<PAGE>

================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                              --------------------

                                    FORM 10-K
                                   (Mark One)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                   for the fiscal year ended December 31, 2001

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

          for the transition period from ____________ to ____________.

                         Commission file number: 0-31299

                                  PEOPLEPC INC.
             (Exact name of registrant as specified in its charter)

            Delaware                                            13-4048510
(State or other jurisdiction of                              (I.R.S. Employer
 incorporation or organization)                           Identification Number)

 100 Pine Street, Suite 1100
      San Francisco, CA                                                 94111
(Address of principal office)                                         (Zip Code)

       Registrant's telephone number, including area code: (415) 732-4400

           Securities registered pursuant to Section 12(b) of the Act:
                                      None

           Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $0.0001 par value
                                (Title of Class)

         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 for 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 the 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]

         The aggregate value of voting stock held by non-affiliates of the
Registrant was approximately $10,475,891 as of December 31, 2001, based upon
the average of the high and low prices of the Registrant's Common Stock reported
for such date on the Nasdaq National Market. Shares of Common Stock held by each
executive officer and director and by each person who owns 10% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. As of December 31, 2001, the
Registrant had outstanding 114,002,422 shares of Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

         No information is incorporated into this report by reference

================================================================================

<PAGE>


                                     PART I

This report contains forward-looking statements that are subject to the
assumptions and uncertainties discussed below. A forward-looking statement is
any statement that looks to future events, including any projections of
earnings, revenues, or other financial items; any statements of plans,
strategies and objectives of management for future operations; any statements
regarding proposed new products, services or developments; any statements
regarding future economic conditions or performance; statements of belief and
any statement of assumptions underlying any of the foregoing. These statements
may be identified by the use of words such as "expect", "anticipate",
"estimate", "believe", "intend" and "plan."

Actual results may vary from those projected in the forward-looking statements.
If our assumptions about the future do not materialize or prove to be incorrect,
our results could differ materially from those expressed or implied by such
forward-looking statements.

Specifically, the forward-looking statements contained herein depend on
assumptions relating to our ability to expand our online program, enter into new
enterprise agreements and expand our membership; our ability to provide consumer
financing for the purchase of our products and services; the willingness of
third party vendors to provide products and services on acceptable terms; our
ability to meet our obligations under enterprise agreements; our ability to
contain customer acquisition costs and the costs of providing products and
services; our ability to generate revenues from merchant partners; our ability
to generate, through operating revenues or through the proceeds of equity or
debt financing, sufficient cash to implement our business plan; our ability to
acquire blocks of members from other service providers through acquisitions of
other ISPs or through wholesaling arrangements; the timing of acquisition of
enterprise program members; our ability to improve pricing and eliminate
acquisition discounts; our ability to generate revenues through our member
commerce program and other activities; the cost of our international operations;
and other risks described in this report and from time to time in PeoplePC's
Securities and Exchange Commission periodic reports and filings.

We assume no obligation to update these forward-looking statements to reflect
events that occur or circumstances that exist after the date on which they were
made. Further information on potential factors that could affect these forward
looking statements and the company's financial results are included in our
filings with the Securities and Exchange Commission.

ITEM 1. DESCRIPTION OF BUSINESS

Overview

PeoplePC provides a customizable dial-up Internet connectivity service to
consumers and to customers of our marketing partners -- corporations, membership
organizations, portals and online content providers,

                                       -2-

<PAGE>

Internet service providers, and other organizations. Our service is nationwide,
competitive in quality, and available at a price well below that of national
branded competitors like AOL, MSN and Earthlink. The service can be customized
to meet the needs of each marketing partner, thus providing our partners with an
online platform through which they can communicate with customers and members.

The PeoplePC Online service is based on a nationwide dial-up network that
provides the widest geographic coverage of any ISP. Our service provides
unlimited dial-up access to the Internet, along with a toll-free Customer Care
number. Service may be purchased on a monthly subscription basis or a prepaid
basis.

The consumer Internet service market is segmented into companies (like AOL and
and MSN) that provide Internet access service in association with Internet
content "portals", and standalone Internet access services (like Earthlink and
Juno) that are not associated with a portal and content. The former are branded
with the name of the Internet service provider; the latter may carry the brand
of the Internet service provider, or they may be co-branded or private-labeled.

PeoplePC has chosen to sell a co-branded or private-labeled service. We do not
offer our own content (although we do readily incorporate content supplied by
our marketing partners), and we have begun marketing our service under the name
of our marketing partners. We enlist the aid of our marketing partners to sell
our service to the marketing partner's customers, employees, and members.
Companies and organizations are motivated to help us sell our service because by
doing so they (1) provide their customers and members with a high quality, low
cost Internet service, which may create synergies with their other business
lines; (2) obtain a significant commission revenue stream; and (3) create a
customizable communications platform through which they can communicate with
customers and members.

We believe that the PeoplePC Online service operates on a cost basis that
favorably compares to that of our competitors. Because we market primarily with
the assistance of companies and organizations, our cost of acquiring Members and
marketing costs are lower than those of competitors who acquire the bulk of
their customers through mass consumer marketing efforts. Our costs may also be
lower than those of some competitors because we do not attempt to provide
content to Members. Rather, we have encouraged our marketing partners to provide
their own content for the various online properties that are presented to
Members. Finally, we have assembled network management technologies and networks
of connectivity vendors that have produced a very competitive cost structure for
providing the basic connectivity service. As a result of these and other
factors, we have been able to establish a $15.95 per month retail price point,
well below that of the industry leaders, AOL ($23.90), MSN ($21.50), and
Earthlink ($21.50). We believe that our service provides outstanding value to
end-users.

Because of our low costs, we are able to sell our service to the end user at a
price substantially below that of the industry leaders. In the case of a
commercial sponsor, the price and quality of our service alone establishes the
value proposition for the end user. For sponsoring affinity groups, the end user
has the added incentives of establishing an online communications link with his
or her organization, and providing financial support as well. And our low cost
permits us to pay to the marketing partner a substantial commission on the
resulting revenue stream.

In addition to providing a revenue stream to a sponsoring organization, we
provide the organization with a turn-key relationship management platform that
is easily customizable to meet its institutional requirements. Our displays,
screens, pages, pop-ups, and other devices can all carry the sponsor's name,
messages, and content. Our marketing partner may use these properties to
merchandise to its customers,

                                       -3-

<PAGE>

to communicate information, to deliver political messages, or to communicate any
other matter that furthers the marketing partner's institutional goals.

We also plan to offer our service at "wholesale" to telephone companies, cable
companies, and other providers for whom narrowband is not a core competency, but
required as part of their overall offering. We believe that the service will
also be of interest to regional Internet service providers who do not enjoy our
cost advantages.

The Internet Access Service Provider Market: Broadband vs. Narrowband
---------------------------------------------------------------------

The consumer market for Internet access services is segmented into so-called
"narrowband" services (access through regular telephone lines at speeds up to
56K) and "broadband" services (access through cable, DSL, or other technologies
allowing speeds in excess of 56K).

Over recent years, many companies have rushed to build infrastructure to provide
broadband services. But broadband services have experienced problems penetrating
the consumer market. The price points for broadband service are substantially
higher than for dial-up. Broadband is more difficult and expensive to install,
and regulatory issues have inhibited its spread. DSL is not technically capable
of serving all users. Cable service carries the potential for degraded
performance as the number of subscribers increases in an area. And the broadband
performance advantage is decreasing as dial-up service performance is enhanced
through a variety of hardware and software solutions.

Apart from the technical problems with various broadband technologies, there is
as yet low consumer demand for broad-band services. In part, this is due to the
lack of compelling applications that require broad-band. Average consumers are
not at this time clamoring to download movies or streaming video over their
Internet connections. This may materialize someday, but we believe that the
present dial-up Internet access technology meets the typical consumer's needs
quite well, and that the dial-up technology will be with us for many years to
come. As a result, we have chosen to assemble a low-cost dial-up network to meet
this demand.

The same infrastructure built to provide broadband service also supports dial-up
service. The delay in acceptance of broad-band means that the carriers have
built network over-capacity that will be available at relatively low prices, at
least for the short term. We can take advantage of this over-capacity in our
wholesale arrangements with telecommunications providers.

While we are placing our current emphasis on dial-up service, at the same time
we are planning for the time when broad-band is demanded by a large number of
consumers. When that happens, we hope to have a large number of subscribers that
are eager to convert to a PeoplePC-offered broad-band service.

Our Internet Access Network and Technology
------------------------------------------

During 2001, we expanded our nationwide Internet access network through
contracts with 12 leading wholesale connectivity providers. We now have the
largest, most redundant dial-up network in North America, with over 7,000 local
dialup numbers that cover 100% of the top 100 Metropolitan Statistical Areas in
the United States. Our network also provides coverage in Canada and many rural
locations throughout the United States. According to a recent study, our
geographic coverage in the US ranked above any other ISP, surpassing even the
world's largest ISP, America Online. We believe that ours is one of the
lowest-cost, highest-quality retail Internet networks available.

                                       -4-

<PAGE>

In assembling our network, we have taken advantage of industry overcapacity by
negotiating with multiple vendors to reduce our cost of providing Internet
connectivity. We use technology that allows us to drive traffic to the best and
lowest cost ISP suppliers. The total number of local access numbers we offer has
been increasing as current ISPs expand their networks and as we integrate new
ISP suppliers. Because of our multiple ISP partnerships, PeoplePC's network
offers significant redundancy. We attempt to structure our ISP contracts with
minimal commitment levels, allowing us to drive traffic based on highest service
quality and lowest cost, instead of mandatory commitment levels. We maintain
service level agreements with our connectivity vendors to ensure the highest
levels of service.

Unlike the industry-leading MSN and America Online ISP services, we produce
minimal content. We do not operate "portals" or "home pages" for our
subscribers. Accordingly, we do not incur the continuing costs of producing
significant content.

Our PeoplePC Online service incorporates a technology that resembles a "home
page," but isn't. Our "Welcome Page" is a customizable page that appears every
time a PeoplePC member logs on. The Welcome Page originates from our servers,
and we control its content. The Welcome Page forms a jumping-off place for the
Member to open the browser and begin to surf the Web. Unlike a default home
page, which is a user-defined browser feature, the Welcome Page is "hard wired"
into the PeoplePC dialer and user experience.

Different Welcome Pages can be served to different groups of customers. Thus,
customers of a corporate sponsor see a Welcome Page designed particularly for
that sponsor. We can also accomplish program customization of other Web
properties, including our proprietary dialer screen, member emails, billing
statements, and browser enhancements.

Our Welcome Page is also used to promote various marketing efforts, including
our "PeopleShop Service." The PeopleShop Service is a merchandising service
provided to us by a third party on a private label basis. We receive
commission income on sales made through the PeopleShop Service. We also display
on the Welcome Page offers from our merchant partners. The merchant partners pay
us sales commissions on purchases by PeoplePC Members made on the merchants'
websites.

We are able to download enhancements automatically to particular groups of end
users, allowing us to add on an automated basis further functionality to the
client platforms installed on end Members' computers.

Products and Services
---------------------

A "PeoplePC Membership" comprises the right to use PeoplePC's Internet access
service, customer care, and other Member services. A PeoplePC Membership can be
acquired in the form of a monthly or prepaid PeoplePC Online subscription, or as
part of a "Membership Package." A member purchasing a Membership Package
receives a new, name-brand personal computer and a four-year pre-paid PeoplePC
Membership. (The components of the Membership Package are described further
below.)

PeoplePC Memberships

A PeoplePC Membership provides the following benefits:

          .    Internet access through a nationwide, high-quality, dial-up
               network.

          .    For Membership Package customers, the choice of several
               brand-name computer systems, and a wide array of upgrades and
               peripherals.

                                       -5-

<PAGE>

          .    Two e-mail accounts.

          .    Customer service and technical support.

          .    Optional in-home extended service contracts for hardware.

          .    The opportunity to participate in our member commerce and
               community programs.

          .    A customizable Welcome Page that appears each time the Member
               signs on to the Internet.

          .    Access to PeopleShop, our online store for members.

          .    PeoplePal, a continually present web-browsing accessory that
               provides context sensitive communications for use in
               merchandising or by an enterprise sponsor. PeoplePal provides
               several functions:

                    .    Constant access to the PeoplePC member home page and
                         its sub-pages through a pull-down menu.

                    .    Automatic alerts about merchant partner deals when a
                         member visits a merchant partner's web site unless a
                         member chooses to disable this feature.

                    .    A "wallet" that stores personal information necessary
                         to complete online purchases, such as credit card
                         number and shipping information. The wallet can be used
                         to automatically fill in information at selected site
                         with a single button click.

                    .    One-click access to online help such as Frequently
                         Asked Questions, or FAQs.

                    .    One-click access to member email.

          .    PeoplePages, a proprietary product that allows members to create
               a web-based digital member profile by answering a questionnaire.
               Members can search for PeoplePages based on interests such as
               nature/the outdoors or technology and communicate with other
               members with similar interests by mail and email.

          .    Web Page Hosting. Members receive 10Mb of disk capacity for
               hosting their personal web page. We offer Trellix's web based
               publishing tool Trellix Web Express, which allows simple and
               powerful web site building without knowledge of HTML.


                                       -6-

<PAGE>

Members receive easy-to-follow instructions to assist with the set-up of their
computers and access to our network. Our Web site contains a customer service
page that outlines PeoplePC policies and provides answers to frequently asked
questions. Members also can call or email representatives for customer service
and technical support.

PeoplePC Online Program and Custom Connections
----------------------------------------------

We have offered monthly PeoplePC Online subscriptions since the first quarter of
2000. We initially charged $9.95 per month. Our current monthly subscription fee
is $15.95. Through most of 2000 and 2001, monthly subscriptions to the PeoplePC
Online service were primarily offered to consumers, and were not heavily
marketed.

We have been able to integrate our customizable platform into our low-cost
Internet access service. This product offering has generated substantial
interest among affinity groups, employers, and large consumer companies. We call
the program "Custom Connections."

Custom Connections is a customizable ISP service that can be branded with the
PeoplePC brand, co-branded with the sponsoring organization's brand, or
completely private labeled. The service can be offered on a wholesale basis,
with the sponsoring organization reselling the service, or retailed by PeoplePC
under the sponsoring organization's branding (this is often referred to as a
"powered by" service). Aside from the benefit to a sponsor of being able to
communicate online with its constituencies, the Custom Connections program
offers a significant economic benefit to sponsors. Because of our low costs, we
are able to provide sponsoring organizations with a substantial monthly revenue
stream, based upon the subscribers that the program produces.

Through the Custom Connections program, we can provide a turn-key ISP solution
in which we provide the following services:

     .    Manufacturing and distributing installation CDs;
     .    Systems to support downloading of installation software;
     .    Account provisioning;
     .    Billing and collection;
     .    Cancellations; and
     .    Tracking and reporting.

The sponsoring company or organization typically pays for the marketing of the
service, and in wholesale/resale and private label deals, may completely take
over the marketing and customer retention functions for the target population.

We offer the following enhancements and customizations to our sponsoring
companies and organizations:

     .    We can place desktop icons on members' desktops that lead to the
          sponsoring entity's Web site or Intranet.
     .    We can customize operating system enhancements such as our dialer,
          wallpaper and other enhancements.
     .    Each time a member connects to the Internet, the Welcome Page appears
          displaying the PeoplePC logo, the enterprise's logo, along with
          selected promotions and correspondence to the enterprise's employees,
          customers and affiliated parties.

