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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2003

OR

For the transition period from                      to                      

Commission file number 0-22784

GATEWAY, INC.

14303 Gateway Place, Poway, CA 92064

Telephone number: (858) 848-3401

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

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.    x

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

The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2003, the last business day of the registrant’s most recently completed second fiscal quarter (based on the last sale price on the New York Stock Exchange as of such date) was approximately $804,777,000.

As of February 23, 2004 there were 324,458,553 shares of Common Stock outstanding and no shares of Class A Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Gateway’s definitive proxy statement relating to our 2004 annual meeting of stockholders are incorporated by reference in Part III of this Form 10-K.

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GATEWAY, INC.

FORM 10-K

For the Fiscal Year Ended December 31, 2003

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Forward-Looking Statements—This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains forward-looking statements based on Gateway’s current expectations that are subject to various risks and uncertainties, as well as assumptions that, if they do not materialize or prove incorrect, could cause our future results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that are or could be deemed forward-looking statements, including without limitation any statements relating to future results of operations, plans or strategies or relating to future economic or industry conditions. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled “Business—Factors That May Affect Gateway’s Business and Future Results” under Part I, page 11 or that are otherwise described from time to time in our reports filed with the Securities and Exchange Commission after this Annual Report. Gateway assumes no obligation to update any forward-looking statements to reflect events that occur or circumstances that may arise after the date as of which they are made.

PART I

Item 1.    Business

General

As a branded integrator of personalized technology solutions, Gateway, Inc. (“Gateway” or “we”) provides a broad range of personal computers (“PCs”), consumer electronics products, enterprise systems, communication tools, applications, training and related services. Our strategy is to deliver value to customers by offering a wide range of plasma, LCD and rear projection TVs, digital cameras, other consumer electronics products, and enterprise systems, which integrate with and complement our award-winning line of PCs and employ the latest technology at competitive prices, along with a full complement of related products and services.

We are one of the leading suppliers of PCs to the U.S. market, with an estimated market share of approximately 3.8% in 2003 based on dollar sales, according to preliminary data from International Data Corporation. We are also a significant supplier of PCs to the U.S. professional market, consisting of large corporate, small and medium businesses and government and educational institutions. We sell our products nationally through a number of channels, including our website at www.gateway.com, our telephone call centers (1-800-GATEWAY), our retail stores where customers can experience our products with assistance from our trained sales force and through a limited number of third-party channels. We believe these multiple sales channel options, our diversified product and service offerings, and our superior customer relations and support provide a unique customer experience that differentiates us from our competitors.

Our strategy is to profitably grow our PC business, to diversify our revenue and increase our gross margin with consumer electronics products and related services, and to reduce our cost structure. Our goal is to make Gateway the place where customers can rely upon effective advice to purchase PC and consumer electronics products and services that provide integrated personalized technology solutions. We plan to continue to deliver the latest technology solutions and to develop innovative new products and services. We also intend to continue to maintain a strong liquidity position to maintain our financial flexibility. We exited 2003 with $1.1 billion in cash and marketable securities.

In 2003, we continued our efforts to reduce fixed costs, strengthen our balance sheet and implement our strategy to evolve from a traditional manufacturer of PCs to a leading branded integrator of personalized technology solutions, substantially expanding our range of consumer electronics products. We also implemented a product fulfillment model that we believe provides us with a competitive system to source, build and deliver products to our consumer and professional customers. In the area of products and services, we continued our strategy of leveraging our existing retail presence and our brand position through new products that include

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plasma, LCD and rear projection TVs, digital cameras and other consumer electronics products. During 2003 we added 118 new products and services in 22 new categories. We intend to expand our consumer electronics and other non-PC (“CE/Non-PC”) business in 2004 and work to further reduce our costs.

On January 30, 2004, we announced our agreement to acquire privately-held eMachines, Inc. (“eMachines”), a leading PC company, for 50 million shares of Gateway common stock and approximately $30 million in cash. Under the agreement, Wayne Inouye, eMachines’ chief executive officer, will become the new chief executive officer of Gateway and a member of Gateway’s Board of Directors. Theodore W. Waitt, Gateway’s founder, will remain Chairman of the Board and Roderick M. Sherwood III will remain Gateway’s executive vice president and chief financial officer. We anticipate that upon the closing of the transaction, we will focus on rapid finalization and execution of combined cost savings plans, channel and product expansion initiatives and other growth strategies.

During 2003, Gateway continued to experience a decline in demand for our PC products and incurred net losses that were partially offset by increased demand for our higher margin consumer electronics products. We expect that the acquisition of eMachines will create a combined company that will be a strong player in the U.S. PC market across multiple channels of distribution and across both the low-end and higher-end PC markets, with sales in key international markets, particularly in the United Kingdom and Japan. We are also evaluating re-entry into other international markets.

The eMachines transaction is subject to customary closing conditions, including expiration of a regulatory waiting period, and is expected to close by mid-March 2004. For a discussion of certain risks associated with this transaction, see “Acquisition of eMachines” under “Business—Factors That May Affect Gateway’s Business and Future Results” on page 11 of this Annual Report.

The information presented in this Annual Report on Form 10-K does not give effect to the eMachines’ acquisition.

Available Information

You can access information about Gateway and our products and services at www.gateway.com. You can also access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports, free of charge, on our website at www.gateway.com, after we file the reports with or furnish them to the Securities and Exchange Commission. Gateway will also provide these reports in printed form to any stockholder who requests them from Gateway. The information on our website is not incorporated into this annual report. Gateway was incorporated as “Gateway 2000 Inc.” in 1986 and we changed our name to “Gateway, Inc.” in 1999.

Business Segments

We operated our business in two segments in 2003: Consumer and Professional. For further information on our operating segments see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 12 of the Notes to the Consolidated Financial Statements.

For a discussion of certain risks associated with Gateway’s operations, see “Business—Factors That May Affect Gateway’s Business and Future Results” beginning on page 11 of this Annual Report.

Consumer Sales

We market our PC and consumer electronics products and solutions directly to customers, primarily by placing advertisements on or through television, newspapers, magazines, radio, the Internet, the www.gateway.com website, local promotions and trade show appearances. We believe our creative marketing, including use of our trademarked Black-and-White Spot Design on product packaging, helps to generate significant brand awareness and a loyal customer base.

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We sell our products and technology solutions directly to consumers primarily through four complementary distribution channels—phone sales, web sales, our nationwide network of Gateway retail stores, and a limited number of third-party channels. Gateway’s stores allow customers to see and evaluate products and obtain information from highly trained sales representatives. We believe that a significant number of our consumer customers take advantage of at least two of these channels before making their purchases.

During 2003, we closed 82 retail locations and exited the year with 190 Gateway retail stores located in the United States. These stores are generally open seven days a week and our sales call centers are open up to eighteen hours a day, seven days a week.

We believe a multi-channel approach, our low-cost sourcing model, and our well-known Gateway brand, should be competitive strengths for us as we continue to expand our product offerings in the PC and consumer electronics markets.

Professional Sales

During 2003, our professional sales and marketing activities focused on our core market segments: large corporate, small and medium business, education and government. To complement our professional sales efforts, Gateway also retains approximately 206 third-party network solutions providers who work with our professional sales force to deliver localized consultation and integration services to business, education and government customers in essentially all the top markets across the United States.

In addition to our retail store and telephone sales channels, Gateway has enhanced customer sales options with Internet-based tools. We offer business, education and government clients customized websites, called eSource sites, to facilitate their order and order management requirements. Additionally, we have developed the Gateway eMarketplace to facilitate both online purchases and sales of a wide range of technology and products that help businesses run.

Gateway’s Custom Integration Solutions (“CIS”) program is designed to accommodate the needs of large professional customers who require specialized hardware, software and services that are not available as a part of our standard offerings. Our CIS group accelerates technology deployment for clients through integration of unique hardware and software and development of customized services to meet professional customer individual requirements.

PCs and Servers

We offer our customers a broad line of Gateway-branded PCs and servers. We market our PCs with recommended configurations, but our large professional customers can also custom-configure some of our PCs with a choice of microprocessor clock speeds, memory, storage capacities, as well as other options. The following are the key products within this class:

Desktop PCs.    Gateway offers a series of desktop PC products, developed to serve targeted customer segments. We offer a range of standard model series—the 310, 510, 710 and Gaming PC Series for consumers and the Gateway E-Series for professional customers, with each series having a number of recommended configurations with increasing levels of technology and features. In addition, Gateway provides an all-in-one desktop, the Profile Series, an all-in-one PC, TV, DVD, PVR, MP3 player, FM tuner and stereo system, the 610 Media Center and the FMC-901 Family Room Media Center PC. Large professional customers can purchase a configuration of our E-Series that they customize for their particular needs. Desktops represented over 48% of net sales in 2003.

