Krauss                                       |  | Director                                                                          
|              
|April 14, 2003 |  | *Douglas L. Lacey                                       |  | Director                                                                          
|              
|April 14, 2003 |  | *James F. McCann                                        |  | Director                                                                          
|              
|April 14, 2003 |  | *Richard D. Snyder                                      |  | Director                                                                          



|    
|----
|*By:
|    



48



---



CEO
CERTIFICATION



I, Theodore W. Waitt, Chairman of the Board
and Chief Executive Officer of Gateway, certify that:



|1. |  | I have reviewed this annual report on Form 10-K/A (Amendment No. 1) of Gateway, Inc.;
|-- |  | -------------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: April 14, 2003



By:

/s/    THEODORE W.
WAITTTheodore W. Waitt Chairman of the Board and Chief Executive Officer




49



---



CFO
CERTIFICATION



I, Roderick M. Sherwood III, Executive Vice
President & Chief Financial Officer of Gateway, certify that:



|1. |  | I have reviewed this annual report on Form 10-K/A (Amendment No. 1) of Gateway, Inc.;
|-- |  | -------------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: April 14, 2003



By:

/s/    RODERICK M. SHERWOOD
IIIRoderick M. Sherwood III Executive Vice President & Chief Financial Officer




50