                                       -7-

<PAGE>

               .    We provide high-quality and reliable customer service that
                    can be co-branded with the enterprise through our call
                    centers and by email.

               .    We offer a friendly environment and tools to personalize our
                    members' experience when surfing the web. Sponsors can
                    co-brand certain community features such as the PeoplePal.

One of our priorities for 2002 will be to offer our Custom Connections programs
through major membership and affiliate organizations and through major consumer
companies. We will also continue to offer our PeoplePC Online service directly
to consumers through monthly subscription arrangements. We will increasingly
rely upon recurring monthly subscription income, rather than the up front
payments that characterize our Membership Package programs.

From a competitive standpoint, the industry leaders in consumer dial-up
connectivity, Earthlink, MSN, and America Online, have established a $21.95
($23.90 in the case of AOL) price point umbrella. We believe that these
providers have a materially higher cost structure. Because we do not attempt to
provide content to our members, we can offer our service at a much lower price
point and still make a healthy margin.

Acquisitions of PeoplePC Online Customers from Existing Internet Service
------------------------------------------------------------------------
Providers
---------

In order to increase our monthly ISP subscription revenue, we are actively
pursuing opportunities to acquire customers from existing retail ISP services.
This could take the form of acquisition of customer bases from existing
companies, acquisitions of existing companies, or wholesaling and private
labeling arrangements under which existing ISPs could effectively outsource
their service obligations. Our low costs and high quality service could make
this an attractive option for higher cost providers, and for providers for whom
dial-up service is not a strategic priority.

Historical Background

We were incorporated in March, 1999 as a Delaware corporation. During mid-1999,
we focused on developing relationships with vendors, suppliers and merchants. We
began offering our products and services on a commercial basis in Fall, 1999.

We currently operate principally in the United States, the United Kingdom, and
France. Foreign majority-owned subsidiaries support our international
operations. We formerly operated in Asia through a Singapore subsidiary, but we
closed that subsidiary effective September 30, 2001.

When we started, we were primarily focused on selling Membership Packages. We
added value by packaging together in a user-friendly way all the elements that a
person would need to access the Internet. At that time, our broad business
strategy was to sell large numbers of Membership Packages at, near, or below our
cost. We would make money through aggressive "monetization" of the resulting
large Membership base. We would be paid up front for Membership Packages, and
although for accounting purposes the revenues would have to be recognized over
the term of the Membership, the up front cash could in the meantime be invested
to grow the business.

In our original vision, PeoplePC would develop its own consumer brand, and would
develop "stickiness" through supplying content and services to Members. In this
vision, our business would eventually have similar dynamics to that of MSN or
AOL, except that we would acquire our customers in a different and

                                       -8-

<PAGE>

more efficient manner. In our current business strategy, we have de-emphasized
the marketing of Membership Packages, whether through large subsidized employee
connectivity programs, channel programs, or our Consumer Program. This enabled
us to cut costs dramatically in 2001 by shedding much of the overhead that went
with a hardware business operating at scale. While we will continue our efforts
to monetize Members, we now are focused on selling the PeoplePC Online service
to subscribers for monthly fees that are intended to generate a
company-sustaining margin and revenue stream.

In the fiscal year 2000, we signed contracts with three large companies, Ford
Motor Company, Delta Airlines, and Vivendi Universal, S.A., under which we
distributed our Membership Packages to their respective employees. In all three
deals, the employer subsidized the purchase of the Membership Packages, and
consequently we had very high program take rates and sales. These deals caused
our Membership numbers and revenues to grow dramatically during 2000 and 2001.

However, with the economic downturn that began in December, 2000, the momentum
behind employer-subsidized home computer/Internet programs dissipated, and fewer
large companies have been willing to adopt capital-intensive employee benefit
programs. In addition, December, 2000 marked the retreat - at least for now - of
the idea that "monetization" of Internet users could generate enough revenues to
support the business. As a result of these developments, we spent the last half
of 2001 refocusing our strategies for the new economic environment.

Products and Services

Membership Packages
-------------------

Through our Membership Package programs, we offer a brand name multimedia
computer system that includes a high-quality personal computer and peripherals
such as printers and monitor upgrades. The computer system is packaged with four
years prepaid PeoplePC Membership (we formerly offered a three-year package).
The Member in effect prepays for the service components of the package, because
he or she pays in full when the package is purchased. However, by financing the
purchase price of the package through our financing partner, a Member can make a
monthly financing payment over the term of the Membership of as low as $24.95.
Our financing partner adjusts the interest rate charged on the financing
depending on the creditworthiness of the Member. Alternatively, a Member could
pay the purchase price of the package through a charge to the Member's credit
card.

Membership Package purchasers may select from as many as four different computer
systems depending on price, customer requirements and availability. We have
provided our members with computer systems from Hewlett-Packard, IBM, Toshiba
and Compaq, depending on the availability and pricing of these systems at the
time of the shipment. Presently, Hewlett-Packard is our principal computer
vendor. In the future, we may offer computers from other computer vendors.
Currently, our systems come pre-loaded with Microsoft Windows XP, Internet
Explorer 5.5, Microsoft Works 2001, Microsoft Encarta 2001 Encyclopedia Deluxe
Online (one-year trial), MusicMatch Jukebox 6.1, Acrobat Readers 5.0, ArcSoft My
Photo Center 2.5, and TLC Learning Adventure.

We offer an optional extended service contract on hardware included in
Membership Packages. A third party vendor provides these contracts. The extended
service contract provides for in-home technical service to Members who live
within 50 miles of an authorized service location.

Although we receive payment for the purchase of Membership Packages at the time
of the Member's enrollment, we defer some or all of the revenue and related cost
of revenue and amortize it over the term of the Membership contract. When we
sell a computer system as part of a Membership Package, we often are able to
sell to the Member upgrades and peripherals, such as upgraded monitors and
printers. The revenue from these sales is recognized in full at the time of the
sale.

                                       -9-

<PAGE>

In May 2001, we increased to 48 months the term of Membership Packages sold
through our consumer program (it had formerly been 36 months). At the same time,
we made other changes in our consumer program. Our credit vendor, MBNA, shifted
from 36-month to 48-month financing. At the same time, we changed computer
suppliers, replacing IBM with Hewlett Packard.

Membership Package Marketing Programs
-------------------------------------

We have sold Membership Packages through three types of marketing programs:
consumer, enterprise, and channel.

               .    The Consumer Program involves the direct marketing and sale
                    of a Membership Package to consumers. We take orders for the
                    Consumer Program through either an 800 telephone number or
                    through a website we maintain.

               .    Enterprise Programs are run in conjunction with large
                    employers, like Ford and Vivendi Universal, who wish to make
                    our computer and Internet services available to their
                    employees. The sponsoring company in an enterprise program
                    typically subsidizes the purchase of Membership Packages.
                    These programs tend to require from PeoplePC a high degree
                    of customization and program management services. Because of
                    subsidization of the purchase price, Enterprise Programs
                    typically have very high participation rates.

               .    In Channel Programs, we market our Membership Packages to
                    members of affiliate organizations, like AAA automobile
                    clubs, and to customers of large companies. In these
                    programs, the Membership Packages are not subsidized, and
                    the participation rates are much lower than in Enterprise
                    Programs. We typically pay the sponsoring organization a
                    commission for Membership Packages sold, and the sponsoring
                    organization pays some portion of the program marketing
                    costs.

Of these programs, the Enterprise and Consumer Programs have historically been
most important to us.

The Consumer Membership Package Program
---------------------------------------

The Consumer Membership Package Program was originally conceived as a branded
consumer program supported by mass advertising and other marketing activities.
To purchase a package, a customer could either call our 800 telephone number, or
the customer could order the package through our website. However, in mid-2001
we curtailed our consumer advertising, and the Consumer Program has continued at
lower sales levels through word-of-mouth and various referral programs.

Since the inception of the Consumer Program, we have maintained a $24.95 per
month financing offer for our entry-level Membership Package. The financing
offer involves the customer qualifying for a line of credit provided by our
credit vendor, MBNA America Bank, N.A. The customer borrows the purchase price
of the Membership Package from MBNA, and MBNA pays the purchase price to us. The
customer pays off the financing over the Membership term, at a monthly amount of
as low as $24.95. In 2001, about 75% of purchasers through our Consumer
Membership Package Program took advantage of the MBNA financing program. The
remaining 25% of purchasers through our Consumer Membership Package Program paid
with a credit card or by other methods.

                                      -10-

<PAGE>

We recently received notice from MBNA that it wishes to discontinue offering
consumer financing for our Membership Packages effective April 30, 2002. We are
currently in discussions with MBNA and with other potential credit providers
regarding continuation of our financing program. If we are unable to conclude
an agreement with any of these providers, we will remove the financing option
and offer our Membership Package products for payment up front by credit card.
If this change happens, our sales through our Consumer Membership Package
Program will be adversely affected. (The financing option is much less important
in Enterprise Programs because the sponsoring company typically subsidizes the
purchase). However, with the shift of our emphasis away from Membership Package
programs and toward our PeoplePC Online programs, we do not believe that the
discontinuance of our financing program - if that happens - will materially
affect our strategic plans and future operating results.

Enterprise Membership Package Programs
--------------------------------------

During 2001, a focus of our marketing efforts has been to convince sponsoring
companies and organizations to provide Membership Packages to the sponsor's
employees, customers and other affiliated parties. We offer sponsoring
enterprises an integrated package of computer and Internet access products and
services from a single source that scales easily and quickly, and requires
little additional technology infrastructure investment. We also offer project
management and systems integration functions that permit rollout of these
programs with minimal administrative commitment from the sponsor.

Enterprise Program sales have been a significant acquisition channel for us. As
of December 31, 2001, approximately 47% of our members joined through Enterprise
Programs and revenues from our Enterprise Programs contributed approximately 43%
of our 2001 revenues.

Enterprises have different reasons for sponsoring such programs. Some are
motivated by the communications platform our programs create. Our programs allow
these customers to streamline certain business processes and reduce
infrastructure costs. For example, increased use of electronic communications
can reduce printing, mailing and other administrative costs. A connected
enterprise can also disseminate corporate information more rapidly and
effectively across businesses and geographies. Others of our customers see value
in developing an educated workforce and providing attractive employee benefits.

Largest Enterprise Member Package Programs
--------------------------------------------

Ford Motor Company

In April 2000, we entered into an agreement to be the sole provider of our
Membership Packages for the Model E Program, the Ford Motor Company's employee
connectivity program. Ford subsidized its employees' purchase of our three-year
Membership Package. We began distributing products under this program in April
2000.

The rollout of the Ford Model E employee connectivity program is substantially
complete in the United States. On May 15, 2001 Ford Motor Company announced that
it was deferring further rollout of the program. Following this action, we
amended our Model E Program agreement with Ford to terminate our right and
obligation to continue to sell Membership Packages to Ford employees. We will
continue to work with Ford under the terms of the amended agreement to provide
Internet access services and support for the more than 165,000 Ford employees in
the U.S., the Philippines, Canada, and the U.K who are currently PeoplePC
members. We believe that while this may negatively impact gross sales, the
impact on our cash position and margins in the near term will be beneficial. As
a result of the cancellation, on June 29, 2001, Ford Motor Company agreed to
reimburse us in the amount of $6.6 million for the costs incurred in preparing
to roll out the

                                      -11-

<PAGE>

Model E Program internationally. The payment was received in July, 2001 and was
recorded as a reduction in expenses in that period. Ford recently announced that
it would not resume the Model E Program.

On December 14, 2001, we entered into a supplemental agreement with Ford that
provides for Ford to pay us twenty consecutive monthly performance bonuses of
$317,545 each commencing in December, 2001. To earn the performance bonuses, we
must perform all of our obligations under our agreements with Ford and our
Member Agreements with Ford employees, and in addition adjust our services in
certain respects. These payments are included in other revenues.

Delta Air Lines, Inc.

In January 2000, we entered into an agreement with Delta Air Lines, Inc. in
which we agreed to provide our Membership Packages to up to 75,000 Delta
employees. Delta subsidized its employees' purchase of our products. Delta
employees make a $12 monthly co-payment to Delta. Delta agreed to pay us on a
monthly basis over the 36-month membership period for each employee, and we
subsequently securitized and sold a portion of this stream of receivables.

We began distributing products under the Delta program in April 2000. The U.S.
rollout to Delta employees has been completed. PeoplePC continues to host and
maintain a Web site for Delta employees participating in the program. Our
agreement with Delta will expire in January 2003.

Cinergy

In June 2001, we began rolling out an Enterprise Program for employees of
Cinergy Services, Inc. The Cinergy program is subsidized, with an employee
co-payment. In the case of employees who already own personal computers, Cinergy
subsidizes the cost of PeoplePC Online services for three years.

Vivendi Universal

In July 2000, our European subsidiary, PeoplePC UK, Ltd., entered into a supply
and service agreement with Vivendi S.A. (now Vivendi Universal S.A.) to provide
our Membership Packages to up to 260,000 full-time and part-time employees. Our
agreement with Vivendi Universal will expire in July 2003 unless Vivendi
Universal elects to extend the term for another year by giving notice at least
180 days before the end of the term. Vivendi Universal subsidizes the employees'
purchase of our products. In France, Vivendi Universal's employees pay a
co-payment of 3 Euros per month for 36 months. We receive payment from Vivendi
Universal for the entire membership package when the package is sold. We host
and maintain a web site for Vivendi Universal employees participating in the
program.

PeoplePC UK began distributing products to Vivendi Universal employees in France
in January 2001. Vivendi has indicated to us that it wishes to extend the
program to Vivendi employees in the United Kingdom, Germany and the United
States. This extended distribution of the program had been anticipated to take
place in the fourth quarter of 2001. However, Vivendi Universal has notified us
that the extension of the program will be delayed. We currently expect the
program to roll out in the United States in mid-2002. We cannot be sure that
Vivendi Universal will not further delay the program, nor that Vivendi Universal
will not terminate the program before its deployment in other countries. Any
decision by Vivendi Universal to delay or discontinue its U.S. rollout would
have significant negative effect on our cash flow.

                                      -12-

<PAGE>

Channel Membership Package Programs
-----------------------------------

In 2001, we signed Channel Membership Package Program agreements with Visa USA,
Highmark Blue Cross/Blue Shield, Food Marketing Institute, EMI, Health Alliance
Plan, and AAA Southern New England.

Member Commerce
---------------

Virtually all of our members access the Internet through a "Welcome Page." We
control the contents of the Welcome Page, unless we have given up that right in
our contract with a sponsoring enterprise client. We engage in two types of
merchandising activities through the Welcome Page.

The first activity is "Member Deals," where we provide links to merchants with
whom we have agreements. Under this model, we negotiate deals with participating
merchants, and they compensate us by paying commissions on completed sales.

The second activity is our PeopleShop service. During the first part of 2001, we
merchandised our own inventory (primarily computer-related) through PeopleShop.
We fulfilled sales through our relationship with Ingram Micro, a distributor of
computer hardware. In the fourth quarter of 2001, we outsourced our PeopleShop
online store through an arrangement with a third-party vendor. The vendor now
operates a retail store, accessible through the Welcome Page, which specializes
in special-purchase merchandise sold at a deep discount. In the current service,
the vendor, operating under the PeopleShop name, sells merchandise directly to
our members and pays PeopleShop a commission in the form of a percentage of
gross sales revenues.