Mobile PCs.    Gateway offers a series of mobile PC products to provide portable computing capabilities for both consumer and professional customers who operate in both a mobile and networked environment. The systems are available with docking stations and various multimedia applications. As with desktops, portables

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have a range of standard model series—the 200, M305, M350, M405, 450, M505 and M675 Series, with each series having a number of recommended configurations. Portables are designed to range from the very light 200 series products that can be undocked from the base unit and weigh about 2 pounds to the M675 Series, a high-end, feature-laden desktop replacement. Mobile PCs are a growing percentage of Gateway’s PC business, representing about 22% of net sales in 2003.

Tablet PC.    Weighing in at less than three pounds, our Tablet PC, which is a special product included within our mobile PC product line, couples the flexibility and ease of a simple notepad with the full computing power of a notebook PC. With its external mobile keyboard and docking station and stand, the Tablet PC is like a traditional notebook PC. However, when in tablet mode, our customers can write on it using a digitizer pen, providing an innovative, convenient computing experience. In addition, we offer a hybrid mobile-tablet PC, the Gateway M275 Series, which is a feature-packed notebook that easily transforms into a Tablet PC.

Servers, Storage and Networking.    Gateway also offers Gateway-branded servers and storage and networking products and related services for professional customers. Every Gateway server has an adaptable design and can be custom built with a variety of options to fit the customer’s needs. Gateway servers can be ordered in tower based or rack-mounted configurations, with Windows^® operating software. Servers, storage and networking products and related services represented approximately 2% of net sales in 2003.

Consumer Electronics and Other Non-PC Products and Services

A key element of our growth strategy is to expand CE/non-PC products and services, particularly those under the Gateway brand. CE/non-PC products were previously referred to as “digital technology solutions,” and “beyond-the-box” offerings, and include all products and services other than the PC, such as peripherals, software, accessories, extended warranty services, training, internet services, plasma, LCD, and rear projection TVs, digital cameras, other consumer electronics products, enterprise systems and financing. Since May 2003, we added 118 new products and services in 22 new categories, exceeding our internal targets. CE/non-PC products and services represented approximately 28% of net sales in 2003.

Consumer Electronics Products.    During 2002, we began to offer a selected inventory of CE/non-PC products, many of which are branded under the Gateway name, in our Gateway retail stores as well as on our website and our call centers. We expanded our Gateway TV product line to include 12 models of plasma, LCD, and rear projection TVs. Initially launched in the fourth quarter of 2002, Gateway’s TV product line delivers a high picture quality television to consumers at attractive price points. Our plasma TV line is available in 42, 46 or 50-inch wide screen sizes, each providing an attractive ultra-thin design. Similarly, we introduced Gateway’s digital camera product line in the third quarter of 2003, which was quickly expanded to include 6 models in response to product demand. During 2003 we also expanded our line of home entertainment offerings to include a high-end surround sound system. We also offer a variety of home networking solutions. We plan to introduce additional CE/non-PC products in 2004.

Peripherals, Software and Other PC-Related Products.    We market printers, scanners, mobile PC accessories, monitors, CD and DVD burners, storage devices, surge protectors and other PC accessories that are manufactured by leading companies in their respective markets. We offer an increasing number of these products under the Gateway brand. We also market a broad range of third-party software offerings, from entertainment and productivity applications for the consumer market to vertical applications for various segments of the commercial and institutional markets. Peripherals, software and other PC-related products are sold in all four of our sales channels, including our website at www.gateway.com, where more than 7,000 products are available.

Services and Support

We provide customers with a number of additional offerings beyond Gateway’s standard warranty, service and support packages included with a typical product purchase.

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Consumer Services Support.    In our consumer segment, our value added fee-based service and support offerings consist of extended service plans, including extended warranty and accidental damage programs, fulfillment of replacement parts, installation and integration services and technical support services.

Professional Services Support.    In our professional segment, our value added service and support offerings are designed to satisfy the needs of customers throughout the technology lifecycle. For this segment, we offer:

Customer Relationship Management.    Gateway’s Customer Relationship Management (“CRM”) system is designed to achieve high consumer and professional customer satisfaction levels and assists our sales force with respect to repeat and referral business and the delivery of quality service and support. With the increased use of CRM tools and processes, we expect to be able to provide more personalized products and services.

Multi-Channel Delivery.    We deliver customer service and support at the customer’s location, at Gateway retail stores, at third-party locations and via telephone and the web. Gateway believes the availability of services through multiple channels benefits customers by providing them with a range of service options. Phone support to consumers is provided by a variety of third-party call center partners. Our professional segment is supported internally.

Communications.    We offer a variety of Internet access service options and networking products and services to our consumer and professional customers. Our offerings include broadband Internet access service provided by a number of leading cable broadband providers and wireless communications offerings, as well as narrowband Internet access service and high-definition video services provided by third-party service providers.

Financing Programs.    In 2003, we partnered with a number of third-party consumer financing institutions who provided financing of approximately 26% of our consumer net sales on a non-recourse basis to Gateway.

Training.    Through our nationwide network of Gateway retail stores, as of February 1, 2004 we had approximately 1,968 classroom seats throughout the U.S., offering training on general PC usage, popular third-party software, Internet usage, digital devices, and networking services to our consumer and professional customers. We also offer a unique, Gateway-branded multi-media training solution that combines instructor-led, CD-ROM and Internet-based training classes that enhance customer convenience and accessibility.

Cooperative Research and Product Development

The PC and consumer electronics industries are characterized by rapid technological advances. Our ability to compete successfully is heavily dependent upon our ability to ensure a continuing and timely flow of competitive products and technology to the marketplace. Our focus is primarily on coordinating and leveraging the research and development activities of a number of key technology partners and product or component providers. Our internal product development efforts are focused on designing and developing competitively priced PC systems and CE/non-PC products that adhere to industry standards and incorporate the technologies

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and features that we believe are most desired by our customers. In 2003 we expanded our presence in Taiwan by establishing a Taiwan branch office to help us facilitate communications with key international suppliers and to promote research and development activities. Our research and development expenditures in each of the last three years were less than 1% of net sales.

We rely on close and cooperative relationships with a wide range of suppliers and other advanced technology developers for research, development and engineering and to evaluate the latest developments in PC and consumer electronics technologies. Working with these companies, our engineers manage quality, integrate technologies and design product and system architecture. We believe that these relationships, together with market information obtained from our direct customer relationships, allow us to rapidly introduce and deliver appealing new products, software and services to the marketplace.

Manufacturing

We have designed our manufacturing process to provide a simplified line of PC products with standardized recommended configurations. We use third-party suppliers to manufacture Gateway-branded mobile PCs, most of our desktop PCs and our CE/non-PC products. All custom-configured desktop PCs are built at our own facility for our large professional customers, including the final assembly of our servers. Our production and quality assurance teams help ensure that all our products meet our quality specifications and applicable regulatory requirements.

Our desktop PC and server manufacturing operation for custom-configured desktop PCs in North Sioux City, South Dakota has been assessed and certified as meeting the requirements of the International Organization for Standardization (“ISO”) 9001-2000. The ISO 9001-2000 certification recognizes Gateway’s compliance with international standards for quality assurance. In an effort to maintain manufacturing excellence, we continue to identify and analyze those risks that impact our manufacturing ability. We utilize risk transfer methods and continuity planning to maintain our manufacturing capabilities. In addition, our major third-party desktop and mobile PC suppliers are ISO 9001-2000 certified.

Patents, Trademarks and Licenses

We hold over 300 U.S. and international patents and have a significant number of pending U.S. and international patent applications. Our portfolio includes a broad range of patents in the areas of computer related and information processing technologies, consumer electronics and manufacturing processes. A majority of the patents in our portfolio are recently issued patents. In addition to our own engineering resources, we work closely with consumer electronics and PC original design manufacturers, key component suppliers and other technology developers to develop products based on the latest technologies. Patents are sought for inventions that contribute to Gateway’s business and technology strategy. We have obtained patent licenses for certain technologies where such licenses are necessary or advantageous, some of which require royalty payments. In addition, we have entered into patent licenses and cross-licenses to obtain access to other technology, and we license our own patents to others in return for royalty payments. Trade secrets developed by us are protected through formal procedures that include employee agreements and confidentiality agreements with other entities.

We own and use a number of trademarks on or in connection with our products and services, including Gateway and our Black-and-White Spot Design, among others. Many of these trademarks are registered in the United States and other countries, and numerous trademark applications are pending in the United States and other countries. We believe these trademarks have strong brand name recognition in the United States marketplace and in many countries throughout the world.

We do not generally own the software used on our PCs and have entered into software licensing arrangements with a number of software developers, including Microsoft Corporation. For example, Gateway has licenses with Microsoft Corporation for Windows XP, Windows 2000, and Microsoft Office software products,

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among others. Software and materials developed by Gateway are protected by copyright in the United States and internationally.

Competition

The PC industry is characterized by aggressive pricing by several large branded and numerous additional branded and generic competitors, short product life cycles, and price sensitivity by customers. The level of pricing aggressiveness is accelerating, particularly in the low-priced end of the market. We also compete with consumer electronics companies and retailers with respect to our PCs and CE/non-PC products. Many of our competitors are larger and better funded than we are. Despite sales declines in 2003, we believe our direct sales model and sales offering of personalized technology solutions will be competitive advantages.

