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Ted Waitt, a fifth-generation entrepreneur, built Gateway in the cornfields of South Dakota, assembling personal computers in a farmhouse. The company specialized in folksy marketing, featuring a black-and-white Holstein cow motif in its ads, on boxes, and darned near everywhere. Gateway proclaimed itself a different kind of company, offering consumers a more personal touch.

But the business of making and selling personal computers is not what you would call down-home friendly these days. The spread of E-commerce and plummeting semiconductor prices have encouraged start-ups like Emachines, Microworkz Computer, and Free-PC to offer computers without monitors for $399, $299, or even free, with certain provisos, of course. Experts are beginning to compare personal computers to cell phones or razors--you give away the product and hope to make money on service or supplies.

It has become such a blood bath that Compaq Computer has just sacked its CEO, Eckhard Pfeiffer, after the company fell short of its projected quarterly earnings. Even mighty IBM is signaling that it may cease assembling personal computers and instead supply components to Dell Computer. Hewlett-Packard is splitting itself into two companies, in part to bolster its sputtering PC division. Onetime highfliers like Packard Bell NEC and Acer are in disarray.

Beyond the box. Sensing the world was about to come crashing down on him like a ton of cow chips, Waitt has pulled off a transformation that seems to be keeping Gateway a step ahead of larger rivals--at least for now. Since everybody in PC land is selling essentially the same box, Gateway needed a better grasp of what customers really want. To develop a more sophisticated approach, Waitt decided he needed a new management team.

Unable to fill key executive positions in remote North Sioux City, S.D., Waitt last year moved headquarters to San Diego County near tony La Jolla, Calif., and started hiring top guns. Fully 10 out of his top 15 executives are new, culled not just from the likes of AT&T and Toshiba but also from Kraft Foods, American Express, even Pizza Hut. It may be the most sweeping reorganization ever of such a large company ($7.5 billion in sales last year, 19,000 employees).

The company's earnings reported last week appeared to validate Waitt's gambit. They surged 31 percent to $99.6 million over the same quarter a year ago. Gateway's stock, which has traded in the $36 to $84 range over the past year, rose to nearly $70, in sharp contrast with the shares of some rivals. Surprisingly, Gateway has been able to actually increase its gross margins to slightly more than 20 percent. One key: holding Gateway's lowest price to $899, betting that first-time buyers may go for the cheapies but more-sophisticated buyers will want greater performance.

At the core of Gateway's strategy is its Your:)Ware program, launched in May 1998. For a monthly fee (typically $37), the program "bundles" different services, including one that offers trade-in privileges if the machine becomes obsolete after two years. Your:)Ware customers can plug into the Net through an Internet service provider connection Gateway offers with UUNet Technologies. Gateway also announced a deal in February with Yahoo! to offer a news and shopping portal, unartfully named Gateway My Yahoo! As part of the same program, Gateway was first to offer financing for buying computers, well before Apple launched its leasing option for the iMac.

At the same time, the company has expanded its "direct" model of Internet and telephone sales to launch 156 Gateway Country stores so far and maybe as many as 300 eventually. The stores aren't full-fledged retail outlets but instead allow potential buyers to sample Gateway's wares in a nonthreatening, Barnes & Noble-like environment. Staffers only take orders, and the PCs are built and shipped after they've been purchased.

Business class. The country stores are particularly important for cracking small and medium-size businesses, the only segment of the PC market that's growing. Gateway has just extended its Your:)Ware program to such customers. At its stores, the company assigns a sales rep to business buyers and offers training classes. The result: After years of relying on home sales, 45 percent of Gateway's boxes now go to business buyers. (Dell is the opposite, getting at least 80 percent of sales from business.)

Quietly, Waitt has arrived at the sweet spot in the market, the place where Dell and Compaq are trying to go: making more money from fees and relationships, and shifting away from reliance on sales of the PC itself. "We've created a unique model," the ponytailed Waitt, 36, now a billionaire, says. "We have more direct relationships with our customers than anyone else." Compaq, IBM, HP, and others have relied on selling through intermediaries.

To be sure, Gateway's repositioning has been wrenching for some of the folks back home. Although Waitt maintains an office in North Sioux City and 5,500 employees in South Dakota, and locals still bump into him having lunch downtown, the departure of headquarters has been a psychological jolt. There's a slight edge when fellow Dakotans say to Waitt, in his words, "Good to see ya. Nice suntan." He acknowledges that "some elements are struggling" with the relocation.

In April the new management team announced its intention to begin outsourcing an estimated 500 information-technology jobs, most of them in North Sioux City. In the culture of the Midwest, that's jarring. "If it were in Silicon Valley, no one would expect him to do otherwise, but in a small town, people feel different," says Roger Kay, research manager at IDC in Framingham, Mass.

Labor woes, meanwhile, are dogging the company at its second-largest assembly facility in Hampton, Va. (The company, which is fighting a unionization drive, says the Hampton problems are isolated.) And the fact that Waitt has created a strong No. 2 spot, tapping Jeff Weitzen, a rising star at AT&T, has fueled worries that Waitt is easing out of the business. "I think he's retiring in phases," says Rob Enderle, an analyst at Giga Information Group in Santa Clara, Calif. The company says Waitt, a father of four, worked every day of the week for years and is simply assuming a more reasonable pace, allowing Weitzen to run day-to-day operations. Far from slowing down, Waitt's team says it wants to double Gateway's sales to $15 billion.

Waitt, who has built a career out of keeping his rivals guessing, shows every sign of wanting to go along for the ride. In his view, Gateway had to grow up. "We decided we were going to take the company to the next level and we were going to do whatever it took," says Waitt, who sports blue jeans and loafers with no socks. The company has had to constantly reinvent itself since it was founded in 1985. "Every year for the past 14 years, we've been a new company," adds Waitt.

In its newest incarnation, Gateway is trying to "own the relationship" with customers. That phrase is fast becoming a cliche throughout the computer industry, but Gateway seems to have an edge in actually doing it. The company has a large installed base of users, having sold some 3.5 million computers last year. Because individuals buy directly from Gateway (as they do from Dell), the company is able to capture a surprising amount of information about their computers and their families--even birthdays. The company says it's automating that information to make better use of database mining and personalization technologies. The goal is to be a little bit like Amazon.com, which makes book recommendations to you on the basis of your earlier buys. As No. 2 Weitzen explains it, if your child has a birthday coming up, Gateway will tell you what the best books might be to buy as gifts. Click to buy. If the kids are going back to school, here is the software they'll be using and here's how they can get a head start. Click to buy. These kinds of contacts are aimed at increasing "stickiness"--the industry term for retaining the loyalty of customers and their eyeballs.

Customer bonding. The company also hopes that as it deepens relationships with customers, it can achieve higher "attach rates"--the number of items that customers buy along with their PC. In tandem with Internet E-commerce company NECX, Gateway has just launched SpotShop.com to encourage customers to buy peripherals through Gateway. Analysts estimate that 20 percent of its profits will come from non-PC sales this year, up from 3 percent last year.