As we move more toward private label and co-branded ISP programs, our
opportunities to engage in commerce with our members will probably decrease.

Marketing

Our marketing strategy is to build our membership, and especially our monthly
subscription fee-generating membership, through programs undertaken with
corporate or institutional marketing partners, wholesale and private label
connectivity service sales, employee connectivity programs, direct-to-consumer
sales, sales through large retailer partners, and other means.

Through the first half of 2001, our emphasis was on building brand recognition,
establishing strong customer loyalty and encouraging transactions with
merchants. Our emphasis has since evolved away from brand establishment and
toward selling our PeoplePC Online service on a wholesale and private label
basis. We have curtailed broad nationwide advertising campaigns for our
direct-to-consumer programs. We may from time to time engage in more limited,
targeted campaigns. We continue to place advertisements on various high-traffic
Web sites. We also engage in targeted direct email campaigns to promote our
product and service offerings. We promote the PeoplePC brand with our existing
members. We sponsor various affiliate programs that offer commissions for
referrals of customers.

In the coming year, we will attempt to increase our monthly subscription
fee-generating membership base for our PeoplePC Online product through several
means of "inorganic" growth such as:

     .    Acquisitions of smaller, less cost-effective ISPs;

                                      -13-

<PAGE>

     .    Wholesale and private label deals with competitive local exchange
          carriers (or CLECs), and regional Bell operating companies (or RBOCs),
          who wish to reduce the general and administrative costs associated
          with running the front end of their dial-up ISP businesses; and

     .    Conversion of our current Members who purchased Membership Packages to
          programs that generate monthly recurring revenue streams. (Our first
          Membership Package Memberships sold will begin expiring in the last
          quarter of 2002.)

Operations

Our strategy is to procure from third party vendors the principal product and
service functions comprising our offerings. We employ multiple vendors wherever
practicable. This allows us to maintain flexibility to scale operations with
demand and improves our ability to provide high-quality products at favorable
pricing.

We currently have twelve vendors who supply us with Internet connectivity and
local telephone access numbers. We deal with the largest nationwide wholesalers
of ISP connectivity. We have developed a flexible technology for routing calls
among the systems provided by our vendors, so that we can direct our customers
away from networks with heavy traffic or system problems and to networks that
provide efficient service and low cost. Our users typically can connect to the
Internet for the cost of a local telephone call. Our service provides full
point-to-point protocol access to the Internet, and supports the v.90 standard
for 56 kbps connections. Internet providers typically charge us on the basis of
the number of hours of Internet usage by our members. Our contracts with
wholesalers of ISP connectivity tend to have terms from two to three years.
There is substantial, but not total, redundancy with regard to geographical
coverage of the various wholesalers.

Through a leading email service vendor, we provide our members with email
services with an "@peoplepc.com" email address. For enterprises that wish to
offer their own email address, we provide an "@enterprisename.com" address.

For our Membership Package programs, we negotiate prices and specifications with
computer manufacturers. The manufacturer sells the computers to Ingram Micro, a
leading distributor of computer hardware, which then resells the machines to us.
The computer supplier ships its products directly to Ingram Micro's distribution
centers around the country. After a customer order is approved and a binding
purchase order is placed with Ingram Micro, products are picked, packed, and
shipped to our customers from the distribution center closest to the shipping
address. Ingram Micro provides us with data on inventory quantities, inventory
location, shipping status and order tracking numbers. Our Web site provides a
direct link from a customer's order information to the United Parcel Service to
provide information on order delivery status. We are required by Ingram Micro to
maintain a deposit, adjusted weekly, equal to 25% of the amount of outstanding
purchase orders and the value of inventory maintained by Ingram in the United
States.

Our Membership Package purchasers may obtain financing through MBNA America
Bank, N.A. We entered into an agreement with MBNA in February 2000 in which MBNA
agreed to provide a line of credit to qualified prospective purchasers that
would allow the purchasers to borrow the purchase price of their membership and
repay the loan over 48 months. Members may also finance the purchase price of
peripherals, upgrades and shipping and handling charges. We have been notified
that MBNA wishes to terminate its agreement with us effective April 30, 2002. We
are currently in discussions with MBNA and with other consumer credit providers
regarding continuation of our financing program. If we are unable to conclude an
agreement with any of these providers, we will

                                      -14-

<PAGE>

remove the financing option and offer our Membership Package products for
payment up front by credit card. If this change happens, our sales through our
Consumer Membership Package Program will be affected (the financing option is
less important in Enterprise Programs because the sponsoring company typically
subsidizes the purchase). However, with the shift of our emphasis away from
Membership Package programs and toward our PeoplePC Online programs, we do not
believe that the discontinuance of our financing program - if that happens -
will materially affect our strategic plans and future operating results.

In order to maintain low costs and enable rapid growth, we outsource most of our
customer service and technical support to multiple providers.

International

PeoplePC has focused its international operations on France and the United
Kingdom. These operations are run by PeoplePC UK Ltd. The headquarters of this
company are in Rickmansworth, England, just outside of Central London. We also
maintain an office in Le Courbevoie, France. As of December 31, 2001, PeoplePC
UK Ltd employed approximately 30 people in England and France.

PeoplePC UK Ltd. is a wholly-owned subsidiary of PeoplePC Europe N.V., a Dutch
company that is 65% owned by PeoplePC, and 35% owned by @viso Limited, a UK
company that is owned in equal parts by Vivendi and SOFTBANK Corp, a Japanese
company. PeoplePC Europe N.V. issued to SOFTBANK Capital Partners LP a warrant
to acquire convertible preferred stock representing 5% of PeoplePC Europe's
outstanding shares. PeoplePC Europe N.V. has no operations.

Under a Put Option Agreement dated May 30, 2001, @viso is entitled to sell all
or a portion of its shares of PeoplePC Europe N.V. to us in exchange for shares
of PeoplePC common stock. Under this arrangement, @viso is entitled to receive
between 13,750,000 and 29,146,132 shares of PeoplePC common stock based on a
formula and the date of exchange. SOFTBANK Capital Partners LP is entitled to
exercise its warrant to purchase convertible preferred stock in PeoplePC Europe
N.V. The exercise price of the warrant is $7,142,857 or $2.05 per share of
PeoplePC common stock, and as a result it is unlikely that the warrant will be
exercised in the foreseeable future. If the warrant were exercised, SOFTBANK
Capital Partners LP would be entitled to sell all or a portion of its shares of
PeoplePC Europe N.V. to us in exchange for PeoplePC stock. Under this
arrangement, SOFTBANK Capital Partners LP would be entitled to receive between
1,850,000 and 3,481,928 shares of PeoplePC capital stock based on a formula and
the date of exchange. These put options will terminate in April 2006. These
securities were exempt from registration under Rule 506 of the Securities Act
since the sale was to accredited investors, as defined in Rule 501 of the
Securities Act.

As a result of executing the Put Option Agreement, we acquired additional
control over PeoplePC Europe, free of certain restrictions contained in the
PeoplePC Europe N.V. Articles of Association and a related shareholder
agreement. In particular, the @viso representatives to the board of directors of
PeoplePC Europe N.V. resigned and we acquired control of the board of directors
of PeoplePC Europe N.V.

In addition, PeoplePC Europe N.V. has the power to make loans to fund our United
States' operations, free of contractual restrictions, thus potentially allowing
use of PeoplePC Europe N.V. assets for the combined benefit of the two
companies.

PeoplePC Europe N.V. has made five loans totaling $35.5 million to fund
PeoplePC's operations in the United States during fiscal year 2001. These notes
are demand notes. Because PeoplePC controls the

                                      -15-

<PAGE>

board of directors of PeoplePC Europe N.V., we have substantial discretion over
the timing of demands made under these notes.

In December 2000, the French government passed Article 2 of the Finance Law,
providing favorable tax treatment for employee connectivity programs such as the
one undertaken by Vivendi Universal and PeoplePC UK. In January 2001, PeoplePC
UK Ltd. began distributing products to Vivendi Universal's French employees. The
Vivendi Universal program in France has now gone through two "waves" with the
third and final wave scheduled to be deployed early in 2002. The program is open
to all of the company's European full-time and part-time employees for an
employee co-payment of 3 Euros per month. The remainder of the program expenses
are subsidized by Vivendi Universal.

In late 2001, PeoplePC UK Ltd began active marketing of a new enterprise
solution product, called the "Win-Win Initiative." The program takes advantage
of UK legislation permitting employees to use company-owned computers at home
without incurring taxation on benefits-in-kind. In a typical program, the
employee voluntarily reduces his or her gross pay, and the sponsoring company
purchases a home PC and allows the employee to use the PC at home. The effect is
that the company acquires home PCs for employees at no cost to the company. Both
the employees and the company take advantage of tax benefits. The program has
generated interest among several blue chip UK companies.

The income or "benefits-in-kind" tax treatment of an employee connectivity
program is a country-by-country issue. To the extent a program is not tax-free,
the extent to which a program is subsidized could be considered taxable wages
and be subject to applicable withholding rules. In countries where the tax cost
of an employee program is too high, local enterprises may be unwilling to enter
into agreements with us. If employees are required to pay tax on the benefit,
our acceptance rates may suffer, resulting in impractical economies of scale.

Asia

We closed our Singapore office in September, 2001. We are in the process of
dissolving Asia PeoplePC Singapore Pte Ltd, our wholly-owned subsidiary.

Competition

The markets for Internet access and personal computers are competitive and
subject to rapid technological change. Although there does not appear at this
time to be a significant number of competitors who provide integrated and
customized Internet access services through institutional marketing partners,
there are numerous competitors that provide parts of what we do. We compete for
customers with the following categories of competitors:

      .    Internet service providers, such as America Online, Earthlink,
           Microsoft, AT&T, and United Online. Some of these companies have
           entered into arrangements with computer manufacturers to provide a
           free year of Internet service to buyers of new computers.

      .    Vendors of personal computers that integrate Internet access and
           service with their products, such as Apple, Compaq, Dell and Gateway.

                                      -16-

<PAGE>

      .    Combinations of computer vendors and Internet service and content
           providers, such as AT&T, Yahoo, Microsoft, Compaq, Hewlett-Packard,
           IBM and Toshiba.

The primary competitive factors in the market for customized Internet access
service are scalability, price, brand, ability to provide customizable
platforms, customer experience, effective customer support, reputation of
reliable service, geographic coverage and distribution. We believe that we
compete favorably on many of these factors.

Developing an integrated computer Internet access service package is costly, and
particularly in the enterprise context. Nevertheless, most major computer
vendors have begun to offer packages that contain some of the elements of our
integrated offering, and some computer vendors offer rebates in exchange for
entering into multi-year Internet access service contracts. Computer vendors and
Internet service providers are competing with us in bids for large enterprise
connectivity programs.

Intellectual Property

Protection of our copyrights, service marks, trademarks, trade dress and trade
secrets is an important factor in our ability to maintain and grow our business.
We rely on a combination of copyright, trade secret and trademark law and
contractual restrictions to establish and protect our proprietary intellectual
property rights in our products and services. We generally enter into
confidentiality agreements with our employees and consultants. Our
confidentiality agreements generally require our employees and consultants to
hold in confidence and not disclose any of our proprietary information. Despite
our efforts to protect our proprietary information, unauthorized parties may
attempt to obtain and use our proprietary information. Policing unauthorized use
of our proprietary information is difficult, and the steps we have taken might
not prevent misappropriation, particularly in foreign countries where the laws
may not protect our proprietary rights as fully as do the laws of the United
States.

We have filed applications for the registration of some of our trademarks and
service marks, including PeoplePC, in the United States and in some other
countries. We have not secured registration of any of our marks to date. We may
be unable to secure such registered marks. It is also possible that our
competitors or others will use marks similar to ours, which could impede our
ability to build brand identity and lead to customer confusion. In addition,
there could be potential trade name or trademark infringement claims brought by
owners of other registered trademarks or trademarks that incorporate variations
of the term PeoplePC. Any claims or customer confusion related to our trademark,
or our failure to obtain trademark registration, would negatively affect our
business. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the United States, and
effective copyright, trademark and trade secret protection may not be available
in such jurisdictions. Our efforts to protect our intellectual property rights
may not prevent misappropriation of our content. Our failure or inability to
protect our proprietary rights could substantially harm our business.

Employees

As of December 31, 2001, we had a total of 98 full-time employees in the United
States and internationally employed by one or more of our subsidiaries including
17 in marketing, business development and corporate sales, 30 in information
systems, 28 in operations and customer care and 23 in administration, finance,
human resources and legal. We had 28 full-time employees working for PeoplePC
Europe and 0 for PeoplePC Asia. None of our employees are represented by a labor
union, and we have no collective bargaining agreements. We consider our
relations with our employees to be good.

                                      -17-

<PAGE>

ITEM 2. PROPERTIES

Our principal executive offices are located in San Francisco, California. We
lease and occupy approximately 26,000 square feet at this facility pursuant to a
lease that expires on February, 2005. We have an option to extend the term of
the lease for an additional five-year period.

Previously, we occupied an additional floor of this building consisting of
approximately 11,300 square feet pursuant to a sublease. Beginning in November,
2001, we ceased payment of rent under the sublease and discontinued use of the
premises. The rent specified in the sublease was substantially over market.
Subsequently, the sublease was terminated and we settled with the landlord
pursuant to a Settlement Agreement dated March 20, 2002. In the settlement, we
were required to pay past due rent through December 31, 2001 to relinquish any
claim to approximately $550,000 of collateral posted to secure our obligations
under the sublease, and further to relinquish an option to terminate our lease
on one of the two floors we still occupy in the building.

Our European operating subsidiary, PeoplePC U.K., Ltd., leases approximately
10,765 square feet of office space in Rickmansworth, a suburb of London, for use
as executive offices. The term of this lease commenced on February 1, 2001 and
ends August 18, 2004.

PeoplePC France SARL leases approximately 5,000 square feet of office space in
Paris, France for use as a sales office. The lease commenced on March 1, 2001
and expires on February 28, 2009. The lease is structured as three 3-year leases
that can be cancelled six months before the end of the third year.

We believe that these facilities are adequate and suitable for our near-term
needs.

ITEM 3. LEGAL PROCEEDINGS

We may from time to time become a party to various legal proceedings arising in
the ordinary course of our business. We are not presently a party in any
material pending legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of stockholders' during the fourth quarter
of the fiscal year ended December 31, 2001.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Price Range of Common Stock

The common stock of PeoplePC has been traded on the Nasdaq Stock Market under
the symbol "PEOP" since PeoplePC's initial public offering on August 15, 2000.
Prior to that time there was no public market for PeoplePC's common stock.

                                      -18-

<PAGE>

The following table sets forth for the period indicated the high and low sale
prices of the common stock.

                                                    PeoplePC Inc.
                                                    ------------------
                                                    HIGH         LOW
                                                    ----         ----
     QUARTER ENDED
          2000
     September 30, 2000                             $10.375      $ 5.031
     December 31,  2000                             $ 6.250      $ 0.688
          2001
     March 30,     2001                             $ 2.375      $ 0.313
     June 30,      2001                             $ 0.600      $ 0.160
     September 30, 2001                             $ 0.290      $ 0.060
     December 31,  2001                             $ 0.640      $ 0.080

Dividend Policy

Historically, we have not paid cash dividends to the holders of capital stock.
We do not expect to pay dividends on our capital stock for the foreseeable
future. We currently intend to retain future earnings for the expansion and
operation of our business.