We believe we compete primarily on the basis of customer intimacy, value, technology, product offerings with new performance features, operational efficiency, quality, reliability, brand, multiple channel distribution, customer service and support, and by maintaining supplier relationships to enable us to bring products quickly to market.

In recent years, we and many of our competitors have regularly lowered prices. We expect these competitive pressures to continue in 2004 and that average sales prices for PCs and digital TVs will continue to decline. If we continue to reduce prices in response to such competition, without corresponding cost savings and product diversification, we may be unable to maintain or improve gross margins.

International Operations

During the third quarter of 2001, we discontinued our company-owned international operations outside of North America. During 2003, Gateway continued to sell products in Canada and Mexico through third-party retailers and resellers, in addition to sales and operations in the United States. In addition, we expanded our presence in Taiwan by establishing a Taiwan branch office in 2003 to help us facilitate communication with key international suppliers and to promote research and development and quality control activities. Although we have exited substantially all of our company-owned international operations, we are still in the process of finalizing the termination of a number of leases and fulfilling warranty obligations. If we complete the planned acquisition of eMachines, we will add sales primarily in the United Kingdom and Japan. We are also evaluating additional international markets.

Environment

Certain of our operations involve the use of substances regulated under various federal, state and international laws governing the environment, including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. Certain of our products are subject to various federal, state and international laws governing chemical substances in products, including those regulating the manufacture and distribution of chemical substances and those restricting the presence of certain substances in electronics products. The liability for environmental remediation and other environmental costs is accrued when it is considered probable and the costs can be reasonably estimated. Environmental costs are presently not material to our operations or financial position. In addition, Gateway currently has an incentive program to encourage our PC customers to recycle or donate their old PC and monitor, regardless of brand or condition.

Employees

As of December 31, 2003, we had approximately 7,400 employees in the United States and 7 employees located in Taiwan. During 2003, we believe our employee relations were generally good.

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Backlog

The backlog of unfilled orders was approximately $80 million at year-end 2003 and approximately $58 million at year-end 2002. We do not believe that backlog is a meaningful indicator of sales that can be expected for any period, and there can be no assurance that the backlog at any point in time will translate into sales in any subsequent period, particularly in light of our policy of allowing customers to cancel or reschedule orders under certain circumstances.

Seasonality

Gateway’s PC business has limited seasonality with stronger consumer sales in the second half of the year and stronger professional sales in the second and third quarters. Consumer electronics products sales tend to increase in the fourth quarter, although we have a limited history selling these products. Due to the increasing percentage of CE/Non-PC revenues to our overall revenues, we expect increased fourth quarter seasonality in the future.

Corporate Governance

The Gateway Board of Directors is elected by stockholders and is responsible for directing the management of business and affairs of Gateway. The Chief Executive Officer and senior management run Gateway’s day-to-day business operations. During 2002, the Board adopted formal Corporate Governance Guidelines. The Corporate Governance Guidelines are available for reading at www.gateway.com and will be provided in printed form to any stockholder who requests a copy from Gateway. The guidelines provide that the principal responsibilities of the Board, in addition to its general oversight responsibilities, include the: (a) selection, evaluation and compensation of the Chief Executive Officer and oversight of the selection and compensation of Gateway’s senior executive management; (b) oversight of succession plans for the CEO and key executive positions; (c) review and evaluation and, as appropriate, approval of Gateway’s financial and business performance, operations, key objectives, strategies, plans and actions; and (d) review of the processes in place to ensure the integrity of Gateway’s financial, accounting and control systems and the accounting principles and practices used to prepare the financial statements.

The current Board consists of six directors, five of whom are independent directors under the rules of the New York Stock Exchange and the sixth director is our Chairman and Chief Executive Officer, Theodore W. Waitt. Following the completion of the eMachines acquisition, Wayne Inouye, eMachines Chief Executive Officer will become Gateway’s Chief Executive Officer and join the Board, while Mr. Waitt will remain Chairman of the Board. The Board meets in regularly scheduled meetings as well as in special meetings. Beginning in 2002, all independent directors meet without management present during each regularly scheduled Board meeting, with a designated independent Board member chairing that segment of the meeting.

The Board has delegated a number of responsibilities to various committees of the Board. At the present time, the Board Committees are the Audit, Compensation, and Corporate Governance and Nominating Committees. The members of each committee are appointed by the Board. Currently, each committee consists entirely of independent directors. Each committee meets on a regularly scheduled basis and operates under a written charter approved by the Board, all of which are available for reading in their entirety at www.gateway.com and will be provided in printed form to any stockholder who requests a copy from Gateway.

The Audit Committee represents the Board in its general oversight of Gateway’s financial reporting, internal controls and audit functions. The Audit Committee is also directly responsible for the appointment, compensation and oversight of the work of Gateway’s independent accountants. During 2003, PricewaterhouseCoopers LLP (“PwC”) was appointed as independent accountants of Gateway and the Audit Committee has appointed PwC as independent accountants for 2004, subject to stockholder approval. The Audit Committee also approves any non-audit services by the independent accountants. The Audit Committee meets regularly in separate sessions with senior management, internal audit and Gateway’s independent accountants.

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The Compensation Committee reviews and approves salaries, bonuses and other compensation for our Chief Executive Officer and other senior executive management. In addition, the Compensation Committee administers Gateway’s 2000 Equity Incentive Plan, including reviewing and granting stock options and equity awards to officers and other employees.

The Corporate Governance and Nominating Committee reviews and reports to the Board concerning corporate governance matters, and conducts an annual evaluation of the performance of the Board and the Corporate Governance Guidelines. In addition, the Corporate Governance and Nominating Committee recommends to the Board the size and composition of the Board and establishes procedures for consideration of candidates for the Board and recommends candidates for election to the Board.

Since early 2001, we have implemented a number of other corporate governance improvements to address both proposed and actual legal requirements, as well as best practices:

We continue to evaluate our corporate governance practices in light of best practices and changing regulatory requirements and anticipate additional changes as necessary or appropriate. In addition, an executed certification from our Chief Executive Officer stating that he is not aware of any violation by Gateway of the New York Stock Exchange’s corporate governance rules will be timely filed with the New York Stock Exchange with respect to the 2003 fiscal year.

Factors That May Affect Gateway’s Business and Future Results

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

Acquisition of eMachines.    There are significant risks and uncertainties associated with Gateway’s proposed acquisition of eMachines. For example, the acquisition, which remains subject to customary closing conditions, including expiration of a regulatory waiting period, may not be consummated, or it may not be completed by the end of the first quarter as anticipated. In addition, Gateway may fail to realize the growth opportunities and cost savings anticipated to be derived from the combination. If Gateway is not able to integrate its business with eMachines’ business as anticipated, the benefits of the transaction would not be realized fully or at all or may take longer to be realized than expected. For example, it is possible that the integration process could result in disruption to or loss of key suppliers, customers or employees. Although Gateway believes it will be strengthened by adding eMachines’ retail channel and value priced PC product lines, Gateway may not be

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able to successfully combine and use to its best advantage the differing distribution and product models of the two companies. For example, potential conflict between third-party retailers and Gateway’s retail stores may adversely impact our combined retail sales. In addition, there are risks and uncertainties relating to the combination of senior management teams, as contemplated by the eMachines transaction, under which the chief executive officer of eMachines will become the new chief executive officer of Gateway. There are also risks and uncertainties from potential market volatility arising from Gateway’s increased shares outstanding, subject to certain sale restrictions agreed to in connection with the transaction.

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

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

Declining Net Sales; Continued Net Losses.    Our revenue growth and profitability depend significantly on the overall demand for PCs and related products and services. From 2000 until the latter half of 2003, the rate of general growth in demand for PCs and related products had slowed as a result of market maturation and deteriorating economic conditions. The rate of growth, market maturation and resulting competitive pressures has resulted in lower average selling prices for our PCs and has adversely impacted demand for our PCs and related products and services to a greater extent than it has impacted some of our PC competitors. In this environment of declining average sales prices, our revenues and PC market share have declined. As a result, we have experienced a net loss in 12 of the last 13 calendar quarters. Our results may continue to decline despite broadening of our product lines in the consumer electronics area. Continued deterioration in our PC unit sales would materially adversely affect Gateway’s future results of operations and financial condition.

Product Mix.    Our product mix significantly impacts our profitability. Our plans to improve gross margins depend substantially on increasing our sales of higher margin consumer electronics and non-PC products and services as a percentage of our net sales. While we have plans to continue increasing our marketing and sales efforts focused on consumer electronics and non-PC products and services, we have limited experience with these products and services and cannot predict market acceptance of our products with complete accuracy. If we are unable to increase sales of higher margin consumer electronics and non-PC products and services, or if

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margins decline in the CE/non-PC products and services we sell, our ability to return to profitability will likely be adversely impacted.

