By Elliot Spagat
The Associated Press

POWAY, Calif. - Ted Waitt had his eureka moment over a baccarat table two years ago at Comdex, the technology trade show in Las Vegas. His computer company, Gateway Inc., was hemorrhaging money and becoming an also-ran against Dell Inc. and Hewlett-Packard Co.

Waitt and a longtime supplier began talking about the flat-panel TVs that were turning up in high-end consumer electronics showrooms. They were sleek enough to hang on living-room walls like paintings and offered sharper images than standard tube TVs. But with prices starting around $5,000, few people could afford them.

"Wait a minute, this is a no-brainer," said Waitt, Gateway's chairman and chief executive. What if he could sell the TVs at more competitive prices and still make a profit? And so he did.

In the last year alone, Gateway has become a serious player in flat-panel TVs and entered hot categories like digital cameras, camcorders and music players. Its stores got a $20 million facelift that relegated PCs to the back to make room for the new gizmos.

Other big changes are largely invisible to consumers. Gateway stopped manufacturing its products - save for some large, custom accounts - and it hired outsiders to handle everything from shipping to employee benefits.

As a result, Gateway will employ 6,700 people by the middle of next year, down from 11,500 at the end of last year and 25,000 in 2000.

"It was just a gut-wrenching level of change," said Rod Sherwood, executive vice president and chief financial officer.

Yet a turnaround is anything but certain for a company that has lost money in 11 of its last 12 quarters. The holiday season will be a pivotal test of whether Gateway's gamble pays off. Last week, the company rounded out its lineup with more TVs, cameras and other devices.

The holiday results may determine the company's chances of competing against the likes of Sony, Panasonic and Samsung. Gateway's strategy has been to undercut well-known brands with prices in the ballpark of no-name manufacturers found at Wal-Mart and other discount retailers.

Steve Baker, an analyst at NPDTechworld, gives Gateway high marks in such higher-margin categories as flat-panel TVs and digital cameras. He notes only one hiccup in execution - the indefinite delay of handheld computers, originally scheduled to be launched in July.

"My early impressions are that most of what they've done has been right," Baker said. "My biggest worry is how many things they can actually pull off in such a short period of time."

And Gateway may face a new threat from old foes. Last month, Dell introduced a 17-inch liquid-crystal display TV for $699 - matching Gateway's price - and two digital music players in what it described as an initial assault on the consumer electronics market.

Dell can't match Gateway with a chain of retail stores - a key advantage if customers want to see and touch the pricey gadgets before digging for their wallets. And Gateway ended the third quarter with more than $1 billion in cash, giving it some cushion as it tries to reverse its decline in sales.

Although last year's Christmas season was disappointing for Gateway, Waitt concluded that his plasma TV idea was a winner that augured well for further diversifying away from the now-commoditized world of PC sales. The 42-inch TVs had sold out quickly at $3,000 apiece.

So the ponytailed executive and a new cadre of lieutenants charted plans to remake the company.

Sherwood, a 49-year-old mountain climber who worked at Chrysler Corp. during its turnaround in the 1980s, joined in October 2002. Other newcomers were Joe Formichelli, 60, a former IBM executive who set out to overhaul manufacturing and distribution; Scott Edwards, 41, a marketer from Sony's consumer electronics division; and Bill Parker, 56, who came from Gap Inc.'s Banana Republic chain to remodel its shrinking chain of nearly 200 stores.