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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2002

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 28, 2002, 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 $978,362,000.

As of April 14, 2003 there were 324,072,364 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 2003 annual meeting of stockholders to be held on May 15, 2003, 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, 2002

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Forward-Looking Statements—This Annual Report on Form 10-K 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 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. 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

Gateway, Inc. (“Gateway”) improves people’s lives through a combination of the latest and best hardware, communication tools, applications, training and services. Gateway takes a localized approach, utilizing our website, call centers and nationwide network of Gateway retail stores to build relationships with consumers, small and medium businesses and government and education institutions. Our strategy is to deliver the best value to customers by offering personal computers (“PCs”) and digital electronics products such as digital cameras, digital audio and video products, plasma televisions, and home entertainment products that employ the latest technology at competitive prices, along with a full complement of related products and services.

Gateway is one of the leading suppliers of PCs to the U.S. consumer market, with an estimated market share of approximately 6% in 2002, according to preliminary data from International Data Corporation. We are also a significant supplier of PCs to the U.S. business 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) and our retail stores where customers can experience our products with assistance from our trained sales force. We believe these sales channel options, our diversified product and service offerings, and our superior customer support provide a unique customer experience that differentiates us from our competitors.

Our strategy is to profitably grow our PC business, diversify our revenue with digital technology products and optimize our cost structure. To do so we intend to continue to integrate our sales channels and in particular our retail locations to make Gateway the place where customers can rely upon effective advice to purchase integrated digital solutions, traditional PC hardware and consumer electronic products and services. We will continue to deliver the latest technology, the best value and seek to develop innovative new products and services to allow our customers to derive the maximum benefits from their digital products. We also intend to continue to maintain a strong liquidity position to maintain our flexibility. We exited 2002 with $1.07 billion in cash and marketable securities.

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, as soon as reasonably practicable after we file the reports with or furnish them to the Securities and Exchange Commission. Gateway was incorporated as “Gateway 2000 Inc.” in 1986 and changed our name to “Gateway, Inc.” in 1999.

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2002 Accomplishments

Although challenging economic conditions and competitive pressures during 2002 negatively impacted revenues, margins and profitability, we achieved significant results in a number of areas:

Business Segments

We operated our business in two segments in 2002: Consumer and Business. For further information on our operating segments see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 13 of the Notes to the Consolidated Financial Statements.

Operations of the Business

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

We sell our products and technology solutions directly to customers primarily through three complementary distribution channels—phone sales, web sales, and our nationwide network of Gateway retail stores. Gateway’s stores allow customers to see and evaluate products and obtain information from highly trained sales representatives. Unlike traditional retail stores, our stores generally maintain only a limited inventory of computers and technology products for sale, keeping inventory risks and related costs low. Customers can buy

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and carry out certain products in inventory at the stores, or order products at stores or on Gateway’s website or over the telephone. We believe that a significant number of our consumer customers take advantage of at least two of these channels before making their purchases.

As of December 31, 2002, we had 272 Gateway retail stores located in the United States. During the first quarter of 2003, we closed 80 underperforming stores to reduce costs. As a result, as of April 15, 2003, we had 192 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.

Gateway believes that this direct distribution and multi-channel approach provides several competitive advantages. First, we can offer competitive pricing by avoiding the additional markups, inventory and occupancy costs associated with distributors, dealers and traditional retail stores. Second, by not maintaining the high levels of finished goods inventory required by traditional retail channels, we can respond quickly to changing customer demands by offering new products on a timely basis, while reducing our exposure to the risk of product obsolescence. Third, we believe that working directly with customers promotes brand awareness and customer loyalty and is instrumental to Gateway’s high customer satisfaction ratings.

Business Sales.    During 2002, our business sales and marketing activities focused on our core market segments: small and medium business, education and government. In 2002, our Business Solutions centers in Gateway’s stores and approximately 50 dedicated Business Solutions Advisors addressed the technology needs of small and medium business clients. To complement our business sales efforts, Gateway also retains approximately 200 third-party Network Solutions Providers who work with our Business Solutions Advisors and business 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. We plan to increase our direct sales force significantly and expand our indirect business sales channel in 2003.

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 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 customer individual requirements.