Holders of Common Stock

As of March 15, 2002, there were 168 record owners of our common stock.

Recent Sales of Unregistered Securities

On December 17, 2001, in order to raise funds to enable us to continue
operations, we issued and sold a total of 4,375,000 shares of series B preferred
stock at $5.00 per share for aggregate gross proceeds of $21,875,000 (the
"Private Placement"). The purchasers of the series B preferred stock included
SOFTBANK Capital Partners LP, SOFTBANK Capital LP, SOFTBANK Capital Advisors
Fund LP, SOFTBANK Technology Ventures IV LP, SOFTBANK Technology Advisors Fund
LP, Beny Alagem, David Silfen, CMS Tech Co-Investment Subpartnership and BIB
Investment Partners. These securities were exempt from registration under
Section 4(2) of the Securities Act.

Pursuant to the terms of the Private Placement, each share of series B preferred
stock converted automatically into 100 shares of common stock immediately
following stockholder approval of the transaction at a Special Meeting of
Shareholders held on February 19, 2002. Therefore, the 4,375,000 shares of
series B preferred stock automatically converted into 437,500,000 shares of
common stock.

Because series B preferred stock was issued and sold at $5.00 per share, and
such holders are receiving 100 shares of common stock for each share of series B
preferred stock, the holders of series B preferred stock effectively received
the common stock at a price of $0.05 per share. At the time of the sale our
common stock was trading at $0.26 per share. As a result, we have recorded a
dividend of $21.2 million relating to the beneficial conversion feature
associated with the sale.

The common stock issued upon conversion of the series B preferred stock is not
registered pursuant to the Securities Act of 1933, as amended (the "Securities
Act"), and, accordingly, such shares may not be offered or sold in the United
States absent registration or an applicable exemption from registration
requirements. However, pursuant to the terms of the Private Placement, we filed
a registration statement with the Securities and Exchange Commission (the "SEC")
to register the resale of such common stock. In addition, some of our existing
stockholders (including entities associated with SOFTBANK Corp. and entities
associated with STV IV LLC) and optionholders have the right to require us to
register the resale of up to an additional 40,206,206 shares of common stock
held by such holders under the same registration statement pursuant to
registration rights granted to such holders in the past.

There were 114,002,422 shares of our common stock outstanding as of December 31,
2001. After giving effect to the conversion of the series B preferred stock
pursuant to stockholder approval obtained on February 19, 2002, we have
outstanding 551,502,422 shares of common stock. Of these shares, following
effectiveness of the registration statement, the 437,500,000 shares of common
stock issued upon conversion of the series B preferred stock and 40,206,206
shares of common stock held by other registration right holders will be freely
tradable without restriction under the Securities Act, unless held by our
"affiliates" as that term is defined in Rule 144 under the Securities Act, which
generally includes officers, directors or holders of 10% or more of our shares.

                                      -19-

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

This section presents our historical financial data. We derived the statement of
operations data for the years ended December 31, 2001 and 2000, and for the
period from March 2, 1999 (date of inception) to December 31, 1999, and the
balance sheet data as of December 31, 2001 and 2000 from our audited financial
statements included in this annual report. When you read this selected financial
data, it is important that you also read the historical financial statements and
related notes included in this annual report, as well as "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Historical results are not necessarily indicative of future results. See the
notes to the financial statements for an explanation of the method used to
determine the number of shares used in computing basic and diluted and pro forma
basic and diluted net loss per share.

<TABLE>
<CAPTION>
                                                                                                Period from
                                                                                                 March 2,
                                                                                               1999 (Date of
                                                                                               Inception) to
                                                                      Years Ended December 31,  December 31,
                                                                          2001         2000         1999
                                                                      -----------  ----------- -------------
                                                                      (in thousands, except per share data)
<S>                                                                    <C>          <C>          <C>
Statement of Operations Data:
Membership revenues earned .........................................   $ 165,836    $  58,033    $   1,255
Other revenues .....................................................       8,142       32,128        2,188
                                                                       ---------    ---------    ---------
Total revenues .....................................................     173,978       90,161        3,443
                                                                       ---------    ---------    ---------
Cost of membership revenues earned .................................     147,524       92,758        5,129
Cost of other revenues .............................................       6,788       26,562        1,905
                                                                       ---------    ---------    ---------
Total cost of revenues .............................................     154,312      119,320        7,034
                                                                       ---------    ---------    ---------
Gross profit (loss) ................................................      19,666      (29,159)      (3,591)
                                                                       ---------    ---------    ---------
Operating expenses:
Sales and marketing (inclusive of stock-based
   compensation of $(45), $21,266, and $134 for the years
   ended December 31, 2001, 2000 and the period ended
December 31, 1999, respectively) ...................................      17,733      113,250       38,413
General and administrative (inclusive of stock-based
   compensation of $3,995, $21,847, and $2,905 for the years
   ended December 31, 2001, 2000 and the period
   ended December 31, 1999, respectively) ..........................      86,981       99,409        9,102
Contract cancellation fees .........................................       2,876            0            0
Other operating (income) expenses ..................................      (9,621)      (6,900)      15,550
                                                                       ---------    ---------    ---------
Total operating expenses ...........................................      97,969      205,759       63,065
                                                                       ---------    ---------    ---------
Loss from operations ...............................................     (78,303)    (234,918)     (66,656)
Net Interest income (expense) and other expenses ...................      (1,958)        (502)         405
Income tax expense .................................................        (405)           0            0
Minority interest in net loss of consolidated subsidiaries .........       5,728        3,226            0
                                                                       ---------    ---------    ---------
Loss before cumulative effect of accounting change .................     (74,938)    (232,194)     (66,251)
Cumulative effect of accounting change .............................           0       (3,844)           0
                                                                       ---------    ---------    ---------
Net loss ...........................................................     (74,938)    (236,038)     (66,251)
Dividend related to beneficial conversion feature of
   preferred stock .................................................     (21,191)     (18,209)           0
                                                                       ---------    ---------    ---------
Net loss attributable to common stockholders .......................   $ (96,129)   $(254,247)   $ (66,251)
                                                                       =========    =========    =========
Basic and diluted net loss per share
Loss before cumulative effect of accounting change .................   $   (0.86)   $   (4.09)   $   (2.04)
Cumulative effect of accounting change .............................   $   (0.00)   $   (0.06)   $   (0.00)
                                                                       ---------    ---------    ---------
Net loss per share .................................................   $   (0.86)   $   (4.15)   $   (2.04)
                                                                       =========    =========    =========
Shares used in computing basic and diluted net loss per
   share ...........................................................     111,825       61,218       32,400
</TABLE>



                                                             2001        2000
                                                          ---------   ---------
Balance Sheet Data:
   Cash and cash equivalents ...........................  $  22,697   $  65,493
   Restricted cash .....................................      2,181      22,954
   Working capital .....................................     (8,014)     45,327
   Total assets ........................................     41,269     153,031
   Mandatorily redeemable convertible preferred stock ..     21,191          --
   Accumulated deficit .................................   (416,627)   (320,498)
   Total stockholders' deficit .........................    (80,351)     (8,951)



                                      -20-

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion contains "forward-looking statements." To put these
statements in the proper context, the reader should refer to the discussion on
forward looking statements set forth on page 2.

The following discussion of our financial condition and results of operations
should also be read in conjunction with the financial statements and notes to
the financial statements included elsewhere in this report.

Overview

We were incorporated in March 1999. We began offering our products and services
on a limited basis in September 1999 and on a commercial basis in October 1999.
Until October 1999, we had no revenues and our operating activities consisted
primarily of developing relationships with vendors, suppliers and merchants. As
of December 31, 2000, we had approximately 355,000 members who had purchased our
Membership Packages and approximately 75,000 PeoplePC Online Members. As of
December 31, 2001, we had approximately 502,000 Members who had purchased our
Membership Packages and approximately 82,000 PeoplePC Online Members.

Our business model evolved during 2001 in response to the changing marketplace
and economic conditions. We had originally focused on growing our Membership by
selling Membership Packages consisting of a personal computer and prepaid
Internet access service for the term of the Membership. We sold Membership
Packages through our Consumer Program, through Employee Connectivity Programs
sponsored by large employers, and through Channel Programs with large affiliate
organizations. The Membership Packages were sold near, at, or below cost, and we
had planned to generate profits from the sale of advertising, merchandising, and
other "monetization" activities directed at our growing base of Members. We
intended to fund our growth in part through our Members' prepayment of the
service portion of the Membership Packages.

Our goal is still to grow our Membership through multiple channels involving
marketing partners. However, our business model now looks to generate profits
not primarily through monetization of Members but rather through the sale of our
Internet access service through monthly subscriptions. This changed emphasis was
made possible, in part, by our development of a low-cost Internet
infrastructure, giving us the opportunity to offer the service for sale at a
high margin.

                                      -21-

<PAGE>

Although we are still selling our programs through large corporate sponsors, the
business rationale for the corporate programs has changed. Many of our corporate
sponsors previously looked at our service as an employee benefit. Now, the
majority of our sponsors anticipate receiving a monthly revenue stream by
working with us to sell monthly ISP subscriptions to their customers and
members. We sell our ISP service for a monthly price that provides us with a
positive margin, even after payment of a commission to the sponsoring
organization. In addition to receiving a new revenue stream, the sponsoring
companies obtain a customizable online platform that they can use for marketing
and cross-selling activities.

We also plan to wholesale our ISP service through other ISP service providers.
In this structure, we will provide our service to the ISP service provider for
resale to the provider's customers. We will charge the service provider a
wholesale price, which we would set at a level to provide us with an acceptable
margin. The service provider will then resell our service to its customers at a
retail price.

Critical accounting policies and estimates
------------------------------------------

General

Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to revenue recognition, allowance for acquisition discounts, membership
cancellations and product returns, allowance for doubtful accounts, deferred tax
valuation allowance and allowance for settlement of potential disputes. We base
our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the

                                      -22-

<PAGE>

basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements (SAB 101), as amended by SAB 101A
and 101B. SAB 101 requires that four basic criteria must be met before revenue
can be recognized: (1) persuasive evidence of an arrangement exists; (2)
delivery has occurred or services rendered; (3) the fee is fixed and
determinable; and (4) collectibility is reasonably assured. Determination of
criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the fee charged for services rendered and products delivered and the
collectibility of those fees. Should changes in conditions cause management to
determine these criteria are not met for certain future transactions, revenue
recognized for any reporting period could be adversely affected.

Allowances for acquisition discounts

Some of our memberships were offered at a price that was less than its total
estimated current and future cost to perform under the agreements. As a result,
we recorded a provision for the amount by which the total estimated costs
exceeded the total revenues and is amortizing the provision over the life of the
related agreements. This provision is based on the estimated future Internet use
of the related members and our estimated cost of providing Internet access to
these members. If Internet usage by these members' increases or our cost to
provide Internet access rises, the provision may have to be increased.

Allowances for Membership cancellations and product returns

We make estimates of potential future membership cancellations and product
returns related to current period product revenues. We analyze historical
returns, current economic trends, and changes in customer demand and acceptance
of our products when evaluating the adequacy of the sales returns and other
allowances. If actual membership cancellations and product returns increase,
additional allowances may be required.

Allowances for doubtful accounts

We maintain allowances for estimated losses resulting from the inability of our
customers to make required payments. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.

Accounting for income taxes

We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. While we have considered future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, in the event we were to
determine that we would be able to realize our deferred tax assets in the future
in excess of our net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made. Likewise,
should we determine that we would not be able to realize all or part of our net
deferred tax asset in the future, an adjustment to the deferred tax asset would
be charged to income in the period such determination was made.

Legal proceedings

We make estimates of potential future disputes in consultation with our outside
counsel handling our defense in these matters and based upon analyses of
potential results, assuming a combination of litigation and settlement
strategies. We do not believe these proceedings will have a material adverse
effect on our consolidated financial position, results of operations or cash
flows. It is possible, however, that future results of operations for any
particular quarterly or annual period could be materially affected by changes in
our assumptions and the effectiveness of our strategies.

                                      -23-

<PAGE>

Revenues, Cost of Revenues and Cash Flows
-----------------------------------------

To place our financial statements in context, one must appreciate how our
business plan has evolved. From our inception through most of 2001, we focused
on marketing our Membership Package programs. Our income statements reflect the
sale of computer/service packages that have a relatively high purchase price,
high cost, and low margin. We expect that monthly PeoplePC Online subscriptions
will provide a significant portion of Membership revenues in the future, as we
continue to de-emphasize the Membership Package programs. We expect that this
service, in comparison to the sale of Membership Packages, will on a unit basis
produce a lower but recurring cash flow, lower initial costs, and comparatively
higher margins.

A proper understanding of our financial statements also requires distinguishing
between the differing accounting treatments accorded to revenues derived from
the sale of a Membership Package and revenues sale of the PeoplePC Online
service.

Membership Packages

To understand the financial effect of the sale a Membership Package, we believe
it is important to distinguish cash flows associated with the sale from the
recognition of revenue from the sale. When we sell a Membership Package, we
receive the entire purchase price and shipping fees up front in cash. The cost
of purchasing and shipping the computer hardware comprise a large part of the
cost of Membership Package revenues. We pay our hardware and distribution
vendors immediately. The difference between the Membership Package purchase
price and the hardware cost is the amount of cash available to pay for the ISP
and other services we promise to provide to the member over the three- or
four-year Membership term. The cost of providing the services portion of the
Membership Package is incurred and paid out over the three- or four-year
Membership term, as the Member uses the ISP and other services.

Most Membership Package revenue and the costs of producing that revenue have
been deferred and are being recognized ratably during the three-or four-year
term of the Membership. Thus, the revenue and cost of revenues numbers that
appear in our financial statements include significant previously deferred
revenues and expenses related to Membership Packages that were sold in prior
periods. Our deferral of revenues and costs is unrelated to the actual cash
positions and cash flows related to the Membership Package transactions. In the
view of management, the most critical factors in our business at this stage of
its development relate to cash reserves and cash flows. Said another way, our
single most important near-term financial goal is attaining positive cash flow,
so that the business can become self-funding.

The up-front revenue received from our original three-year $24.95 per month
entry-level consumer Membership Package and from the Ford and Delta enterprise
programs was less than our estimated total current and expected future cost of
providing services and performing under the applicable agreements. The amount by
which our total current and expected future costs exceed our membership revenues
from these programs was recorded as a loss provision, or acquisition discount.
During 2001, we ceased to offer acquisition discounts in our Membership Package
Enterprise and Consumer Programs. During the second through fourth quarters of
2001, we were able to reduce our loss provision, as our estimate of our future
cost to provide Internet access to these Members has substantially decreased.

                                      -24-

<PAGE>

PeoplePC Online Service

Our PeoplePC Online service is generally sold on a monthly subscription basis,
and revenues are earned from monthly subscription fees. The principle cost of
these revenues is the cost of providing Internet access. Both revenues from
PeoplePC Online and the cost of those revenues are recorded as services are
provided and related costs are incurred, except in the case of Members who
purchase a 12-month prepaid subscription. Revenues from sales of 12-month
prepaid subscriptions will be recognized on a monthly basis over the term of the
subscription. Monthly PeoplePC Online Members may cancel their Membership at any
time.