Attraction and Retention of Customers in a Cost-Effective Manner.    Our business strategy depends on increasing our overall number of customer transactions in a cost-effective manner. In order to increase our number of transactions, we must attract new prospects and repeat customers to our various marketing channels, including our website, our telephone call centers and our retail stores, and then convert these interactions into closed sales transactions. Although we have spent significant financial resources on sales and marketing and plan to continue to do so, there are no assurances that these efforts will be cost effective at attracting new customers or increasing transaction volume. In particular, we believe that the cost for desirable advertising and marketing placements are likely to increase in the foreseeable future, and we may be disadvantaged relative to our larger competitors in our ability to expand or maintain our advertising and marketing commitments. If we do not achieve increased transaction volume, our ability to grow and become profitable would be adversely impacted.

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

Selling, General and Administrative Costs.    As a result of costs associated with selling and marketing our products and services, particularly in our retail stores, Gateway incurs higher selling, general and administrative costs as a percent of revenue, than many of our competitors. While SG&A costs, before restructuring and transformation expenses, decreased approximately $150 million in 2003 from 2002, total SG&A costs decreased by $103 million in part due to restructuring and transformation expenses. Future restructuring, business transformation or other expenses could increase our SG&A costs and could negatively impact our future results and financial condition. In addition, if Gateway is unable to develop and/or sell products with relatively high gross margins, our results of operations would be materially adversely affected by our higher SG&A cost structure, particularly in our retail stores.

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

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

During 2003, we closed 82 retail locations and exited the year with 190 Gateway retail stores. During the second half of 2003, we remodeled six pilot retail stores to better accommodate our broader product line and customer focused sales approach. The rest of our retail network was refurbished in the second half of 2003, with most of the stores completed in the third quarter. However, the remodeling investment may not result in substantially increased sales. If Gateway chooses to close a significant number of individual stores, we could incur substantial costs. Such costs could adversely affect our results and financial condition.

Retail operations present many other risks and uncertainties, some of which are beyond Gateway’s control. For instance, our retail operations are subject to the risk of macro-economic factors that could have a negative

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impact on general retail activity; consumer acceptance of Gateway’s retail approach; our potential inability to sell third-party products and services at adequate margins; our potential inability to manage relationships with existing retail channel partners; our lack of experience in managing retail operations; the costs associated with unanticipated fluctuations in the value of Gateway-branded and third-party retail inventory; and our potential inability to obtain and retain quality retail locations at reasonable costs.

Outsourcing and Corporate Restructuring.    As part of our transformation, we are increasingly dependent upon third-party providers of products and services. During 2003, we outsourced a substantial portion of our manufacturing operations, service and support operations together with the implementation of new IT systems and a number of administrative services to third-party providers under contract. Although we have partnered with major vendors to implement these activities and systems, there is no assurance that we will avoid business interruptions in connection with the implementation of these activities or the possibility that the systems will not scale to meet the needs of our business. If we are unable to properly manage these outsourcing providers or accurately forecast our demand requirements of them, our revenues and gross margins may be adversely affected. Similarly, if our third-party providers do not comply with their contractual obligations, our results of operations could be adversely impacted. Our reliance on third party suppliers for the provision of employees could expose us to various legal claims relating to their employment status. Cost-cutting efforts have been implemented in recent periods and are contemplated in the future. Our ability to motivate employees and maintain employee morale during our restructuring and transformation may be adversely impacted by workforce reductions and general uncertainties. Moreover, our business creates ongoing demands for personnel, facilities, information and internal control systems and other infrastructure requirements. If we are unable to maintain and develop our infrastructure while reducing costs, we could experience disruptions in operations, which could have an adverse financial impact.

Suppliers.    We require a high volume of quality products and components for our PC and CE/non-PC offerings, substantially all of which we obtain from outside suppliers. In some circumstances we maintain single-source supplier relationships, such as with Microsoft for operating system products and Intel for PC microprocessors. If the supply of a key material product or component is delayed or curtailed, our ability to ship the related product or service in desired quantities and in a timely and cost-effective manner could be adversely affected. We seek to mitigate a portion of these risks by maintaining insurance to protect ourselves against loss of profits due to a supplier’s inability to perform due to an insurable property loss. In addition, we seek to mitigate such risks by having dual sources of supply where appropriate and by using reputable and reliable suppliers. However, even where multiple suppliers are available, certain key components are at times subject to industry-wide availability and pricing pressures. In cases where we need to switch to another supplier and alternative sources of supply are available, qualification of the sources and establishment of reliable supplies could result in delays and possible reduction in net sales. In the event that the financial condition of our third-party suppliers for key products or components were to erode, the delay or curtailment of deliveries of such products or components could occur.

Our reliance on third-party suppliers of key products and components exposes us to potential product quality issues that could affect the reliability and performance of our products and services. While such outsourcing arrangements, including the outsourcing of a substantial portion of manufacturing, may lower the fixed cost of operations, they also reduce our direct control over production and distribution. If we are unable to ship our products and solutions in desired quantities and in a timely manner due to a delay or curtailment of the supply of material products or components, or product quality issues due to faulty products or components manufactured by third-party suppliers, the market for our products or services could be adversely affected with a resulting reduction in revenues. Our estimated warranty and extended warranty costs are affected by ongoing product failure rates and specific product class failures. If product failure rates, material usage or service delivery costs exceed our estimates due to faulty products or components manufactured by third-party suppliers, warranty expenses may increase. In many instances we rely on offshore suppliers, particularly from Asia, for product assembly and manufacturing, and risks associated with transportation and other natural or human factors may disrupt the flow of product. If for any reason manufacturing or logistics in any of these locations or the

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subsequent transportation to the U.S. or other customer locations, is disrupted by economic, business, environmental, political, medical, or military conditions or events, Gateway’s results of operations and financial condition could be adversely affected.

Consumer Financing.    Reduced availability of financing generally or additional tightening in consumer credit policies from our third-party financial partners could materially and adversely affect our operations and financial results. In 2003, third-party financial institutions provided financing of approximately 26% of our consumer net sales on a non-recourse basis to Gateway

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

Fraud and Online Commerce Security.    We bear some of the financial risk from products or services purchased via fraudulent payment methods, even though historically the financial risk has been immaterial. Although we have implemented a number of anti-fraud measures, a failure to adequately control fraudulent methods of payment could adversely affect our operations and financial results.

In addition, customer concerns over the security of transactions conducted on the internet or the privacy of user information may inhibit the growth of our web sales. To transmit confidential information, such as customer credit card numbers securely, we rely on encryption and authentication technology. Unanticipated events or developments could result in a compromise or breach of the systems we use to protect customer transaction data. Furthermore, our servers and those of our service providers may be vulnerable to viruses, other harmful code or harmful activity transmitted over the internet. While we proactively search and protect against intrusions into our infrastructure, a virus, other harmful code or harmful activity could cause a service disruption.

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

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

Third-Party Patents and Intellectual Property.    There is no assurance that we will continue to have access to existing or new third-party technology for use in our products. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products and business methods, Gateway believes that based upon past experience and industry practice, such licenses generally can be obtained on commercially reasonable terms. However, there is no assurance that the necessary licenses would be available on acceptable terms. If we

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or our suppliers are unable to obtain such licenses, we may be forced to market products without certain desirable technological features. We could also incur substantial costs to redesign our products around other parties’ protected technology.

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

Inventory Risks.    By distributing products directly to our customers, we have historically been able to avoid the need to maintain high levels of finished goods inventory. This has minimized costs and allowed us to respond more quickly to changing customer demands, reducing our exposure to the risk of product obsolescence. If we are not successful in forecasting product demand, we could have excess or insufficient inventory of certain products. During 2003, we continued to expand the level of finished goods inventory of PCs and CE/non-PC products in our retail stores based on our expectations for demand, increasing the risk that we could have excess inventory in finished products. We ended the fourth quarter of 2003 with higher than anticipated levels of retail and other inventory of $114 million, of which $50 million is retail inventory. The retail inventory may decline in value if we are unable to sell it in a timely manner.

In addition, we maintain certain component products in inventory. A decrease in market demand or a decision to increase supply, among other factors, could result in higher finished goods and component inventory levels, and a decrease in value of this inventory could have a negative effect on our results of operations. For example, the continued decline in PC prices may decrease the value of any PC inventory in our retail stores.