Gateway’s Customer Relationship Management (“CRM”) system is designed to achieve high customer satisfaction levels and assists our small and medium business 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 and valued services and products. This tailored sales approach, based on leveraging behavior information from CRM, is designed to increase customer loyalty and has enabled revenue gains for Gateway.

Growth Initiatives.    In 2002, we continued our efforts towards reducing fixed costs, strengthening our balance sheet, improving product quality and customer satisfaction and pursuing our strategy to evolve from a traditional manufacturer of PCs to a leading provider of digital technology products. In the area of products and services, we continued our strategy of leveraging our existing retail presence and our brand position through new products ranging from digital cameras to plasma televisions. As part of this strategy, we continued to transform our national network of retail stores into local technology resource centers, serving as hubs for cross-functional sales, service and marketing teams that will provide customers with increased personalization and local service and support.

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This transformation is continuing in 2003 and we intend to expand significantly our digital solutions and consumer electronics offerings while working to significantly further reduce our costs.

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.

PC Hardware

We offer our customers a broad line of Gateway-branded PCs and servers. We market our PCs with recommended configurations, but our customers can also custom-configure 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 300, 500 and 700 Series for consumers and the Gateway E-Series for businesses, with each series having a number of recommended configurations representing increasing levels of technology and features. In addition, Gateway introduced an updated all-in-one desktop, the Profile 4. Individual customers can and often purchase a configuration that they customize for their particular needs. Desktops represented over 65% of net sales in 2002.

Mobile PCs.    Gateway offers a series of mobile PC products to provide portable computing capabilities for users who operate in both a mobile and networked environment. The systems can be designed for either home or business use and models are available with docking stations and various multimedia applications. As with desktops, portables have a range of standard model series—the 200, 400, 450, and 600 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 600 Series, a high-end, feature-laden desktop replacement. Mobile PCs are a growing percentage of Gateway’s business, representing about 17% of net sales in 2002.

Tablet PC.    In November 2002, we introduced the Tablet PC. Weighing in at less than three pounds, our new Tablet PC 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.

Servers.    Gateway also offers Gateway-branded servers for business 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 represented approximately 1% of net sales in 2002.

Digital Technology Solutions

A key element of our growth strategy is expansion of “digital technology solutions,” also referred to as “beyond-the-box” offerings, which includes 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. Our digital technology solutions include the newly-introduced Gateway Plasma TV. Digital technology solutions represented approximately 17% of net sales in 2002.

Digital Solutions Products.    During 2002, we began to carry a strategically selected inventory of consumer electronics products in our Gateway retail stores as well as on our website and from our call centers, including digital cameras, digital audio products and digital video products. We also began marketing a Gateway Plasma TV. Launched in the fourth quarter of 2002, Gateway’s Plasma TV delivers an affordable, high picture quality

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television to consumers. The Plasma TV provides an attractive 42-inch wide screen, with an ultra-thin design. We plan to introduce additional television and consumer electronics products in 2003. We also offer a variety of home networking solutions.

Peripherals, Software and Other Computer-Related Products.    We market printers, scanners, personal digital assistants (PDAs), monitors, CD burners, storage devices, surge protectors and other PC accessories that are manufactured by leading companies in their respective markets. We also market a broad range of 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 computer-related products are sold in all three of our sales channels, including online through Gateway’s “Accessory Store” on our website at www.gateway.com, where more than 9,000 SKUs 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. These fee-based services include extended warranties, repair service and technical support, home and office installation and integration services, software application support, network support, technology planning and consulting and outsourcing of IT support for businesses. We have also partnered with a number of third parties to provide and strengthen our fee-based service offerings to consumers and businesses of all sizes. In addition, with our nationwide network of stores, we offer a unique ability among PC manufacturers to service in most of our stores the PCs we sell.

In our consumer segment, our value added service and support offerings consist of extended service plans, including extended warranty and accidental damage programs, installation services and fee based technical support services. In our business segments, our value added service and support offerings are designed to satisfy the needs of customers throughout the technology lifecycle. For this segment, we offer:

In addition to standard customer service and support offerings, Gateway also offers highly customized services to meet customer specifications.

We deliver customer service and support at the customer’s location, at Gateway, at third-party locations and via telephone and online. Gateway believes the availability of services through multiple channels benefits customers by providing them with a range of service options. We are the only major OEM that controls our local repair facilities through our chain of retail stores, most of which have service capabilities.

