But the PC maker still missed analysts' expectations for the quarter, ended June 30.
Gateway lost $61 million, or 19 cents per share, on revenue of $1 billion.
Analysts expected the Poway, Calif.-based company to report a loss of 17 cents per share on revenue of $988 million, according to FirstCall.
Gateway CFO Joseph Burke, in an interview with CNET News.Com, attributed the difference to a $20 million write-down on a strategic investment, worth about 2 or 3 cents per share.
Otherwise, Gateway's second-quarter performance was an improvement from its first quarter, which resulted in aof 20 cents per share, excluding charges, on revenue of $992 million.
Early this year Gateway kicked off a campaign to gain market share by selling its PCs for extremely aggressive prices, oftenthe prices of archrival Dell Computer.
Gateway unit sales increased to 651,000 during the second quarter, up from 645,000 in the first quarter. Typically, Gateway's unit sales fall from the first quarter to the second.
"We're very pleased with that. Our history is down 7 percent sequentially" from first quarter, Burke said. Instead, "We actually grew about 1 percent. We grew when the market shrunk, which means we are gaining share."
One of the more surprising aspects of Gateway's second quarter was the strength of its sales to customers in government and education. Sales to those two areas remained strong while general consumer sales slowed during the quarter, Gateway executives said.
"I think we were helped a little bit by the confusion associated with the Hewlett-Packard/Compaq" merger, Gateway CEO Ted Waitt said during a conference call with analysts. "Also, being more aggressive on price helps."
Meanwhile, Gateway's consumer business "wasn't as strong as we would have liked" in June, Waitt said. But the company saw sales tic up again after July 4.
"We're optimistic for back-to-school" sales, he said.
Gateway intends to continue with its pricing strategy, Burke said.
Going forward, the company expects revenue for the third quarter to increase and its net loss per share to improve modestly, but analysts say Gateway still has a long way to go.
"If shipments have not increased significantly this quarter, then the outlook for Gateway is very bleak," Charles Smulders, an analyst with Gartner, said before the company released earnings.
Gateway has said it must sell 1 million units per quarter to be profitable.
The computer maker held its guidance for the full year steady, saying it will take in $4.5 to $5.0 billion in revenue and post a pre-tax loss of $200 to $250 million, excluding charges.
One way Gateway expects to help drive sales is through more targeted advertising, designed to send buyers to Gateway Country Store locations.
Waitt said he was pleased with the company's recent television ad campaign, which features him with Gateway's trademark Holstein cow.
The ads helped raise consumer awareness of Gateway. New ads will include a more clear product pitch and call to action, designed to be more persuasive in enticing customers to buy PCs, he said.
"We said 2002 would be the year Gateway starts growing again and so far, we've made meaningful progress against that goal," Gateway CEO Ted Waitt said in a statement.