Other Revenues

When we sell Membership Packages, we generate "other revenues," which are
revenues from the sale of upgraded monitors, printers and other peripherals and
additional shipping revenues related to upgraded monitors and the sale of
printers and other peripherals. The shift in emphasis away from our Membership
Package programs is likely to mean that "other revenues" will decline in the
future.

Also included in "other revenues" are revenues from our PeopleShop service, and
Member commerce program revenues from merchants, content partners and suppliers.
Member commerce program revenues are recognized in the period when a transaction
occurs because the transactions are not requested by all members, are separately
identifiable transactions, and the related earnings process is completed at that
time. We do not expect revenues from these sources to be significant for us for
2002.

The cost of other revenues consists of the cost of peripherals and the
incremental cost of upgrades; the cost to pick, pack, and ship peripherals and
upgrades; and other costs of revenues such as costs associated with returns. The
cost of other revenues is recorded in the period incurred. We anticipate that
the cost of our Member commerce program revenues will be minimal in 2002.

Foreign Operations
------------------

We currently operate principally in the United States, the United Kingdom, and
France. Our operations in France are primarily focused on servicing the Vivendi
Universal account, and we do not anticipate actively marketing our products and
services in France in the coming year. We expect that our primary foreign
activity during 2002 will take place in the United Kingdom.

                                      -25-

<PAGE>

Although we offer various products and services to our Members, we do not manage
operations by these service lines. Instead, we view our company as one operating
segment when making business decisions. We do manage our operations on a
geographical basis. Revenues are attributed to the United States and to all
foreign countries based on actual sales made in those geographic areas.
Revenues, loss from operations and long-lived assets information by geographic
area are summarized as follows:

<TABLE>
<CAPTION>
                                                                       Period from
                                                                      March 2, 1999
                                          Years ended December 31, (Date of Inception)
                                                                     to December 31,
                                             2001          2000            1999
                                         -----------   -----------     -----------

<S>                                      <C>           <C>              <C>
Revenues from External Customers
   United States                         150,110,000    89,348,000       3,443,000
   International                          23,868,000       813,000              --

                                         -----------   -----------     -----------
   Total                                 173,978,000    90,161,000       3,443,000
                                         ===========   ===========     ===========

Loss from Operations
   United States                          58,772,000   221,814,000      66,656,000
   International                          19,531,000    13,104,000              --

                                         -----------   -----------     -----------
   Total                                  78,303,000   234,918,000      66,656,000
                                         ===========   ===========     ===========
</TABLE>

<TABLE>
<CAPTION>
                                                    As of December 31,
                                             2001          2000            1999
                                         -----------   -----------     -----------
<S>                                        <C>           <C>               <C>
Long-Lived Assets
   United States                           4,641,000     6,661,000         330,000
   International                             755,000     1,027,000              --

                                         -----------   -----------     -----------
   Total                                   5,396,000     7,688,000         330,000
                                         ===========   ===========     ===========
</TABLE>



Results of Operations

Year ended December 31, 2001 compared to the Year ended December 31, 2000
-------------------------------------------------------------------------

Revenues

         Membership Revenues Earned. Membership revenues earned includes
         --------------------------
revenues from the sale of Membership Packages, related shipping revenues,
revenues from PeoplePC Online Memberships, and recognition of Membership
revenues previously deferred. Gross Membership sales decreased by 53% to $161.0
million for the year ended December 31, 2001, from $342.0 million for the year
ended December 31, 2000. Revenues recognized from our PeoplePC Online programs
were $7.1 million and $6.4 million for the years ended December 31, 2001 and
2000, respectively. Because we generally recognize revenues from the sale of
Membership Packages over the term of the Membership, $135.4 million of gross
sales of memberships was deferred in the year ended December 31, 2001, while
$287.5 million of gross sales of memberships was deferred in the year ended
December 31, 2000. Membership revenues include the recognition of $139.2 and
$7.6 million in Membership sales previously deferred for the years ended
December 31, 2001 and 2000, respectively.

The decline of gross Membership sales was primarily due to fact the rollout of
the Ford and Delta Programs was substantially completed in 2000. During 2001,
large companies became more reluctant to commit to subsidized employee
connectivity programs involving Membership Packages. Subsidized employee
programs accounted for a material portion of our sales of Membership Packages
during the year ended December 31, 2000. The general downturn in the economy
during 2001 also contributed to the decrease in gross Membership sales through
our Consumer Program.

On December 26, 2001, we recently received notice from our finance partner, MBNA
America Bank, N.A., that effective April 30, 2002, it wished to terminate the
arrangement under which it provided financing to consumers wishing to purchase
one of our Membership Packages through our Consumer Program. We are in
discussions with MBNA and other potential credit vendors regarding continuation
of our financing program, but it is not certain that we will be able to
successfully conclude these discussions. If we are unable to offer consumer
financing, sales of Membership Packages through our Consumer Program would be
negatively affected.

                                      -26-

<PAGE>

75% of our sales of Membership Packages through our Consumer Program involved
financing in 2001. However, with our shift in emphasis away from Membership
Packages, we do not believe that any such negative effect would have a
significant effect on our future results.

         Other Revenues. Other revenues consist of sales of peripherals and the
         --------------
incremental cost of upgrades, the related shipping revenues, revenues from
merchants, content partners and suppliers and revenues from providing
development services. Other revenues decreased by 75% to $8.1 million for the
year ended December 31, 2001, of which $4.4 million was related to the sale of
upgrades and peripherals and $0.9 million was related to services provided to
SOFTBANK. Other revenues were $32.1 million for the year ended December 31,
2000, of which $30.5 million was related to the sale of upgrades and peripherals
and $1.6 million was related to revenues from merchants, content partners and
suppliers. The decrease in other revenues can be explained by the decline in
gross sales of Membership Packages and by the fact that the Vivendi Universal
program did not feature peripherals or upgrades (earlier employee connectivity
programs did offer peripherals and upgrades).

Cost of Revenues

         Cost of Membership Revenues Earned. Cost of Membership revenues earned
         ----------------------------------
consists primarily of the cost of the basic system hardware and software,
fulfillment and shipping costs and our cost of providing members with Internet
connectivity. Cost of gross sales of Memberships decreased 58% to $152.6 million
for the year ended December 31, 2001 compared to $363.4 million for the year
ended December 31, 2000. Because we recognize some system hardware and software
cost of revenues over the term of the Membership, $94.9 million of cost of gross
Membership sales was deferred in the year ended December 31, 2001, while $277.3
million of cost of gross Membership sales was deferred in the year ended
December 31, 2000. Cost of Membership revenues earned included the recognition
of $113.5 and $6.7 million in costs previously deferred for the years ended
December 31, 2001 and 2000, respectively. The cost of providing Internet service
to our members included in cost of Membership revenues was $23.3 million and
$14.9 million for the years ended December 31, 2001 and 2000, respectively. Cost
of Membership revenues for the year ended December 31, 2001 also includes a
$23.7 million net amortization of acquisition discount previously recognized,
$15.4 million of which was the reversal of the acquisition discount reserve
resulting from a change in estimate of future costs due to decreased ISP
expenses. For the year ended December 31, 2000, cost of Membership revenues
includes a net provision of $27.5 million for the amount by which our current
and estimated future cost of Memberships exceeds the related total Membership
revenue. The decrease in cost of Membership revenues is consistent with the
decrease in Membership revenues.

         Cost of Other Revenues. The cost of other revenues for the year ended
         ----------------------
December 31, 2001 decreased by 74% to $6.8 million from $26.6 million for the
year ended December 31, 2000. Cost of other revenues primarily consists of the
cost of printer and monitor peripherals, the incremental cost of upgrades, and
the related shipping expense. Cost of other revenues also includes incidental
costs incurred such as costs related to returns. The decrease in cost of other
revenues is consistent with the decrease in other revenues.

Operating Expenses

         Sales and Marketing. Sales and marketing expenses include fees paid to
         -------------------
third-party advertising sales agents, sales support functions, travel and
related expenses and related salaries and benefits. Sales and marketing costs
are expensed in the period incurred. Sales and marketing expenses decreased 84%
to $17.7 million for the year ended December 31, 2001, of which $6.1 million was
related to fees paid for third-party advertising. The decrease resulted from the
shift in our business model to more targeted

                                      -27-

<PAGE>

marketing efforts and away from mass marketing of our memberships to consumers
to build our brand. For the year ended December 31, 2000, sales and marketing
expenses were $113.3 million, of which $61.5 million was related to fees paid
for third-party advertising, and $26.0 million was related to a charge taken in
connection with the warrants and rights granted to Ford and Delta as well as
with the beneficial conversion feature related to the issuance of preferred
stock to Ford. Sales and marketing expenses included a $0.1 million reversal of
deferred stock-based compensation amortization previously recognized for the
year ended December 31, 2001. Sales and marketing expenses include the
amortization of deferred stock-based compensation of $21.3 million for the year
ended December 31, 2000. In 2001, we shifted the focus of our sales and
marketing program to less costly enterprise and affinity channels and targeted
marketing. In 2002, we do not expect sales and marketing expenses to increase as
a percentage of revenues.

         General and Administrative. General and administrative expenses include
         --------------------------
payroll and related expenses for management and administrative personnel,
expenses related to maintaining member relations, facilities costs, professional
service fees, travel and other general corporate expenses. General and
administrative expenses decreased 12% to $87.0 million for the year ended
December 31, 2001, including approximately $2.2 million facilities expense and
$24.3 million paid to outside consultants, contractors and other professionals
for services rendered. For the year ended December 31, 2000, general and
administrative expenses were $99.4 million, including approximately $2.6 million
facilities expense and $32.8 million paid to outside consultants, contractors
and other professionals for services rendered. General and administrative
expenses included stock-based compensation amounting to $4.0 million for the
year ended December 31, 2001 and $21.8 million for the year ended December 31,
2000. We have been aggressively reducing our general and administrative
expenses. As a result, we do not anticipate a significant increase in general
and administrative expenses.

         Contract cancellation fee. For the year ended December 31, 2001, we
         -------------------------
paid $2.9 million to cancel contracts with two original equipment manufacturers,
which amount is treated as an operating expense.

         Other operating expenses. For the year ended December 31, 2001, other
         ------------------------
operating expenses consisted of a reimbursement of $6.6 million from Ford Motor
Company for the cost incurred in preparing for the international roll out of the
Ford Program, a credit adjustment to the loss reserve established in 1999 to
cover any potential exposure related to non-conforming computers held on our
behalf by our distributor in the amount of $4.4 million, and other operating
expenses of $1.1 million. For the year ended December 31, 2000, other operating
expenses consist of a credit adjustment of $8.0 million related to the
non-conforming computers noted above and other operating expenses of $1.1
million.

Net interest income (expense) and other expenses

Net interest income (expense) and other expenses consist of net interest income
earned on cash balances and short-term investments, interest expense related to
our credit facility with Chase Manhattan Bank, imputed interest on our
acquisition discount reserve and other miscellaneous expenses. Interest income
from cash equivalents and restricted cash decreased 48% to $1.6 million for the
year ended December 31, 2001 from $3.1 million for the year ended December 31,
2000, primarily because of lower average balances. Interest expense for the year
ended December 31, 2001 was $3.6 million, $1.4 million of which was attributable
to a discount related to the sale of receivable from Delta Airlines, Inc. and
$0.8 million of which was related to the Chase Manhattan Bank line of credit.
For the year ended December 31, 2000, interest expense was $2.1 million.

                                      -28-

<PAGE>

Minority interest

The minority interest in net loss of consolidated subsidiaries of $5.7 million
for the year ended December 31, 2001 represents 35% of the $16.4 million net
loss of the consolidated subsidiaries. Most of this loss was attributable to the
activities of People PC UK in Europe. For the year ended December 31, 2000, the
minority interest in net loss of consolidated subsidiaries of $3.2 million
represents 35% of the $9.2 million net loss of the consolidated subsidiaries.

Income Taxes

As a result of our operating losses and the uncertainties related to our ability
to recognize a benefit from our deferred tax assets, we have not recorded a
provision for income tax for the year ended December 31, 2001. We have provided
a full valuation allowance on our deferred tax assets, consisting primarily of
net operating loss carry-forwards of $105.2 million.

Net Loss

Net loss for the year ended December 31, 2001 decreased 68% to $74.9 million
from $236.0 million for the year ended December 31, 2000. Significant components
of net loss for the year ended December 31, 2001 were revenues exceeding cost of
revenues by $19.7 million, including the net amortization of acquisition
discount of $23.7 million, operating expenses of $98.0 million, and amortization
of deferred stock-based compensation of $4.0 million. For the year ended
December 30, 2000, $29.2 million of net loss was attributable to cost of
revenues exceeding revenues, including $27.5 million attributable to a provision
for acquisition discounts, $205.8 million was attributable to operating
expenses, $43.1 million was attributable to the amortization of deferred
stock-based compensation, and $26.0 million was attributable to a non-cash
charge taken in connection with the warrants and rights granted to Ford and
Delta.

Year ended December 31, 2000 compared the period from March 2, 1999
-------------------------------------------------------------------
(Inception) to December 31, 1999
--------------------------------

Revenues

         Membership Revenues Earned. Gross sales of memberships increased to
         --------------------------
$342.0 million for the year ended December 31, 2000 from $22.8 million for the
period from inception to December 31, 1999. These amounts included revenues
recognized from our online program of $6.4 million for the year ended December
31, 2000 and $0 for the period from inception to December 31, 1999. Because we
recognize Membership revenues over the 36-month term of the Membership, $287.5
million of gross sales of Memberships was deferred in the year ended December
31, 2000, while $21.5 million was deferred for the period from inception to
December 31, 1999. For the year ended December 31, 2000, Membership revenues
include the recognition of $7.6 million in revenues previously deferred. The
increase in gross Membership revenues was due to reporting a full year of
operations and the introduction of our enterprise programs in 2000.

         Other Revenues. Other revenues increased 1,359% to $32.1 million for
         --------------
the year ended December 31, 2000 from $2.2 million for the period from inception
to December 31, 1999. The increase in other revenues was due to reporting a full
year of operations and the introduction of our enterprise programs in 2000.

                                      -29-

<PAGE>

Cost of Revenues

         Cost of Membership Revenues Earned. Cost of gross Membership revenue
         ----------------------------------
increased to $363.4 million for the year ended December 31, 2000 from $24.5
million for the period from inception to December 31, 1999. Because we recognize
system hardware and software cost of revenues over the 36-month term of the
Membership, $277.3 million of gross Membership revenue was deferred in the year
ended December 31, 2000, while $18.9 million of gross Membership revenue was
deferred for the period from inception to December 31, 1999. For the year ended
December 31, 2000, $6.7 million of costs previously deferred was recognized. The
amount of Internet service provider expense in cost of Membership revenues is
$14.9 million and $345,000 for the year ended December 31, 2000 and the period
from inception to December 31, 1999. Cost of Membership revenues for the year
ended December 31, 2000 also includes a net provision of $27.5 million for the
amount by which our estimated current and future cost of Memberships exceeds the
related Membership revenue, an increase from $1.7 million for the period from
inception to December 31, 1999. The increase in cost of Membership revenues was
due to reporting a full year of operations and the costs associated with the
introduction of our enterprise programs in 2000.

         Cost of Other Revenues. The cost of other revenues increased to $26.6
         ----------------------
million for the year ended December 31, 2000 from $1.9 million for the period
from inception to December 31, 1999. The increase in cost of other revenues was
due to reporting a full year of operations and the introduction of our
enterprise programs in 2000.