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

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

Risks of Acquisitions, Joint Ventures and Strategic Alliances.    We have entered into certain strategic alliances and acquired certain businesses that we believe are complementary to our operations. We may make additional acquisitions and enter into joint ventures in the future. See Note 15 of the Notes to the Consolidated Financial Statements. While we believe we will effectively integrate such businesses, joint ventures, or strategic alliances with our own, we may be unable to successfully do so and may be unable to realize expected cost savings and/or sales growth. These transactions may involve significant other risks and uncertainties, including distraction of management’s attention away from normal business operations, insufficient revenue generation to offset liabilities assumed and expenses associated with the transaction, and unidentified issues not discovered in Gateway’s due diligence process, such as product quality issues and legal contingencies. In addition, in the case of acquisitions, we may be unable to smoothly integrate the acquired companies’ marketing, production, development, distribution and management systems. In the case of certain strategic alliances involving services

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by third-parties to Gateway, we may be dependent upon the financial reporting methodology selected by our strategic partners for the calculation of payments to Gateway. Our operating results could be adversely affected by any problems arising during or from acquisitions or from modifications or termination of joint ventures and strategic alliances or the inability to effectively integrate any future acquisitions. If we decide to issue Gateway Common Stock or other equity related purchase rights as consideration in a transaction, such as we decided in the case of the eMachines acquisition, current stockholders’ ownership percentage and earnings per share may become diluted.

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

Customer Sales Mix.    Our profits vary by type of customer and product mix. As a result, our results of operations and profitability for a particular period will depend, in part, on the corresponding mix of customers including increasing sales to professional customers and sales of CE/non-PC products to consumers. Government contracts are subject to the right of the government to terminate for convenience and subject to vendor suspension or disbarment in the event of certain violations of legal and regulatory requirements. In the event we do not meet such government requirements, Gateway’s results of operations and financial condition could be adversely affected.

Item 2.    Properties

The following are Gateway’s principal administrative and sales offices, production and manufacturing facilities, and support and training centers in the following locations:

As of December 31, 2003 we leased store space for our 190 retail locations throughout the United States. We are actively seeking to terminate or sublease 33 retail locations which we have closed. We also continue to actively market for sale or sublease warehouse, office and distribution facilities in Lake Forest, California; San Diego, California; Lakewood, Colorado; Beverly, Massachusetts; Vermillion, South Dakota; Salt Lake City, Utah; and Hampton, Virginia.

We exited substantially all of our company-owned international operations outside of North America in 2001, and currently own a facility in Dublin, Ireland, our former European headquarters, which we are marketing for sale. We have exited substantially all of our European leases.

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We believe that our administrative and sales offices, production and manufacturing facilities, support and training centers, and retail store space will be adequate for our business needs in the foreseeable future. All of these properties are used by our business and consumer segments.

Item 3.    Legal Proceedings

Gateway is a party to various lawsuits, claims, including assertion of patent infringements, 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 we believe are without merit.

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

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

As previously disclosed, Gateway was subject to an investigation by the Securities and Exchange Commission (“SEC”) primarily related to our fiscal year 2000. In April 2003, we voluntarily restated certain results of operations included in our 2001 Form 10-K, including certain revisions to our 2001 financial statements. In November 2003, Gateway reached an agreement with the SEC to resolve the matters covered by the investigation with respect to Gateway. Pursuant to the agreement, Gateway consented, without admitting or denying any findings, to entry of an administrative cease and desist order prohibiting any future violations of the antifraud, reporting, books and records and internal control provisions of the federal securities laws. In connection with the settlement, no fines or penalties were assessed against Gateway and no adjustments to Gateway’s prior financial statements were required. Gateway continues to cooperate fully in matters relating to the same time period and subject matter with respect to the SEC’s charges against three former officers of Gateway.

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

Item 4.    Submission of Matters to a Vote of Security Holders

Not applicable.

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PART II

Item 5.    Market for Registrant’s Common Equity and Related Stockholder Matters

Market Information

Gateway common stock is listed on the New York Stock Exchange under the trading symbol “GTW”. The following table sets forth the quarterly high and low price per share for our common stock as quoted at the close of trading on such date in 2003 and 2002:

Holders of Record

As of February 17, 2003, there were 5,128 holders of record of our common stock. There were no issued and outstanding shares of the Class A Common Stock as of such date.

Dividends

Gateway management believes the best use of cash is to fund internal growth and for general corporate purposes. As a result, we have not declared any cash dividends on our common stock since it was first publicly registered and do not anticipate paying any cash dividends on our common stock in the foreseeable future.

Gateway is obligated to pay dividends on our Series A Convertible Preferred Stock (“Series A Preferred Stock”) at the annual rate of 2.92%, payable quarterly, and on our Series C Redeemable Convertible Preferred Stock (“Series C Preferred Stock”) at the annual rate of 1.5%, payable semi-annually. We are precluded from declaring or paying dividends on our common stock unless all required dividends have been paid in full on Series A Preferred Stock and Series C Preferred Stock (“Preferred Stock”).

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

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Item 6.    Selected Consolidated Financial Data

The following historical data was derived from our consolidated financial statements, which have been audited by PricewaterhouseCoopers LLP, independent auditors. This financial data should be read in conjunction with the consolidated financial statements and notes thereto beginning on page 38 of this Annual Report on Form 10-K and in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 21 of this Annual Report on Form 10-K. The information below is not necessarily indicative of the results of future operations.

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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. 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 Gateway’s expectations include the factors described under “Business—Factors that May Affect Gateway’s Business and Future Results” beginning on page 11 of this Report or that are otherwise described from time to time in our reports filed with the Securities Exchange Commission after this report. We assume no obligation to update any forward-looking statements to reflect events that occur or circumstances that arise after the date as of which they are made.

The management’s discussion and analysis that follows is designed to provide information that will assist readers in understanding our financial statements, changes in certain items in those statements from year to year and the primary factors that caused those changes and how certain accounting principles, policies and estimates affect our financial statements.

Overview

Since its founding in 1985, Gateway has been a technology and direct-marketing pioneer, using our call centers, web site and retail stores to build direct customer relationships. As a branded integrator of personalized PC and consumer electronics products and services, we offer consumers, businesses, and government and educational institutions a wide range of plasma, LCD, and rear projection TVs, digital photo and video solutions, enterprise networking systems and services and other products which integrate with and complement our award-winning line of PCs.

Gateway faces a variety of challenges and opportunities inherent within the PC and consumer electronics industries which are characterized by rapid change, evolving customer demands and intense competition. We manage our business along two operating segments: consumer and professional. Our strengths revolve around our strong name recognition, our innovative product lines, unique business model and ability to maneuver quickly in the rapidly changing PC and consumer electronics industries. Key challenges we face include our ability to increase demand for Gateway products, our ability to continue lowering costs as part of our branded integrator transformation announced in the second quarter of 2003, managing our outsourced manufacturing supply, customer service and administrative relationships, anticipating changing customer demands, maintaining and growing PC market share (reversing market share declines) in both the consumer and professional segments in the face of intense competition, and continuing to grow our consumer electronics business at current or higher growth margin levels with increased competition from a number of business fronts.

During 2003, we continued to experience a significant decline in demand for our PC products offset in part by a significant increase in demand for our higher-margin consumer electronics products. Some of the key highlights from 2003 include:

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We exited 2003 with net sales of $3.4 billion, an 18% decline over 2002 net sales of $4.2 billion. A substantial portion of this decline was due to the closure of the 82 retail stores, competitive pricing, our focus on growing our consumer electronics business, supply constraints and general market share loss. Gross margins for the year held steady at 14%, evidence as to the effectiveness of our cost reduction strategies. During 2003, we recorded $63 million, or approximately 1.8% of net sales, of transformation and restructuring charges to cost of goods sold.

Agreement to Acquire eMachines

On January 30, 2004, we announced our agreement to acquire eMachines for 50 million shares of Gateway common stock and approximately $30 million in cash. Under the agreement, Wayne Inouye, eMachines’ chief executive officer, will become the new chief executive officer of Gateway and a member of Gateway’s Board of Directors. Theodore W. Waitt, Gateway’s founder, will remain Chairman of the Board and Roderick M. Sherwood III will remain Gateway’s executive vice president and chief financial officer.

This acquisition combines our branded integrator strategy, consumer electronics leadership, scale and cash availability with eMachines low cost structure, PC market strength, and international presence. We expect the combined company will create a strong player in the U.S. PC market across multiple channels of distribution and across both the low-end and higher-end PC markets, with sales in key international markets, particularly in the United Kingdom and Japan. We expect to evaluate re-entry in other international markets.

The eMachines transaction is subject to customary closing conditions, including expiration of a regulatory waiting period, and is expected to close by mid-March 2004.

Outlook

Gateway’s growth plans are focused on new CE/non-PC product and solution introductions, competitive low-end PC offerings, our branded integrator strategy and related products, and networking products and services in the professional segment.

We expect that the pricing environment will continue to be challenging for 2004, potentially resulting in further decreases in average product prices.

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Upon closing the eMachines’ transaction, we plan to leverage eMachines’ existing relationships in the retail channel to explore expanded distribution of Gateway’s consumer electronics products beyond our own channels. With this multi-channel approach, increased points of distribution and expanded product line, there is potential for enhanced growth across both our PC and consumer electronics businesses in the US and overseas, although restructuring actions could curtail this growth in 2004. Additionally, we expect that as we integrate, we will gain significant operating leverage by adopting many elements of eMachines’ efficient, low-cost model to our operating structure and to combine the best practices from both companies to continue driving reductions in the costs of goods sold and SG&A. We expect that, together, the scaling of more profitable lines of business and continued costs reductions will drive substantial margin synergies and cost savings and return us to profitability in 2005.