We also offer services to enable customers to create and maintain websites and conduct business over the Internet. Product offerings range from domain registration to web site design and hosting, as we offer customized e-commerce sites for commercial accounts that tailor the product offerings and procurement practices to the customer’s specifications.

Communications.    We offer a variety of Internet access service options and networking products and services. 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.

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Financing Programs.    In 2002, we arranged for third-parties to provide financing of approximately 36% of our consumer net sales by partnering with a number of third-party consumer financing and business lease partners, which are non-recourse to Gateway.

Training.    Through our nationwide network of Gateway retail stores, as of April 15, 2003 we had approximately 2,200 classroom seats throughout the U.S., offering training on general PC usage, popular third-party software, Internet usage, digital devices, and networking services to consumers, businesses and institutions. 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 industry is 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 computer systems that adhere to industry standards and incorporate the technologies and features that we believe are most desired by our customers. Our research and development expenditures in each of the last three years were less than 1% of net sales. The amount we spend on research and development activities is based on cost-benefit analyses and we prioritize such activities to focus on projects that we believe will have the greatest market acceptance and achieve the highest return on investment.

In addition, as noted, 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 PCs and solutions-related digital technology. 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, the flexibility of our build-to-order manufacturing, low inventory and short production lead times, 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 products with standardized recommended configurations as well as products that are “build to order” or custom-configured to meet customer specifications. We use production teams to assemble most of our desktop PCs and servers with each member of a production team trained to do several tasks, increasing flexibility and efficiency. We also use third-party suppliers to manufacture Gateway-branded mobile PCs and certain desktop and other products such as monitors on our behalf as well as to supply the Gateway Plasma TV. Our production and quality assurance teams ensure that products meet our quality specifications and applicable regulatory requirements. Most desktop PCs are shipped from Gateway’s manufacturing facilities ready-for-use, with an operating system and certain application software already installed. Replacement parts are also shipped directly from Gateway or our suppliers to customers. Other digital products that we sell are manufactured and branded by third parties.

Our desktop computer manufacturing operations in North Sioux City, South Dakota and Hampton, Virginia have been assessed and certified as meeting the requirements of the International Organization for Standardization (“ISO”) 9002. ISO 9002 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 and we are presently preparing to be approved as a company under the new ISO 9001-2000 certification. We utilize risk transfer methods and continuity planning to maintain our manufacturing capabilities.

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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 patents cover a broad range of computer-related and information processing technologies. A majority of the patents in our portfolio are recently issued patents. In addition to our own engineering resources, we work closely with PC component suppliers and other technology developers to develop products based on the latest PC technology. 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, the Black-and-White Spot Design, the Spotted G Logo and the Spotted G Gateway Logo, 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, 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 stores and retailers with respect to our PCs and digital technology products. We believe our direct sales model, dedicated retail stores, and sales offering of technology solutions are competitive advantages.

We compete primarily on the basis of customer intimacy, 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. We believe we compete favorably with respect to many of these factors.

Our results of operations, however, could be adversely affected if we are unable to compete successfully in any of these areas. In recent years, we and many of our competitors have regularly lowered prices. We expect these competitive pressures to continue in 2003 and that average sales prices for PCs will continue to decline. If we continue to reduce PC 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 2002, Gateway continued to sell products in Canada and Mexico in addition to sales and operations in the United States. 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. Net sales in 2001 and 2000 were $229 million and $586 million, respectively in Europe, Middle East and Africa. Net sales in 2001 and 2000 were $322 million and $776 million, respectively in Asia-Pacific.

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Employees

As of December 31, 2002, we had approximately 11,500 employees in the United States. We believe our employee relations are generally good. During the first quarter of 2003, we reduced our workforce by approximately 1,900 employees as part of our cost reduction initiatives.

Backlog

The backlog of unfilled orders was approximately $58 million at year-end 2002 and approximately $55 million at year-end 2001. 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

Our operating results have been subject to seasonality and to quarterly and annual fluctuations. Factors involved include new product developments or introductions, availability of components, changes in product mix and pricing and product reviews and other media coverage. Historically, our sales have increased in the third and fourth quarters due, in part, to back-to-school and holiday spending and institutional buying patterns; however, the third and fourth quarters of 2001 and 2002 did not follow the historical trend in light of adverse general economic and industry trends and the intensely competitive environment.