Operating Expenses

         Sales and Marketing. Sales and marketing expenses increased 196.0% to
         -------------------
$113.3 million for the year ended December 31, 2000, of which $61.5 million was
related to fees paid for third-party advertising, and $26.0 million was related
to a charge taken in connection with the warrants and rights granted to Ford and
Delta as well as with the beneficial conversion feature related to the issuance
of preferred stock to Ford. For the period from inception to December 31, 1999,
sales and marketing expenses were $38.3 million, substantially all of which was
related to fees paid for third-party advertising. Sales and marketing expenses
include the amortization of deferred stock-based compensation of $21.3 million
and $134,000 for the year ended December 31, 2000 and the period from inception
to December 31, 1999. The increase in operating expenses was due to reporting a
full year of operations during which we significantly increased our Membership
base.

         General and Administrative. General and administrative expenses
         --------------------------
increased to $99.4 million for the period ended December 31, 2000 from $9.1
million in 1999. Significant general and administrative expenses were the cost
of maintaining member relations and approximately $10 million spent on expanding
our international operations. General and administrative expenses included
stock-based compensation amounting to $21.8 million and $2.9 million for the
year ended December 31, 2000 and the period from inception to December 31, 1999.
The increase in general and administrative expenses was due to reporting a full
year of operations during which we rapidly expanded our business.

         Other operating expenses. For the year ended December 31, 2000, other
         ------------------------
operating expenses consisted of an adjustment to a loss reserve established in
1999 to cover any potential exposure related to non-conforming computers held on
our behalf by our distributor in the amount of $8 million offset by other
operating expenses of $1.1 million. For the period from inception to December
31, 1999, other operating expenses consisted of a $15.6 million loss reserve
related to the non-conforming computers noted above.

                                      -30-

<PAGE>

Net interest income and other expenses

Net interest income and other expenses consist of net interest income earned on
cash balances and short-term investments, interest expense related to our credit
facility with Chase Manhattan Bank, imputed interest on our acquisition discount
reserve and other miscellaneous expenses. For the year ended December 31, 2000,
net interest income and other expenses consisted of $3.1 million of interest
income, $2.1 million of interest expense and $1.5 million of other expense. Net
interest income and other expenses for the period from inception to December 31,
1999 consisted of $400,000 of interest income.

Minority interest

The minority interest in net loss of consolidated subsidiaries of $3.2 million
for the year ended December 31, 2000 represents 35% of the $9.2 million net loss
of the consolidated subsidiaries formed in June 2000.

Income Taxes

As a result of our operating losses and the uncertainties related to our ability
to recognize a benefit from our deferred tax assets, we have not recorded a
provision for income tax for the year ended December 31, 2000. We have provided
a full valuation allowance on our deferred tax assets, consisting primarily of
net operating loss carry-forwards of $75 million.

Cumulative Effect of Accounting Change

In accordance with the FASB's Emerging Issues Task Force ("EITF") Issue No.
98-5, "Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios," and SEC requirements, we have
recorded an additional $3.8 million in connection with the Beneficial Conversion
Feature related to the issuance of series C preferred stock to Ford Motor
Company Inc., as the original calculation was based on the proceeds received
rather than the proceeds allocated to the series C preferred stock for the year
ended December 31, 2000.

Net Loss

Net loss for the year ended December 31, 2000 increased to $236.0 million from
$66.3 in the period from inception to December 31, 1999. In the year ended
December 31, 2000, $29.2 million of net loss was attributable to cost of
revenues exceeding revenues, and $205.8 million was attributable to operating
expenses, of which $43.1 million was attributable to amortization of deferred
stock-based compensation, and $26.0 million to the warrants and rights granted
to Ford and Delta, while in the period from inception to December 31, 1999, $3.6
million of net loss was attributable to cost of revenues exceeding revenues, and
$63.1 million was attributable to operating expenses, of which $3.0 million was
attributable to amortization of deferred stock-based compensation.

Liquidity

Our consolidated financial statements have been prepared assuming that we will
continue as a going concern. We have incurred substantial losses and negative
cash flows from operations since inception. At December 31, 2001, we had a
net capital deficiency of $80.4 million. Based upon current Membership levels,
our current working capital and expected cash flows to be generated from
operations may not be sufficient to fund operations during the next 12 months.

On a consolidated basis as of December 31, 2001, our sources of liquidity
consisted of $24.7 million in cash and cash equivalents, including $2.2 million
in restricted cash. Our net accounts receivable balance as of December 31, 2001
was $6.1 million. Of these amounts, $4.3 million in cash and $0.4 million in
accounts receivable balance are held by our subsidiary, PeoplePC U.K. Limited.
Due to legal and other constraints, some or all of the cash assets held by
PeoplePC U.K. Limited may not be available to fund our United States operations.

We have plans to acquire additional revenue-generating PeoplePC Online members
through a combination of private label programs, wholesale arrangements, or
acquisitions of members from other Internet service providers. There is no
guarantee that we will be able to increase our Membership levels.



                                      -31-

<PAGE>

If we are unable to increase Membership to generate sufficient operating
revenues, further capital investment or other financing will be needed to fund
operations. There is no guarantee that additional financing will be available on
favorable terms, or at all. We may have to sell stock at prices lower than those
paid by existing stockholders, and perhaps lower than existing market prices,
resulting in dilution of existing stockholders. We may have to sell stock or
bonds with rights superior to rights of holders of common stock. Also, any debt
financing might involve restrictive covenants that would limit our operating
flexibility. If we are not able to raise additional funds, we may be required to
curtail or discontinue some or all of our operations.

We have already taken steps to improve liquidity, including the series B
preferred stock financing obtained during December 2001, targeting sales and
marketing expenditures on channels with a low acquisition cost per member,
consolidation of sales offices and a realignment and reduction of our workforce.
We can reduce expenses further through additional work force reductions and
other cost cutting measures.

These factors raise substantial doubt about our ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

Net cash used in operating activities was $94.0 million for the year ended
December 31, 2001. Cash provided by operating activities for this period
consisted primarily of Membership fees. Cash used in operating activities for
these periods consisted primarily of advertising expenses, the cost of providing
Internet access, customer support, and other Membership services, general and
administrative expenses,

                                      -32-

<PAGE>

costs of our computer systems and peripherals, payroll and other
employee-related expenses, and a decrease in accrued liabilities.

Net cash provided by investing activities was $20.5 million for the year ended
December 31, 2001. Net cash provided by investing activities for this period
consisted primarily of a decrease of $20.8 million in accounts collateralizing
letter of credit agreements securing future inventory.

Net cash provided by financing activities was $30.8 million for the year ended
December 31, 2001. Net cash received from financing activities for this period
consisted of $14.5 million for the sale of Delta Airlines, Inc. receivables,
$21.2 million proceeds from the issuance of series B preferred stock, and a $4.7
million repayment of borrowings under our line of credit.

We have incurred substantial losses and negative cash flow from operations since
inception. As of December 31, 2001, we had a net capital deficiency of $80.4
million.

Any projections of future cash needs and cash flows are subject to substantial
uncertainty. We are also subject to unanticipated developments in the short
term, such as the entry into agreements that require large cash payments,
further deterioration of the Internet industry or the acquisition of businesses
with negative cash flows, which may necessitate additional financing. We may
seek to raise additional funds through public or private equity or debt,
strategic relationships or other arrangements in order to fund our operations
and capital expenditures; take advantage of favorable business opportunities;
acquire complementary businesses or technologies; develop and upgrade our
technology infrastructure; develop new product and service offerings; take
advantage of favorable conditions in capital markets; or respond to competitive
pressures.

Except where we contract directly with equipment manufacturers, we rely on
Ingram Micro to distribute computer systems and peripherals from our suppliers
to our customers. Our computer suppliers ship their products directly to Ingram
Micro's distribution centers around the country. When a customer application is
approved, products are picked from inventory, packed and shipped to our
customers from the distribution center closest to the shipping address. Ingram
Micro purchases inventory on our behalf based on sales projections made by us.
We are obligated to purchase inventory held by Ingram Micro purchased on our
behalf. Our agreement with Ingram Micro expired on February 28, 2001. The term
of the agreement has not been extended. However, the parties currently continue
their business relationship. At December 31, 2001, we had approximately $1.6
million noncancelable purchase commitments with Ingram Micro. With the movement
of our business model away from Membership Packages involving the sale of
computers, we expect hardware distribution arrangements to be of diminishing
importance.

In the ordinary course of our business we make commitments to purchase computers
in order to make timely deliveries to new Members as they sign up for our
Membership Package. However, we normally pay for the computers no sooner than
two days after the time of shipment to the member, although we are required to
maintain a deposit at Ingram Micro, adjusted weekly, equal to approximately 25%
of outstanding purchase orders and unshipped inventory. On December 31, 2001,
this deposit amounted to approximately $0.4 million.

                                      -33-

<PAGE>

The following table summarizes our contractual obligations at December 31, 2001,
and the effect such obligations are expected to have on our liquidity and cash
flow in the future periods:

<TABLE>
<CAPTION>
As of December 31, 2001                              Total       Less Than 1 Year    1-3 Years      After 3 Years
<S>                                               <C>              <C>              <C>              <C>
Contractual obligations:
Non-cancelable operating lease obligations ....   $ 7,016,000      $ 2,269,000      $ 4,467,000      $   280,000
Commercial commitments for Internet service ...    41,000,000        5,000,000       19,000,000       17,000,000
Commercial commitments for computers ..........     1,700,000        1,700,000               --               --
                                                  -----------      -----------      -----------      -----------
Total Contractual cash obligations ............   $49,716,000      $ 8,969,000      $23,467,000      $17,280,000
                                                  -----------      -----------      -----------      -----------
</TABLE>

During 1999, Ingram Micro purchased on our behalf approximately 29,000 computers
from Toshiba, which proved to be non-conforming. We recorded a provision of
$15.6 million relating to the cost of resolving any potential dispute over such
non-conforming computers. During the year 2000, we reached an agreement with
Ingram Micro to liquidate the non-conforming computers and to split the parties'
combined losses equally. As a result of this agreement, we reduced the provision
by $8 million in December 2000. During 2001, we reached a final settlement with
Ingram Micro and paid our share of the loss and reversed the remaining $1.0
million in the provision because we believe that the probability of any future
claim from the OEM is remote.

In June 2000, we formed a European subsidiary, PeoplePC Europe N.V. (PeoplePC
Europe), a Netherlands corporation. We and PeoplePC Europe entered into
financing and related agreements with @viso Limited, a partnership of SOFTBANK
Corp., a Japanese company, and Vivendi Universal S.A., a French corporation. In
the financing, PeoplePC Europe received $50.0 million from @viso payable over a
two month period beginning on the closing date in exchange for 35% of PeoplePC
Europe's outstanding capital stock in the form of convertible preferred stock,
and we retained 65% of PeoplePC Europe's outstanding capital stock in the form
of common stock.

We received our 65% interest in exchange for our grant of an exclusive license
to use and exploit our technology and brand in Europe. We have retained the
rights to our technology and brand in the rest of the world. The financing
closed in July 2000. In addition, PeoplePC Europe issued a warrant to acquire
convertible preferred stock to SOFTBANK Capital Partners LP representing 5% of
PeoplePC Europe's shares outstanding as of the closing of the financing, this
warrant was amended on May 30, 2001 in connection with the execution of the Put
Option Agreement described below. PeoplePC Europe has the exclusive right and
obligation to fulfill, market and sell PeoplePC products to and receive buyer's
club revenues from European members including the European employees of
enterprises such as Ford and Delta. We have comparable rights worldwide,
including with respect to any enterprise agreement entered into by PeoplePC
Europe with a European multinational operation. PeoplePC Europe will pay us, and
we will pay PeoplePC Europe $100 for each member acquired in our respective
territories as a result of the other party entering into an enterprise
agreement.

Under a Put Option Agreement signed on May 30, 2001, @viso is entitled to sell
all or a portion of its shares of PeoplePC Europe to us in exchange for PeoplePC
stock. Under this agreement, @viso is entitled to receive between 13.8 million
and 29.1 million shares of PeoplePC common stock based on a formula and the date
of exchange. SOFTBANK Capital Partners LP is entitled to exercise its amended
warrant to purchase convertible preferred stock in PeoplePC Europe. Once the
amended warrant is exercised, SOFTBANK Capital Partners LP will be entitled to
sell all or a portion of its shares of PeoplePC Europe to us in exchange for
PeoplePC stock. Under this arrangement, SOFTBANK Capital Partners LP will be
entitled to receive between 1.9 million and 3.5 million shares of PeoplePC
capital stock based on a formula and the date of exchange.

As a result of executing the Put Option Agreement, we acquired additional
control over PeoplePC Europe, free of certain restrictions contained in the
PeoplePC Europe Articles of Association and a related shareholder agreement. In
particular, the @viso representatives to the board of directors of PeoplePC
Europe resigned and we acquired control of the board of directors of PeoplePC
Europe. In addition, PeoplePC Europe has the power to make loans to us, free of
pre-existing structural and contractual

                                      -34-

<PAGE>

restrictions, thus allowing use of PeoplePC Europe assets for the combined
benefit of the two companies. PeoplePC Europe has made five loans totaling $35.5
million to fund our United States' operations during fiscal 2001. PeoplePC
Europe's remaining cash assets (which are consolidated in our financial
statements for purposes of this report) may be unavailable for purposes of
funding our United States' operations and for general corporate purposes.

In July 2001, our credit agreement with The Chase Manhattan Bank providing for a
$50.0 million revolving credit facility expired. The facility was to be used in
connection with the financing of receivables owed to us by Ford. We paid fees to
the lender for the loan commitment and for underwriting and structuring. As of
December 31, 2001, there was no balance outstanding in regard to this credit
facility.

Under our typical consumer financing arrangements with MBNA, we receive promptly
a lump sum payment from MBNA that completely pays for the purchase price of the
Membership. We generally receive this payment from MBNA before we are obligated
to pay our computer system suppliers. Therefore, these arrangements enable us to
use a relatively small amount of capital because the number of computers
purchased and not paid for or financed at any given time will be only a fraction
of the total purchase commitment that will typically extend over several months.
Our enterprise connectivity programs typically provide for payment by the
enterprise on a monthly or semi-monthly basis. Payments due from employees are
typically collected at the time the order is placed with the distributor.

Recent Accounting Pronouncements

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 addresses significant issues
relating to the implementation of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and develops a
single accounting method under which long-lived assets that are to be disposed
of by sale are measured at the lower of book value or fair value less cost to
sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and its provisions are to be applied prospectively. We are
currently assessing the impact of SFAS No. 144 on our financial position and
results of operations.

In November 2001 the Emerging Issues Task Force ("EITF") issued EITF 01-09,
Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products, ("EITF 01-09"). We are currently evaluating the impact of
this pronouncement on our consolidated statement of operations or consolidated
balance sheet and will adopt EITF 01-09 in 2002.

Effective January 1, 2001, we adopted FAS 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. This statement establishes a new
standard for accounting for derivatives and hedging activities. Under FAS 133,
all derivatives must be recognized as assets and liabilities and measured at
fair value. The adoption of FAS 133 did not have a material impact on our
consolidated statement of operations or consolidated balance sheet.