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 of America. The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles and Gateway’s discussion and analysis of our financial condition and results of operations requires Gateway’s management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Note 1 to the consolidated financial statements in Item 8 of this Form 10-K summarizes the significant accounting policies and methods used in the preparation of Gateway’s consolidated financial statements.

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

Revenue Recognition

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

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

Gateway records reductions to revenue for estimated commitments related to customer incentive programs, including customer rebates and other sales incentives, including, among other things, trade-ins and referral

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

Allowance for Doubtful Accounts

Gateway maintains an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The estimate is based on management’s assessment of the collectibility of specific customer accounts and includes consideration of the credit worthiness and financial condition of those specific customers. We record an allowance to reduce the specific receivables to the amount that is reasonably believed to be collectible. We also record an allowance for all other trade receivables based on multiple factors including historical experience with bad debts, the general economic environment, the financial condition of our customers, and the aging of such receivables. We do not expect default rates to be greater than 1% of professional segment net sales. If there is a deterioration of a major customer’s financial condition or we become aware of additional information related to the credit worthiness of a major customer, or if future actual default rates on trade receivables in general differ from those currently anticipated, we may have to adjust our allowance for doubtful accounts, which would affect earnings in the period the adjustments are made. Gateway does not have a single customer that accounts for 10% or more of our revenue or accounts receivable.

Inventory Valuation

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

Warranty Provision

Gateway provides standard warranties with the sale of products. The estimated cost of providing the product warranty is recorded at the time revenue is recognized. We maintain product quality programs and processes, including actively monitoring and evaluating the quality of suppliers. We experienced a significant decline in our required warranty provision at the end of 2003 due to the shortening of our PC standard warranty periods and increased sales of consumer electronics products which typically have much shorter warranty periods, generally 90 days. Estimated warranty costs are affected by ongoing product failure rates, specific product class failures outside of experience and material usage and service delivery costs incurred in correcting a product failure or in providing customer support. If actual product failure rates, material usage or service delivery costs differ from the estimates, revisions to the estimated warranty liability would be required and would affect earnings in the period the adjustments are made.

Restructuring

Gateway has engaged and may continue to engage in restructuring actions which require our management to utilize significant estimates related to realizable values of assets made redundant or obsolete, expenses for severance and other employee separation costs, lease cancellation and other exit costs and estimates of future rental income that may be generated through the subleasing of excess facilities. Should the actual amounts differ from our estimates, the amount of the restructuring charges could be materially impacted. For a full description of our restructuring actions, refer to our discussion of restructuring charges in the Results of Operations section.

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Taxes on Earnings

Gateway records a tax provision/benefit for the anticipated tax consequences of our reported results of operations. The provision for (benefit from) income taxes is computed using the liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. We consider our ability to carryback losses, forecasted earnings and future taxable income and feasible tax planning strategies in determining the need for and amount of a valuation allowance. As of December 31, 2003, our valuation allowance was $302 million and our net deferred tax asset had been reduced to $0. If we determine that it is more likely than not that our net deferred tax assets will be realized, our valuation allowance would be reversed, resulting in a positive adjustment to earnings in the period such determination is made.

Litigation

Gateway is currently involved in certain legal proceedings. When a loss is considered probable in connection with litigation or governmental proceedings and the loss amount can be reasonably estimated within a range, we record the minimum estimated liability related to the claim if there is no best estimate in the range. As additional information becomes available, we assess the potential liability related to the legal proceedings and revise those estimates. Revisions in estimates of the potential liability could materially impact our results of operations in the period of adjustment.

Results of Operations

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

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The following table summarizes Gateway’s net sales for the periods indicated by segment and by geographic region (dollars in thousands):

The following table summarizes Gateway’s net sales and by major product or service group (dollars in thousands):

(a)    Certain prior year amounts between segments have been reclassed to conform to current year presentation.

Net Sales

2003 vs. 2002

Net sales declined 18% in 2003 to $3.4 billion as compared with $4.2 billion in 2002. We shipped approximately 2.1 million PC units in 2003 as compared with 2.7 million PC units in 2002, a decrease of approximately 24%. The 2003 decline in PC unit shipments and net sales, particularly within the consumer segment, primarily stems from the closure of a number of retail stores, competitive pricing and general market share loss. Our fourth quarter 2003 PC market share was approximately 3.3% as compared with approximately 5.5% for the fourth quarter 2002, based on unit sales data from International Data Corporation. The consumer and professional segments represented 51% and 49%, respectively, of total net sales in 2003 compared to 57% and 43%, respectively, in 2002. There were no significant international sales in 2003 and 2002.

Consumer net sales and related PC unit shipments declined 27% and 38%, respectively, in 2003 from 2002. This decline in the consumer segment was driven primarily by the closure of retail stores in the first quarter of 2003 and decreases in desktop PC market share. The decrease in desktop PC market share was partly due to intense price competition in the low-end of the market and our strategy of offering higher margin, fully configured systems which meet our customers’ needs for more powerful computers with digital convergence capability. In 2003, third party financial institutions provided financing for approximately 26% of our consumer net sales. The consumer financing is on a non-recourse basis to Gateway.

Professional segment (previously referred to as business segment) net sales and unit shipments declined by 7% and 8%, respectively, in 2003 from 2002. The declines in professional segment net sales were attributable to declines in average selling prices and PC unit shipments resulting in a decrease in PC market share, particularly within the government and education sectors. Gateway’s professional segment continues to maintain an operating profit before unallocated corporate expenses.

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CE/Non-PC (previously referred to as digital technology solutions or beyond-the-box) products accounted for $946 million or 28% of net sales in 2003 as compared to $788 million or 19% in 2002 due primarily to growth in our consumer electronics business reflected by a 169% increase in consumer electronics net sales for 2003 as compared with 2002. CE/Non-PC offerings include all products and services other than the PC, such as peripherals, software, accessories, extended warranty services, training, internet services, digital solutions and digital television products.

During 2003, we closed 82 retail locations and exited the year with 190 stores in the United States compared to 272 stores at the end of 2002. We are continuing to evaluate the retail stores and their locations in terms of contribution to multiple channels sales and financial results. This could result in a decision to close or relocate retail locations in the future. Additional store closures would incur substantial costs and potential loss of related revenue which could adversely affect our results of operations and financial condition in future periods.

PC average unit price (“PC AUP”) is calculated using total PC net sales divided by total PC units. PC AUP was $1,181 for 2003 compared to $1,232 for 2002. The decline in PC AUP is primarily the result of competitive pricing pressures. We expect PC AUP to continue to decline in 2004 based on competitive pressures and Gateway’s expansion in the low-end PC market.

2002 vs. 2001

Our net sales declined 30% in 2002 from 2001. We shipped approximately 2.7 million units in 2002 compared to 3.6 million units in 2001, representing a decrease of 25%. North America net sales decreased 23% in 2002 from 2001. The consumer and professional segments represented 57% and 43%, respectively, of total net sales in 2002 compared to 50% and 41%, respectively, in 2001. International net sales were 0% and 9% of total net sales in 2002 and 2001, respectively.

Consumer net sales and unit shipments declined 19% and 10%, respectively, in 2002 from 2001 primarily due to the closure of retail stores and our exit out of international markets in the third quarter of 2001. In 2002, third-party financial institutions provided financing of approximately 36% of our consumer net sales. In the professional segment in North America, net sales and unit shipments declined by 27% and 20%, respectively, in 2002 from 2001.

CE/Non-PC products and services accounted for $788 million in 2002, or 19% of net sales, compared to $1.04 billion in 2001, or 17% of net sales. The decline in CE/Non-PC revenue on a year-over-year basis was primarily attributable to the decline in unit shipments as well as our decision to discontinue certain non-profitable revenue streams and the insourcing of certain extended warranty service plans. For 2001 and 2002, CE/Non-PC included all products and services other than the PC, such as peripherals, software, accessories, extended warranty services, training internet services, digital solutions, digital television products and financing. Digital televisions were not introduced until fourth quarter 2002.

During the first quarter of 2001, we modified our strategic alliance with America Online, Inc. (AOL) whereby we converted existing gateway.net customers to the AOL-branded internet access in order to improve the customer experience and the economic return to Gateway for such subscribers. In addition, we began to participate earlier in a greater share of recurring income on new prepaid ISP subscribers. In the fourth quarter of 2002, AOL unilaterally recomputed payments it had made in 2001 and the first half of 2002 and withheld the claimed overpayments from amounts currently owed to us. We disputed AOL’s retroactive adjustment to the mutually agreed and previously paid amounts and commenced formal dispute proceedings as required by our agreement. In view of the uncertainty over our ultimate ability to collect the withheld amounts, we reduced 2002 net sales and gross margins by the approximately $16 million in dispute.

During 2002, we closed 24 retail locations and exited the year with 272 stores in the United States compared to 296 stores at the end of 2001.