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 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 and operations and key objectives, strategies, plans and actions; and (d) review of the processes in place to ensure the integrity of Gateway’s financial and accounting systems and the auditing and accounting principles and practices used to prepare the financial statements.

The current Board consists of six directors, of whom five 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. 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.

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

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and oversight of the work of Gateway’s independent accountants. During 2002, PricewaterhouseCoopers LLP (“PwC”) was appointed as independent accountants of Gateway and the Audit Committee has appointed PwC as independent accountants for 2003, 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. The Audit Committee met six times during 2002.

The Compensation Committee reviews and approves salaries, bonuses and other compensation for the 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.

Factors That May Affect Gateway’s Business and Future Results

In addition to other information contained in this 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 report.

General Economic and Business Conditions and Current Political Uncertainty.    If general economic and industry conditions fail to improve or continue to deteriorate, demand for our products could continue to be adversely affected, as could the financial health of Gateway’s suppliers and resellers. In addition, war in the Middle East or wherever located around the world and the related political and economic uncertainties, terrorist attacks, national and international responses to terrorist attacks, and other acts of war or hostility could materially adversely affect our future operating results and financial condition.

Declining Net Sales of Gateway’s Computers and Computer-Related Products.    Our revenue growth and profitability depend significantly on the overall demand for PCs and related products and services. Since late

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2000, general growth in demand for computers and computer-related products has slowed as a result of market maturation and deteriorating economic conditions. This has adversely impacted demand for our products and services. In this environment of decreasing demand and declining average selling prices, our revenues and operating results have declined and may continue to decline as a result. Continued uncertainty about future economic conditions has also made it increasingly difficult to forecast future operating results and continued deterioration in our unit sales would materially adversely affect Gateway’s future results of operations and financial condition. If future net sales significantly decline further, it will be difficult for Gateway to return to profitability.

Competitive Market Conditions.    The PC industry is 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 stores and retailers with respect to our digital technology products. Many of our competitors have greater financial, marketing, manufacturing and technological resources and consolidation in the PC industry has resulted in larger and stronger competitors in many of our markets. We compete primarily on the basis of customer intimacy, value, technology, product offerings with new performance features, operational efficiency, quality, reliability, brand, our retail network and their locations, customer service and support value and by maintaining supplier relationships to enable us to bring products quickly to market. Gateway from time to time has lost market share in this competitive market. To the extent we are unable to compete successfully in any of these areas, our revenues and business prospects could be affected adversely. We expect these competitive pressures to continue in 2003 and that average sales prices for PCs will continue to decline. If we continue to reduce PC prices in response to such competition, we may be unable to maintain or improve gross margins through cost reductions or offsetting sales of higher margin products.

Selling, General and Administrative Costs.    As a result of costs associated with marketing our products and Gateway’s retail stores, Gateway incurs higher selling, general and administrative costs as a percent of revenue, than many of our competitors. If Gateway is unable to develop and sell innovative new products with attractive gross margins, our results of operations would be materially adversely affected by our SG&A cost structure.

Gateway’s Retail Initiative.    Gateway’s 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 digital solutions, digital TVs, and other beyond-the-box revenue and gross margins, our retail operations may not achieve our expectations.

During 2002, we expanded the product offering in our retail stores beyond PCs, peripheral products and software, to include consumer electronics products and digital TVs. We have limited experience as a major retailer of non-PC consumer electronics products and if we are unable to compete profitably in these highly competitive retail markets, our results of operations and financial condition could be materially adversely affected.

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

Corporate Restructuring and Infrastructure Requirements.    We plan to transform Gateway into a leading provider of personalized digital technology products and solutions by leveraging our existing retail stores, our

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brand and our digital technology products and services. To meet competitive conditions, we have undertaken several corporate restructurings and additional cost-cutting efforts have recently been implemented and are contemplated in the future. There can be no assurance that our strategy of focusing on our core domestic markets, reducing costs and diversifying sales of non-PC products and services will be successful in the event of sustained adverse economic industry conditions or at all. Moreover, our business creates ongoing demands for personnel, facilities, information and internal control systems and other infrastructure requirements. If we are unable to maintain and develop our infrastructure while reducing costs, we could experience disruptions in operations, which could have an adverse financial impact.