Effective January 1, 2001, the we adopted Staff Accounting Bulletin No. 101,
Revenue Recognition in financial Statements, as amended ("SAB 101"), issued by
the SEC in December 1999. The adoption of SAB 101 did not have a material impact
on our consolidated statement of operations or consolidated balance sheet.

                                      -35-

<PAGE>

                        PEOPLEPC INC. AND SUBSIDIARIES
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

                                                                            Page
                                                                            ----

Report of Independent Accountants.............................................36
Consolidated Balance Sheets...................................................37
Consolidated Statements of Operations and Comprehensive Loss..................38
Consolidated Statements of Mandatorily Redeemable Convertible
   Preferred Stock and Stockholders' Deficit..................................39
Consolidated Statements of Cash Flows.........................................43
Notes to Consolidated Financial Statements....................................44
Report of Independent Accountants on Financial Statements Schedule............65
Financial Statement Schedule II - Valuation and Qualifying Accounts...........66




REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Stockholders of PeoplePC Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive loss, of mandatorily
redeemable convertible preferred stock and stockholders' deficit and of cash
flows present fairly, in all material respects, the financial position of
PeoplePC Inc. and its subsidiaries, at December 31, 2001 and 2000 and the
results of their operations and their cash flows for the years ended December
31, 2001 and 2000 and the period from March 2, 1999 (date of inception) to
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America. These consolidated financial statements are the
responsibility of PeoplePC Inc.'s management; our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We
conducted our audits of these financial 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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has negative working capital and a net capital deficiency
that raise substantial doubt as to its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.


/s/ PricewaterhouseCoopers LLP

April 1, 2002 San Francisco, California

                                      -36-

<PAGE>

                              PEOPLEPC INC. AND SUBSIDIARIES
                                CONSOLIDATED BALANCE SHEET
                           (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                          December 31,

                                                                        2001         2000
                                                                     ---------    ---------
                               ASSETS
                               ------
<S>                                                                  <C>          <C>
Current Assets:
    Cash and cash equivalents ....................................   $  22,497    $  65,493
    Restricted cash ..............................................       2,181       22,954
    Accounts receivable, net of allowance for doubtful accounts of
    $665 and $3,500 as of December 31, 2001 and 2000,
    respectively .................................................       4,254       41,864
    Prepaid expenses and other current assets ....................       2,065        2,177
                                                                     ---------    ---------
    Total current assets .........................................      30,997      132,488
Accounts receivable, long-term ...................................       1,836       11,589
Retained interest in accounts receivable .........................       2,070            0
Property and equipment, net ......................................       5,396        7,688
Capitalized web site development costs, net ......................         243          674
Deposits and other assets ........................................         727          592
                                                                     ---------    ---------
    Total assets .................................................   $  41,269    $ 153,031
                                                                     =========    =========
LIABILITIES, MINORITY INTEREST, MANDATORILY
   REDEEMABLE CONVERTIBLE PREFERRED STOCK
         AND STOCKHOLDERS' DEFICIT
-------------------------------------------
Current liabilities:
    Accounts payable .............................................   $   8,741    $  23,745
    Accrued and other liabilities ................................       9,188       39,193
    Borrowing under line of credit ...............................           0        5,176
    Current portion of deferred revenue, net .....................      21,082       19,047
                                                                     ---------    ---------
    Total current liabilities ....................................      39,011       87,161
Other long term liabilities ......................................         141            0
Deferred revenue, net ............................................      20,964       28,121
                                                                     ---------    ---------
    Total liabilities ............................................      60,116      115,282
                                                                     ---------    ---------
Commitments and contingencies (Note 6)
Minority interest in consolidated subsidiaries ...................      40,313       46,700
                                                                     ---------    ---------
Mandatorily redeemable convertible preferred stock ...............      21,191            0
                                                                     ---------    ---------
Stockholders' deficit:
    Common stock: $0.0001 par value; 500,000 shares authorized;
    115,466 and 115,159 shares issued, and 113,944 and 114,905
    shares outstanding at December 31, 2001 and 2000,
    respectively .................................................          11           11
    Additional paid-in capital ...................................     342,111      350,884
    Common Stock in treasury at cost, 1,522 and 254 shares at
    December 31, 2001 and 2000, respectively .....................        (502)        (280)
    Deferred stock-based compensation ............................      (4,903)     (38,995)
    Receivable from stockholder ..................................        (116)         (73)
    Accumulated other comprehensive loss .........................        (325)           0
    Accumulated deficit ..........................................    (416,627)    (320,498)
                                                                     ---------    ---------
Total stockholders' deficit ......................................     (80,351)      (8,951)
                                                                     ---------    ---------
Total liabilities, minority interest, mandatorily redeemable
    convertible preferred stock and stockholders' deficit ........   $  41,269    $ 153,031
                                                                     =========    =========
  The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                      -37-

<PAGE>

<TABLE>
<CAPTION>
                                       PEOPLEPC INC. AND SUBSIDIARIES
                         CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
                                    (in thousands, except per share data)
                                                                                                Period from
                                                                                                  March 2,
                                                                                               1999 (Date of
                                                                                               Inception) to
                                                                       Year Ended December 31,  December 31,
                                                                          2001         2000         1999
                                                                       ---------    ---------    ---------

<S>                                                                    <C>          <C>          <C>
Membership revenues earned .........................................   $ 165,836    $  58,033    $   1,255
Other revenues .....................................................       8,142       32,128        2,188
                                                                       ---------    ---------    ---------
        Total revenues .............................................     173,978       90,161        3,443
                                                                       ---------    ---------    ---------
Cost of membership revenues earned .................................     147,524       92,758        5,129
Cost of other revenues .............................................       6,788       26,562        1,905
                                                                       ---------    ---------    ---------
        Total cost of revenues .....................................     154,312      119,320        7,034
                                                                       ---------    ---------    ---------
Gross profit (loss) ................................................      19,666      (29,159)      (3,591)
                                                                       ---------    ---------    ---------
Operating expenses:
    Sales and marketing (inclusive of stock-based compensation
      of $(45), $21,266 and $134 for the years ended December
      31, 2001, and 2000 and the period ended December 31, 1999,
      respectively) ................................................      17,733      113,250       38,413
General and administrative (inclusive of stock-based
  compensation of $3,995, $21,847, and $2,905 for the years
  ended December 31, 2001 and 2000 and the period ended
  December 31, 1999, respectively) .................................      86,981       99,409        9,102
Contract cancellation fees .........................................       2,876            0            0
Other operating (income) expenses ..................................      (9,621)      (6,900)      15,550
                                                                       ---------    ---------    ---------
        Total operating expenses ...................................      97,969      205,759       63,065
                                                                       ---------    ---------    ---------
Loss from operations ...............................................     (78,303)    (234,918)     (66,656)
Net interest (income) expense and other expenses ...................      (1,958)        (502)         405
Income tax expenses ................................................        (405)           0            0
Minority interest in net loss of consolidated subsidiaries .........       5,728        3,226            0
                                                                       ---------    ---------    ---------
Loss before cumulative effect of accounting change .................     (74,938)    (232,194)     (66,251)
Cumulative effect of accounting change, net of tax .................           0       (3,844)           0
                                                                       ---------    ---------    ---------
        Net loss ...................................................     (74,938)    (236,038)     (66,251)
Dividend related to beneficial conversion feature of preferred stock     (21,191)     (18,209)           0
                                                                       ---------    ---------    ---------
        Net loss attributable to common stockholders ...............     (96,129)    (254,247)     (66,251)
Foreign translation loss ...........................................        (325)           0            0
                                                                       ---------    ---------    ---------
Comprehensive loss .................................................   $ (96,454)   $(254,247)   $ (66,251)
                                                                       ---------    ---------    ---------
Basic and diluted net loss per share
      Loss before cumulative effect of accounting change ...........   $   (0.86)   $   (4.09)   $   (2.04)
      Cumulative effect of accounting change, net of tax ...........       (0.00)       (0.06)       (0.00)
                                                                       ---------    ---------    ---------
        Net loss per share .........................................   $   (0.86)   $   (4.15)   $   (2.04)
                                                                       =========    =========    =========
Shares used in computing basic and diluted net loss per share ......     111,825       61,218       32,400

        The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                      -38-

<PAGE>

<TABLE>
<CAPTION>
                                                   PEOPLEPC INC. AND SUBSIDIARIES
              CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
                                                           (in thousands)

                                    |                                                                  Accumu-
                                    |                                              Deferred  Receiv-   lated
                   Mandatorily      |               Additional                      Stock-    able     Other                Total
                    Redeemable      |                Paid-In    Common Stock        based     from    Compre- Accumu-       Stock-
                   Convertible      |                Capital   in Treasury at      Compen-   Stock-   hensive  lated       holders'
                 Preferred Stock    |  Common Stock                 cost            sation    holders   loss   Deficit      Deficit
                  Shares  Amount    | Shares  Amount            Shares  Amount
<S>                  <C>      <C>      <C>      <C> <C>          <C>       <C>       <C>       <C>     <C>     <C>        <C>
Issuance of                         |
  common stock                      |  31,440   $3  $       5                        $ --      $ --    $ --    $ --       $       8
Issuance of                         |
  common stock                      |
  from exercise of                  |
  options                           |   2,320              29                                                                    29
Issuance of Series                  |
  A Mandatorily                     |
  Redeemable                        |
  Convertible                       |
  Preferred Stock in                |
  May 1999, net of                  |
  issuance costs of                 |
  $21                24,000   2,979 |
Issuance of Series                  |
  B mandatorily                     |
  redeemable                        |
  convertible                       |
  preferred stock in                |
  October 1999, net                 |
  of issuance costs                 |
  of $40             29,817  64,960 |
Deferred stock-                     |
  based                             |
  compensation                      |                  21,679                        (21,679)                                     0
Stock-based                         |
  compensation                      |
  expense                           |                                                  3,039                                  3,039
Net loss                            |                                                                           (66,251)    (66,251)
                                    |
Balance at                          |
  December 31,                      |
  1999               53,817  67,939 |  33,760    3     21,713         0          0   (18,640)     0       0     (66,251)    (63,175)
                                    |
Issuance of Series                  |
  C mandatorily                     |
  redeemable                        |
  convertible                       |
  preferred stock in                |
  April 2000, net of                |
  issuance cost of                  |
  $54                 9,468  49,615 |
Beneficial                          |
  conversion                        |
  feature related to                |
  the issuance of                   |
  Series C                          |
  Mandatorily                       |
  Redeemable                        |
  Convertible                       |
  Preferred Stock           (18,209)|                  18,209                                                                18,209
</TABLE>

                                      -39-

<PAGE>

<TABLE>
<CAPTION>
                                    |                                                                 Accumu-
                                    |                                              Deferred  Receiv-   lated
                    Mandatorily     |               Additional                      Stock-    able     Other              Total
                     Redeemable     |                Paid-In    Common Stock        based     from    Compre- Accumu-     Stock-
                    Convertible     |                Capital   in Treasury at      Compen-   Stock-   hensive  lated     holders'
                   Preferred Stock  | Common Stock                 cost            sation    holders   loss   Deficit    Deficit
                  Shares    Amount  |Shares  Amount            Shares  Amount
                                    |
<S>                  <C>     <C>       <C>       <C>   <C>        <C>       <C>        <C>      <C>     <C>      <C>       <C>
Dividend related                    |
  to beneficial                     |
  conversion                        |
  feature related to                |
  the issuance of                   |
  Series C                          |
  mandatorily                       |
  redeemable                        |
  convertible                       |
  referred stock            18,209  |                                                                           (18,209)  (18,209)
Exercise of                         |
  common stock                      |
  options                           |   8,394    1      3,141                         (3,142)                                   0
Payment net on                      |
  receivable from                   |
  stockholders for                  |
  purchase of                       |
  common stock                      |                                                  2,981                                2,981
Repurchase of                       |
  unvested common                   |
  stock                             |    (685)            (88)                            88                                    0
Deferred stock-                     |
  based                             |
  compensation                      |                  63,468              (63,468)                                             0
Stock-based                         |
  compensation                      |
  expense                           |                                       43,113                                         43,113
Issuance of                         |
  common stock                      |
  warrants to Delta                 |
  Air Lines Inc                     |                   1,498                                                               1,498
Beneficial                          |
  conversion                        |
  feature related to                |
  issuance of                       |
  preferred stock to                |
  Ford Motor                        |
  Company                           |                  17,944                                                              17,944
Issuance of                         |
  common stock                      |
  warrants to Ford                  |
  Motor Company                     |                   6,113                                                               6,113
Issuance of                         |
  common stock                      |
  rights to Ford                    |
  Motor Company                     |                     515                                                                 515
Proceed of the                      |
  initial Public                    |
  offering, net of                  |
  issuance cost of                  |
  $7,071                            |   8,500    1     77,929                                                              77,930
Exercise of                         |
  common stock                      |
  Warrants issued                   |
  to Ford Motor                     |
  Company                           |   1,905    0     19,050                                                              19,050
Conversion of                       |
  Series A                          |
  mandatorily                       |
  redeemable                        |
  convertible                       |
  preferred stock                   |
  into common                       |
  stock             (24,000) (2,979)|  24,000    2      2,977                                                               2,979
                                    |
Conversion of                       |
  Series B                          |
  mandatorily       (29,817)(64,960)|  29,817    3     64,957                                                              64,960
</TABLE>

                                      -40

<PAGE>

<TABLE>
<CAPTION>
                                     |                                                                    Accumu-
                                     |                                                 Deferred  Receiv-   lated
                   Mandatorily       |                  Additional                      Stock-    able     Other              Total
                    Redeemable       |                   Paid-In    Common Stock        based     from    Compre- Accumu-    Stock-
                   Convertible       |                   Capital   in Treasury at      Compen-   Stock-   hensive  lated    holders'
                 Preferred Stock     |    Common Stock                 cost            sation    holders   loss   Deficit    Deficit
                  Shares  Amount     |   Shares  Amount            Shares  Amount
                                     |
<S>                  <C>      <C>        <C>       <C>   <C>           <C>        <C>    <C>       <C>   <C>   <C>         <C>
redeemable                           |
  convertible                        |
  preferred stock                    |
  into common                        |
  stock                              |
  Conversion of                      |
  Series C                           |
  mandatorily                        |
  redeemable                         |
  convertible                        |
  preferred stock                    |
  into common                        |
  stock              (9,468) (49,615)|      9,468    1     49,614                                                            49,615
Purchase of                          |
  treasury shares                    |                                 (254)      (280)                                        (280)
Additional                           |
  beneficial                         |
  conversion                         |
  feature related to                 |
  issuance of                        |
  Preferred Stock to                 |
  Ford Motor                         |
  Company                            |                      3,844                                                             3,844
Net loss                             |                                                                         (236,038)   (236,038)
                                     |
Balance at                           |
  December 31,                       |
  2000                    0        0 |    115,159   11    350,884      (254)      (280)  (38,995)   (73)       (320,498)     (8,951)
                                     |
Issuance of                          |
  common stock                       |
  from exercise of                   |
  options                            |        229             145                                  (106)                         39
Issuance of                          |
  common stock                       |
  under the                          |
  employee stock                     |
  purchase plan                      |         78              33                                                                33
Payments from                        |
  stockholders                       |                                                               63                          63
Issuance of Series                   |
  B mandatorily                      |
  redeemable                         |
  convertible                        |
  preferred stock in                 |
  December 2001,                     |
  net of issuance                    |
  cost of $684        4,375   21,191 |
 Beneficial                          |
  conversion                         |
  feature related to                 |
  the issuance of                    |
  Series B                           |
  mandatorily                        |
  redeemable                         |
  convertible                        |
  preferred stock            (21,191)|                     21,191                                                            21,191
Dividend related                     |
  to beneficial                      |
  conversion                         |
  feature related to                 |
  the issuance of                    |
  Series B                           |
  mandatorily                        |
  redeemable                         |
  convertible                 21,191 |                                                                          (21,191)    (21,191)
</TABLE>