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Gross profit

2003 vs. 2002

Gross profit in 2003 declined to $0.5 billion, a decrease of approximately 18% from 2002. As a percentage of net sales, gross profit for 2003 remained consistent with 2002 at 13.6%. During 2003 and 2002, we recorded charges of $63 million (approximately 1.8% of net sales) and $16 million (approximately 0.5% of net sales), respectively, in cost of goods sold related to the closure of certain sites, severance obligations and transformation activities. For 2003, these charges were offset by $260 million in cost of goods sold reductions largely passed through to customers through competitive pricing, a shift in sales mix from lower-margin PCs to higher margin CE/Non-PC products and a $9 million margin benefit stemming from favorable developments related to a contingent liability. CE/non-PC sales accounted for approximately 80% and 58% of gross profit during 2003 and 2002, respectively, with no portion of the $63 million restructuring and transformation charge being allocated to our CE/Non-PC segment.

2002 vs. 2001

Gross profit in 2002 declined to $0.6 billion, a decrease of 32% from 2001. As a percentage of sales, gross profit for 2002 decreased to 13.6% from 14.1% in 2001. During 2002 and 2001, we recorded charges of $16 million and $116 million, respectively, in cost of goods sold related to the closure of certain sites and severance obligations. During 2001, we incurred an operating loss of $75 million related to our consumer financing portfolio, and recorded an additional $100 million charge to reduce the carrying value of those receivables to their net realizable value following our decision to sell the substantial balance of our consumer financing portfolio. The decline in gross margin percentage in 2002 compared to 2001 was primarily due to the decline in unit shipments, the value pricing and marketing strategy we adopted and maintained in 2002, the AOL dispute discussed above, a $4.8 million provision for losses shared with a third-party financing partner on an old loan portfolio, as well as the insourcing of certain extended warranty service plans discussed above, partially offset by the net impact of approximately $18 million for favorable determinations of litigation and contingent liabilities, and offset by lower restructuring and other special charges in 2002. We earned approximately $30 million in 2002, included in net sales, from our customers for certain extended warranty services, of which $6 million, included in net sales and associated cost of goods sold, relates to payments to the third-party provider of such services.

Selling, General and Administrative Expenses

2003 vs. 2002

Selling, general and administrative (“SG&A”) expenses totaled $1.0 billion in 2003 compared to $1.1 billion in 2002. The decline in SG&A was due to approximately $150 million in SG&A savings realized through store closures, headcount reductions, marketing efficiencies and other programs, partially offset by a $45 million increase in restructuring and transformation charges in 2003 compared to 2002. The 2003, SG&A restructuring and transformation charges included $96 million related to the closure of certain sites, severance obligations and the write down of capital assets, including the abandonment of certain information technology projects and $33 million representing transformation and outsourcing costs. See “Restructuring Activities” below for further information concerning 2003 and 2002 restructuring activities.

2002 vs. 2001

Selling, general and administrative (SG&A) expenses totaled $1.1 billion in 2002 compared to $2.0 billion in 2001. During the first quarter of 2002, SG&A included charges of $83 million related to the closure of certain sites, severance obligations and the write down of capital assets, including the abandonment of certain information technology projects. During 2001, we approved restructuring plans which, among other things, led to the closure of substantially all of our Gateway-owned international operations, reduction of our workforce, closure of certain store locations, consolidation of facilities, redefinition of our information technology strategy,

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and the exit from certain other activities. Pre-tax charges of $759 million were recorded to SG&A in 2001 to provide for these actions and other related items. See “Restructuring Activities” below for further information concerning 2002 and 2001 restructuring activities.

This decline in SG&A expenses in 2002 compared to 2001 reflects the restructuring decisions made in 2001 and variable cost declines associated with lower sales volume, as well as other cost reduction efforts.

Restructuring Activities

Third Quarter of 2003 Plan (“Q3 2003 Plan”):

During the third quarter of 2003, Gateway approved a restructuring plan to, among other things, reduce our workforce and close certain facilities. Restructuring charges of $79 million ($48 million in cost of goods sold and $31 million in selling, general and administrative expenses) were recorded in 2003 to provide for these actions. The significant restructuring activities related to this charge were initiated in the third quarter of 2003 and related actions will continue through the second quarter of 2004. In addition to the $79 million restructuring charge, we recorded $35 million ($2 million in cost of goods sold and $33 million in selling, general and administrative expenses) in store remodeling, consulting and other expenses related to our transformation into a branded integrator.

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

First Quarter 2003 Plan (“Q1 2003 Plan”):

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

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

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First Quarter 2002 Plan (“Q1 2002 Plan”):

During the first quarter of 2002, Gateway approved a restructuring plan to, among other things, reduce its workforce and close certain retail locations and other company sites. A pre-tax charge of $109 million ($16 million in cost of goods sold and $93 million in selling, general and administrative expenses) was recorded to provide for these actions. Included in the pre-tax charge of $109 million is $55 million for asset write-downs related to the impairment of certain long-lived assets that were abandoned during the quarter.

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

In addition, we recorded an adjustment to reduce previously recorded charges pursuant to the Q3 2001 Plan by $10 million during the quarter ended March 31, 2002, primarily due to a higher than expected recovery on assets.

Third Quarter 2001 Plan (“Q3 2001 Plan”):

During the third quarter of 2001, Gateway approved a restructuring plan to, among other things, reduce its workforce, close certain retail locations, consolidate facilities, redefine its information technology strategy, and exit certain other activities, including its company-owned international operations. Pre-tax charges of $454 million (including non-cash charges of $229 million) were recorded in 2001, to provide for these actions. The charges were included in cost of goods sold and selling, general and administrative expenses. In the first quarter of 2002, an adjustment to reduce these charges by $10 million was recorded due to higher than expected recovery on assets.

The nature of the charges related to the Q3 2001 Plan summarized above is as follows:

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First Quarter 2001 Plan (“Q1 2001 Plan”):

During the first quarter of 2001, Gateway approved a restructuring plan to, among other things, reduce its workforce, close certain retail locations, consolidate facilities, redefine its information technology strategy, and exit certain other activities. Pre-tax charges of $422 million were recorded in 2001 to provide for these actions and other related items. The charges are included in cost of goods sold and selling, general and administrative expenses. Included in the pre-tax charges of $422 million is $306 million for asset write-downs and additional depreciation expense related to the impairment of certain long-lived assets that were either abandoned during the quarter, or for which the resulting estimated future reduced cash flows were insufficient to cover the carrying amounts.

The nature of the charges related to the Q1 2001 Plan summarized above is as follows:

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During 2001, Gateway recorded total restructuring and other special charges of $1.1 billion. Included in this amount is the $454 million and $422 million related to the Q3 2001 Plan and Q1 2001 Plan, respectively ($117 million is included in cost of goods sold for costs associated with the shutdown of domestic and international manufacturing sites, such as asset write downs and severance costs, and $759 million is included in selling, general and administrative expenses which consists of the impairment of goodwill and other assets acquired in the acquisition of NECX and the costs associated with the shutdown of the international operations and the alignment and closure of certain sites), 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 Gateway’s investments and long-term note receivables were impaired on an other-than-temporary basis and a $100 million charge included in cost of goods sold to reduce the carrying value of Gateway’s consumer financing receivables, partially offset by $34 million in income included in other income (loss), net, associated with the consumer financing portfolio which was ultimately sold during the third quarter.

Operating Loss

2003 vs. 2002

Operating loss for 2003 totaled $511 million compared with $511 million in 2002. The operating loss in 2003 includes $192 million in restructuring and other special charges discussed above compared with $99 million in 2002. The operating losses for 2003 and 2002 largely resulted from the relatively low PC unit volumes compared to the fixed cost base and restructuring charges. This in turn reflected market share losses, store closures and competitive pricing.

Operating loss in 2003 for the consumer segment was $141 million compared to a loss of $183 million in 2002. This improvement in operating results is due to growth in CE/Non-PC product sales, Gateway’s cost of goods sold reduction initiatives and SG&A expense management, partially offset by declining PC product sales. Professional segment operating income in 2003 was $112 million compared to $114 million in 2002. The decrease in operating income for the professional segment is due to declining PC product sales related to market share losses in the government and education sectors, offset by improved mix of services and server products, Gateway’s cost of goods sold reduction initiatives and SG&A expense management.

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. Non-segment operating losses were $481 million in 2003 and $443 million in 2002.

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2002 vs. 2001

Operating loss for 2002 totaled $511 million compared to $1.2 billion in 2001. The operating loss in 2002 includes $99 million in restructuring and other special charges discussed above. The operating loss in 2001 reflected the restructuring and other special charges of $975 and the $75 million loss from the consumer financing operations noted above.