Suppliers.    We require a high volume of quality components for our products and solutions offerings, substantially all of which we obtain from outside suppliers. While we attempt to have multiple suppliers for such components, in some circumstances we maintain single-source supplier relationships, such as with Microsoft for Windows products. If the supply of a key material component is delayed or curtailed, our ability to ship the related product or solution in desired quantities and in a timely and cost-effective manner could be adversely affected. We seek to mitigate these potential costs by requiring our suppliers to protect us with insurance. In cases where alternative sources of supply are available, qualification of the sources and establishment of reliable supplies could result in delays and possible reduction in net sales. In the event that the financial condition of our third-party suppliers for key components were to erode, the delay or curtailment of deliveries of key material components could occur.

Dependence on Third Party Manufacturing and Logistics Services.    Our reliance on third-party suppliers of key material components exposes us to potential product quality issues that could affect the reliability and performance of our products and solutions. In addition, many of Gateway’s products are manufactured in whole or in part by third-party manufacturers and Gateway relies upon a principal logistics partner. While such outsourcing arrangements may lower the fixed cost of operations, they also reduce Gateway’s 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 components, or product quality issues arose from faulty components manufactured by third-party suppliers, the market for our products or solutions could be adversely affected with a resulting reduction in revenues. In many instances we rely on offshore suppliers, particularly from Asia, including for product assembly and manufacture, and risks associated with transportation and other natural or human factors may disrupt the flow of product. The recent outbreak of Severe Acute Respiratory Syndrome in Asia may disrupt the manufacturing of such goods and our ability to purchase from suppliers in Asia. If for any reason manufacturing or logistics in any of these locations is disrupted by regional economic, business, environmental, political, medical, or military conditions or events, Gateway’s results of operations and financial condition could be adversely affected.

Consumer Financing.    Reduced availability of financing generally or additional tightening in consumer credit policies from our third-party financial partners could materially and adversely affect our operations and financial results. In 2002, third-party financial institutions provided financing of approximately 36% of our consumer net sales. The consumer financing is on a non-recourse basis to Gateway. In 2001, Gateway participated in a loss sharing arrangement with one lender that at December 31, 2002 had a maximum exposure of $15 million. Additional financing under this arrangement ended in the second quarter of 2001.

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

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Product Cycles.    Short product life cycles resulting from rapid changes in technology and consumer preferences and declining product prices characterize the PC and consumer electronics industry. Our internal engineering personnel work closely with PC component suppliers and other technology developers to evaluate the latest developments in PC and digital technology products. The success of new products is dependent on many factors including market acceptance and availability of the product. There is no assurance that we will continue to have access to or the right to use new technology or will be successful in incorporating such new technology in our products in a timely manner.

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

Because of technological changes in the computer industry, 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.

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 occurred in late 2000 through 2002 and poor operating results of certain of these underlying investments have resulted and may in the future result in our incurring losses or an inability to recover the original carrying value of our investment.

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

Inventory Risks.    By distributing directly to our customers, we have been able to avoid the need to maintain high levels of finished goods inventory. This has minimized costs and allows us to respond more quickly to changing customer demands, reducing our exposure to the risk of product obsolescence. During 2002, we carried a limited inventory of computers and digital technology products in our retail stores which we expect to expand. In addition, we maintain certain component products in inventory. A decrease in market demand or an increase in supply, among other factors, could result in higher finished goods and component inventory levels which could have a negative effect on our results of operations. In addition, continued declines in PC prices may decrease the value of any PC inventory in our retail stores.

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

Customer or Product Sales Mix.    Our profits vary by product and customer segment. As a result, our results of operations for a particular period will depend, in part, on the corresponding mix of customers and products.

Item 2.    Properties

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

As of December 31, 2002 we leased store space for our 272 retail locations throughout the United States. During the first quarter of 2003, we closed 80 under performing stores. We are actively seeking to dispose of leases in all closed locations. 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; Rio Rancho, New Mexico; 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. During 2002, we sold our former manufacturing facility in Malacca, Malaysia, and have exited all of our leases in the region.

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.

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Item 3.    Legal Proceedings

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

Intergraph Hardware Technologies Company v. Dell Computer Corporation, Hewlett-Packard, Inc. & Gateway, Inc. is a suit filed in the United States District Court in the Eastern District of Texas on December 16, 2002. The suit alleges Gateway infringed three patents related to cache memory. Intergraph seeks