Operating loss in 2002 for the consumer segment was $183 million compared to operating income of $15 million in 2001. Professional segment operating income in 2002 was $114 million compared to $220 million in 2001. The declines in operating income in the consumer and professional segments in 2002 were due to net sales softness and a de-leveraging of fixed expenses due to lower unit sales. The consumer segment loss in 2002 also reflects the aggressive pricing environment in the consumer segment. Non-segment expenses for 2002 totaled $443 million compared to $1.3 billion in 2001. This decrease is primarily the result of decreases 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.

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 was $19 million in 2003, a decline from $35 million in 2002. The decrease in other income (loss), net, for 2003 compared to 2002 is primarily due to the favorable renegotiation and settlement of an acquisition liability and gains on the disposition of certain equity portfolio holdings in 2002, partially offset by write-downs of strategic investments in that year.

Other income (loss), net resulted in a loss of $95 million in 2001 including charges totaling $184 million to write-down the carrying value of our investments partially offset by income of $34 million associated with the sale of the consumer financing portfolio sold during the third quarter and a $7 million gain on early extinguishment which was reclassed from an extraordinary item, net of related tax, in 2003 upon adoption of SFAS No. 145.

Income Taxes

We recorded tax expense of $24 million in 2003 compared with a 2002 benefit of $178 million. The 2003 expense relates primarily to certain state income tax receivables and net deferred tax assets that have been deemed not recoverable. The 2002 tax benefit primarily reflects the impact of 2002 losses related to our domestic operations. We recorded a tax benefit of $272 million or 21.2% of our loss before income taxes and cumulative effect of change in accounting principle for the year ended December 31, 2001. The 2001 tax benefit rate reflects the impact of losses related to our 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.

Liquidity and Capital Resources

At December 31, 2003, Gateway had approximately $1.1 billion in cash and marketable securities. Approximately $37.6 million was restricted cash at December 31, 2003, to provide for certain commitments and contingencies including $16.1 million in Standby Letters of Credit and Guarantees.

During the first quarter of 2003, we terminated our former $300 million bank credit facility under which no loans were outstanding, in order to reduce commitment fees payable under this unused facility. We had not previously had any loans outstanding under this credit facility, and given our substantial liquidity position, we did not foresee any need to borrow under the facility during its remaining term.

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The following table presents selected financial statistics and information as of December 31 for the periods indicated (dollars in thousands):

Gateway generated $73 million in cash from operating activities in 2003, reflecting a $287 million income tax refund partially offset by $258 million of net loss adjusted for non-cash items. Other significant factors affecting cash provided by operations include a net increase in accounts receivable, inventory and other assets of $30 million (excluding the $287 million income tax refund) offset by a net increase in accounts payable, accrued and other liabilities of $74 million. The increase in accounts receivable was driven by an increased mix of professional sales. The increase in inventory was driven by the increased level of products stocked in the retail store network as well as transitional inventory for outsourcing of operational fulfillment processes while accounts payable increased in connection with new supply and manufacturing agreements. We used approximately $73 million cash for capital expenditures and $530 million to purchase marketable securities, offset by proceeds from sales of marketable securities of $401 million, while generating $20 million in proceeds from a note receivable. We also used $9 million to pay preferred dividends and generated $2 million through stock option exercises.

For 2002, we used $25 million of cash to support operations, including $197 million of net loss adjusted for non-cash items. Other significant factors affecting available cash included an increase in other liabilities of $55 million and an increase in inventory, accounts receivable and other assets of $34 million, due in large part to the collection of income tax refunds of approximately $425 million in the first and third quarters, offset by the current income tax receivable of $305 million, and inventory reduction efforts throughout the supply chain, particularly in components and subassemblies. This increase was largely offset by a decrease in accounts payable, accrued liabilities and royalties of $243 million, due primarily to payments associated with restructuring activities initiated in 2001 and the first quarter of 2002. We used approximately $78 million cash for capital expenditures and $614 million to purchase marketable securities, offset by proceeds from sales of marketable securities of $436 million, while generating $10 million in proceeds from the sale of finance receivables and $11 million from the sale of an investment. We also used $6 million to pay preferred dividends.

We 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 included $199 million for capital expenditures and $639 million to purchase available-for-sale securities offset by proceeds from sales of marketable securities of $356 million.

In December 2001, we extinguished our $200 million 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 again of $6.8 million. The Series C Preferred Stock bears a 1.5% annual dividend, paid semi-annually and has a face value of $200 million. The holder can put the Series C Preferred Stock to us in December 2004, 2009 and 2014 (or earlier in the event of a change in control or other fundamental events) at face value and we can satisfy this put option in cash or registered common stock, or a combination thereof, at our option. The holder can convert the Series C Preferred Stock to 5,938,948 shares of common stock at any time prior to December 2014, provided our common stock trades over $33.68 for 5 consecutive days. In addition, we can redeem the Series C Preferred Stock at any time after December 2004 for cash in an amount equal to the face value plus accrued and unpaid dividends.

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In December 2001 we also issued to AOL $200 million of Series A Convertible Preferred Stock, bearing an annual dividend of 2.92% paid quarterly. Our Series A Preferred Stock and the Series C Preferred Stock are subject to certain limitations on transfer and certain registration rights. See Note 7 to the consolidated financial statements included herein for further information. Our Series A Preferred Stock will automatically convert into our common stock in December 2004 at a conversion rate between $8.99 and $10.07 per share based on the fair value of our common stock at the date of conversion. If our common stock price on that date is comparable to our common stock price as of December 31, 2003, the Series A would convert into a total of 22,238,283 shares of our common stock. The preferred stock is convertible earlier than the third anniversary of issuance at the option of AOL in the event of certain circumstances.

We will incur certain registration obligations relating to our common stock to be issued in connection with our acquisition of eMachines, subject to lock-up agreements. Sales or the availability for sale of a substantial number of shares of our common stock could adversely affect the trading price of our securities.

We believe that our current sources of working capital, provide adequate flexibility for our 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 our estimates of future financial needs and sources of working capital.

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

Contractual Obligations

The cash impact of our contractual obligations associated with operating leases, royalty and licensing agreements, purchase obligations and restructurings announced in 2001, 2002 and 2003 is as follows:

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We have royalty-bearing license agreements that allow us 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.

Off-Balance Sheet Arrangements and Other

Gateway does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as special purpose entities (“SPEs”) or variable interest entities (VIEs), which would have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes. As of December 31, 2003, we are not involved in any unconsolidated SPEs or VIEs.

During the normal course of business, Gateway makes certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include: (i) intellectual property indemnities to our customers and licensees in connection with the use, sales and/or license of our products, (ii) indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of Gateway and (iii) indemnities involving the accuracy of representations and warranties in certain contracts. In addition, Gateway has made contractual commitments to several employees providing for payments upon the occurrence of certain prescribed events. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential for future payments the company could be obligated to make. Gateway has not recorded any liability for these indemnities, commitments and other guarantees in the accompanying consolidated balance sheets.

New Accounting Pronouncements

In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Accounting Standard (“SFAS”) No. 145, “Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This Statement rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt.” Under SFAS 4, all gains and losses from the extinguishment of debt were required to be aggregated and, if material, classified as an item, net of related income tax effects. The Company previously reported an extraordinary gain on the early extinguishment of debt, net of related tax in 2001 of $4.3 million. The adoption of this Statement in 2003 resulted in a reclassification of that amount, $6,890 gross of tax, to other income (loss), net and a $2,549 decrease in our benefit for income taxes for 2001.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities,” and a revised interpretation of FIN 46 (FIN 46-R) in December 2003. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. Since January 31, 2003, the Company has not invested in any entities it believes are variable interest entities for which the Company is the primary beneficiary. For arrangements entered into prior to February 1, 2003, the Company is required to adopt the provisions of FIN 46-R in the first quarter of 2004. The Company does not believe the adoption of FIN 46-R will have a material impact on its financial statements.

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Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

We are generally not subject to material market risk with respect to our investments classified as marketable securities as such investments are readily marketable, liquid and do not fluctuate substantially from stated value. Marketable equity securities that have certain regulatory disposal limitations could contain some market risk. Regarding long-term investments, Gateway holds and expects to continue to consider investments in minority interests in companies having operations or technology in areas within Gateway’s strategic focus. Many of these investments are in early stage companies, investment funds or Internet or e-commerce companies where operations are not yet sufficient to establish them as profitable concerns. Certain of these investments are in publicly traded companies whose share prices are highly volatile. Adverse changes in market conditions such as occurred in the years starting in 2000, and poor operating results of certain of these underlying investments, have resulted and may in the future result in Gateway incurring losses or an inability to recover the original carrying value of our investments. As of December 31, 2003, we held long term investments of approximately $15 million.

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Item 8.    Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

Financial Statements:

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Report of Independent Auditors

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

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Gateway, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 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 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 1 to the consolidated financial statements, effective January 1, 2001, Gateway adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities.

/s/    PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

San Diego, California

January 30, 2004

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GATEWAY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, 2003, 2002 and 2001

(in thousands, except per share amounts)

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

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GATEWAY, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2003 and 2002

(in thousands, except per share amounts)

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

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GATEWAY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2003, 2002 and 2001

(in thousands)