                                      -41-

<PAGE>

<TABLE>
<CAPTION>
                                                                                                      Accumu-
                                   |                                               Deferred  Receiv-   lated
                   Mandatorily     |                Additional                      Stock-    able     Other                Total
                    Redeemable     |                 Paid-In    Common Stock        based     from    Compre- Accumu-       Stock-
                   Convertible     |                 Capital   in Treasury at      Compen-   Stock-   hensive  lated       holders'
                 Preferred Stock   |  Common Stock                 cost            sation    holders   loss   Deficit      Deficit
                  Shares  Amount   | Shares  Amount            Shares  Amount
                                   |
<S>                   <C>     <C>     <C>       <C>   <C>        <C>          <C>     <C>      <C>     <C>     <C>          <C>
  referred stock                   |
Purchase of                        |
  treasury shares                  |                             (1,268)      (222)                                            (222)
Translation loss                   |
  on foreign                       |
  operations                       |                                                                   (325)                   (325)
Reversal of                        |
  deferred stock-                  |
  based                            |
  compensation                     |
  upon termination                 |
  of employment                    |                  (30,142)                        30,142                                      0
Amortization of                    |
  deferred stock-                  |
  based                            |
  compensation                     |                                                   3,950                                  3,950
Net loss                           |                                                                            (74,938)    (74,938)
                                   |
Balance at                         |
  December 31,                     |
  2001               4,375 $21,191 |  115,466  $11   $342,111    (1,522)     $(502)  $(4,903)  $(116) $(325)  $(416,627)   $(80,351)
</TABLE>

                                      -42-

<PAGE>

                                   PEOPLEPC INC. AND SUBSIDIARIES
                                CONSOLIDATED STATEMENT OF CASH FLOWS
                                           (in thousands)

<TABLE>
<CAPTION>
                                                                                       Period from
                                                                                      March 2, 1999
                                                                                        (Date of
                                                                                      Inception) to
                                                              Year Ended December 31,  December 31,
                                                                 2001         2000         1999
                                                              ---------    ---------    ---------
<S>                                                           <C>          <C>          <C>
Cash flows from operating activities:
Net loss ..................................................   $ (74,938)   $(236,038)   $ (66,251)
Adjustments to reconcile net loss to net cash used in
    operating activities:
    Depreciation and amortization .........................       2,573        1,198           40
    Amortization of deferred stock-based compensation .....       3,950       43,113        3,039
    Loss on sale of accounts receivable ...................       1,380           --           --
    Net increase in allowance for doubtful accounts .......       6,165        3,500           --
    Beneficial conversion feature related to issuance of
      preferred stock to Ford Motor Company ...............          --       17,944           --
    Additional beneficial conversion feature related to
      issuance of preferred stock to Ford Motor Company ...          --        3,844           --
    Issuance of common stock warrants and rights ..........          --        8,126           --
    Minority interest in net loss of consolidated
      subsidiaries ........................................      (5,728)      (3,226)          --
    Changes in assets and liabilities:
        Accounts receivable ...............................      15,602      (45,089)        (311)
        Prepaid expenses and other current assets .........         112       (2,111)         (66)
        Accounts receivable, long term ....................       9,753      (11,589)          --
        Deposits and other assets .........................        (135)        (401)        (191)
        Accounts payable ..................................     (15,004)      13,941        9,766
        Accrued liabilities ...............................     (30,663)       5,410       33,783
        Deferred revenues .................................      (5,122)      42,847        4,321
        Retained interest in accounts receivable ..........      (2,070)          --           --
        Other .............................................         140         (236)         236
                                                              ---------    ---------    ---------
        Net cash used in operating activities .............     (93,985)    (158,767)     (15,634)
                                                              ---------    ---------    ---------
Cash flows from investing activities:
    Restricted cash .......................................      20,773       (7,204)     (15,750)
    Purchase of property and equipment ....................        (303)      (7,901)        (323)
    Capitalized web site development costs ................          --         (762)        (161)
                                                              ---------    ---------    ---------
        Net cash provided by (used in) investing activities      20,470      (15,867)     (16,234)
                                                              ---------    ---------    ---------
Cash flows from financing activities:
    Sales of accounts receivable ..........................      14,463           --           --
    Proceeds from issuance of common stock, net ...........         135        2,981           37
    Proceeds from issuance of Series A preferred stock (net
    of issuance costs of $21) .............................          --           --        2,979
    Proceeds from issuance of a note ......................          --           --       10,000
    Proceeds from issuance of Series B preferred stock (net
    of issuance costs of $683 and $40) ....................      21,191           --       54,960
    Repurchase of common stock ............................        (222)        (280)          --
    Proceeds from initial public offering (net of issuance
    cost of $7,071) .......................................          --       77,929           --
    Borrowings under line of credit (net of issuance cost
    of $1,087) ............................................          --        4,724           --
    Proceeds from minority investment in PeoplePC Europe ..          --       50,000           --
    Proceeds from issuance of Series C preferred stock
    (net of issuance cost of $54) .........................          --       49,615           --
    Exercise of warrants for common stock .................          --       19,050           --
    Payments on borrowings under a line of credit .........      (4,723)          --           --
                                                              ---------    ---------    ---------
    Net cash provided by financing activities .............      30,844      204,019       67,976
                                                              ---------    ---------    ---------
Effect of exchange rate changes on cash and cash
    equivalents ...........................................        (325)          --           --
                                                              ---------    ---------    ---------
Net increase (decrease) in cash and cash equivalents ......     (42,996)      29,385       36,108
Cash and cash equivalents at beginning of period ..........      65,493       36,108           --
                                                              ---------    ---------    ---------
Cash and cash equivalents at end of period ................   $  22,497    $  65,493    $  36,108
                                                              =========    =========    =========
Supplemental non cash investing and financing
    activity:
    Conversion of preferred stock into common stock .......   $      --    $ 117,554    $      --
    Beneficial conversion feature, preferred stock ........      21,191       18,209           --
    Conversion of a note into Series B preferred stock ....          --           --       10,000
     Deferred stock-based compensation ....................                   63,468       21,679
     Reversal of deferred stock-based compensation upon
     termination of employment ............................      30,142
    Receivable from stockholders ..........................         106           73           --

     The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                      -43-

<PAGE>

                         PEOPLEPC INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business and Summary of Significant Accounting Policies
-------------------------------------------------------------------------

Description of Business

PeoplePC Inc. (the "Company" or "PeoplePC") provides a membership package that
includes a brand-name computer, unlimited Internet access, customer support and
an in-home warranty. Members also have the opportunity to benefit from discounts
and special offers from merchants who participate in PeoplePC's member commerce
program (formerly referred to as the buyer's club). The Company also operates
PeoplePC's Online program, which provides consumers who do not wish to purchase
a computer with all of the other benefits of a PeoplePC membership for a monthly
fee. The Company was incorporated in Delaware on March 2, 1999.

Liquidity

The Company's  consolidated  financial statements have been prepared assuming
that it will continue as a going concern. The Company has incurred  substantial
losses and negative cash flows from operations since its inception.  At December
31, 2001, the Company had a net capital  deficiency of $80.4 million.  Based
upon current  Membership  levels,  the Company's current working capital and
expected cash flows to be generated from operations may not be sufficient to
fund  operations  during the next 12 months.

On a  consolidated  basis as of December 31, 2001,  the  Company's  sources of
liquidity  consisted of $24.7  million in cash and cash equivalents,  including
$2.2 million in restricted  cash.  The Company's net accounts  receivable
balance as of December 31, 2001 was $6.1  million.  Of these  amounts,  $4.3
million in cash and $0.4  million in accounts  receivable  balance are held by
the  Company's subsidiary,  PeoplePC U.K. Limited.  Due to legal and other
constraints,  some or all of the cash assets held by PeoplePC U.K. Limited
may not be available to fund the Company's United States operations.

The Company has plans to acquire additional revenue-generating PeoplePC Online
members through a combination of private label programs, wholesale arrangements,
or acquisitions of members from other Internet service providers. There is no
guarantee that the Company will be able to increase its Membership levels.



                                      -44-

<PAGE>

If the Company is unable to increase  Membership to generate  sufficient
operating  revenues,  further capital  investment or other  financing  will be
needed to fund  operations.  There is no guarantee  that  additional  financing
will be available on favorable terms, or at all. The Company may have to sell
stock at prices lower than those paid by existing  stockholders,  and perhaps
lower than  existing  market  prices,  resulting in dilution of existing
stockholders.  The Company may have to sell stock or bonds  with  rights
superior  to  rights  of  holders  of common  stock.  Also,  any debt  financing
might  involve restrictive  covenants that would limit the Company's  operating
flexibility.  If the Company is not able to raise additional funds, the Company
may be required to curtail or discontinue some or all of its operations.

The Company has already taken steps to improve  liquidity,  including the Series
B preferred stock  financing  obtained during December 2001,  targeting sales
and marketing  expenditures on channels with a low acquisition  cost per member,
consolidation of sales offices and a realignment and reduction of its workforce.
The Company can reduce expenses  further  through  additional work force
reductions and other cost cutting measures.

These factors raise  substantial  doubt about the Company's  ability to continue
as a going  concern.  The financial  statements do not include any adjustments
that might result from the outcome of this uncertainty.

Principles of Consolidation

These consolidated financial statements include the accounts of the Company and
its majority owned or otherwise controlled subsidiaries. All significant
intercompany balances and transactions have been eliminated. The equity and net
loss attributable to minority shareholders' interests are shown separately in
the consolidated balance sheets and consolidated statements of operation.

Estimates

The preparation of financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, the Company evaluates its estimates, including those related to
allowance for acquisition discounts, membership cancellations and product
returns, allowance for doubtful accounts, deferred tax valuation allowance and
allowance for settlement of potential disputes. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under

                                      -45-

<PAGE>

the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.

Revenue recognition

In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue recognition in Financial
Statements". We adopted SAB 101, in the quarter ended December 31, 2000. The
adoption of SAB 101 did not have an effect on the results of operations or
financial position of the Company.

Revenues and the related cost of revenues for the initial membership package,
which generally includes the personal computer, extended warranty, cost of
shipping the personal computer system, internet access for the term of the
membership, and participation in a member commerce program, are generally
deferred and recognized over the term of the membership agreement for members
signed up under enterprise deals and consumers up to May 2001. Beginning in May
2001, the extended warranty was offered separately as an option in the consumer
Membership Package program. This resulted in revenues and the related cost of
revenues for the personal computer and shipping the personal computer system
being recognized once the right of return has elapsed. Revenues and any related
cost allocated to internet access, the participation in a member commerce
program and the extended warranty are deferred and recognized over the four-year
term of the membership agreement.

Revenues from the PeoplePC Online program are recognized monthly as services are
delivered. Monthly subscriptions to PeoplePC's online service are renewable each
month and the monthly fees are not refundable.

The Company also offers peripherals and upgrades at the time of the initial
membership. As there are no future obligations with respect to the peripherals
and upgrades, the revenue and cost of revenues related to the sale of
peripherals and upgrades are recognized in the period shipped. These revenues
are included under the line item "Other revenues", which includes peripherals
revenue, the related shipping revenues and revenues from the member commerce
program.

In some instances, and in an effort to aggressively enroll new members to build
its brand, as well as to develop new channels of distribution, the Company
offered pricing on some its memberships and services that was less than its
total current and estimated future costs (primarily the cost of providing
Internet access and email services) of performing under its membership
agreements, resulting in an estimated gross margin loss over the life of the
contract. As a result, the Company accrued for the estimated loss related to
this acquisition discount during the membership period. These amounts are being
amortized over the life of the membership as an offset to future expenses.

The Company also derives revenue from providing development services on a time
and material basis. Revenues pursuant to time and materials contracts are
generally recognized as services are provided. Revenues include reimbursable
expenses charged to clients.

Foreign currency translation

The Company uses the U.S. dollar as its functional currency. Foreign currency
assets and liabilities are translated into U.S. dollars at the end-of-period
exchange rates. Revenues and expenses are translated at average exchange rates
in effect during each period, except for those

                                      -46-

<PAGE>

expenses related to balance sheet amounts which are translated at historical
exchange rates. Gains or losses from foreign currency transactions are included
in net earnings.

Cash equivalents

The Company considers all highly liquid investments with an original maturity of
three months or less at the date of purchase to be cash equivalents.

Restricted cash

Restricted cash represents funds deposited in restricted accounts to secure
letters of credit established as collateral in favor of certain significant
vendors to the Company, security deposits for rent, and charges for possible
disputes or fraud with credit card processors.

Retained Interest in Accounts Receivables

During May 2001, the Company sold $18.0 million in accounts receivable via its
subsidiary PeoplePC Funding, Inc., a qualified special purpose entity, to a
financial institution. The Company received $14.5 million from the financial
institution which was used to fund operations. The financial institution has no
recourse to the Company's assets for failure of the debtors to pay when due. The
financial institution reserved an overcollateralization amount equal to 13% of
the present value of the receivables. After all lender obligations, interest
expenses and administrative fees are paid in full, the Company will receive the
residual amount represented by the overcollateralization reserve. The Company's
retained interests are non-interest bearing and subordinated to investor's
interests. Their value is subject to credit risks on the transferred assets. The
residual assets amounted to $2.1 million as of December 31, 2001.

Under the provisions of Statement of Financial Accounting Standards ("SFAS") No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," the transaction was accounted for as a sale. As
a result, the related accounts receivable have been excluded from the
accompanying condensed consolidated balance sheet and the Company recognized a
loss on sale of $1.4 million, which is included in interest expense.

Concentration of credit risk

Financial instruments that potentially subject the Company to a concentration of
credit risk consist primarily of cash, cash equivalents, restricted cash and
accounts receivable.

The Company maintains its cash, cash equivalents and restricted cash in accounts
with major financial institutions in the United States and Europe. The Company
has not experienced any losses on its deposits of cash, cash equivalents and
restricted cash.

The Company's accounts receivable are primarily derived from revenue earned from
customers located in the U.S. The Company performs ongoing credit evaluations of
its customers' financial condition and generally requires no collateral from its
customers. The Company maintains an allowance for doubtful accounts based on the
expected collectibility of accounts receivable.

Members who wish to finance their membership fees generally enter into a
36-month or 48-month loan agreement with a third party financial institution.
The Company receives the present value of the membership fee when it notifies
the financial institution that the related member's products have been shipped.
The Company does not generally bear any credit risk with regard to

                                      -47-

<PAGE>

these loan agreements. In the event of default by a member, the Company is
obliged to terminate the service provided to the defaulting member following
notification from the financial institution. In the event of a member's
termination due to the member's default under their credit obligation, all
amounts related to the member's previously deferred revenue and deferred cost of
revenue are recognized.

Some members elect to prepay the membership fee, in which case the amount is
charged to their credit card or electronically debited directly by the Company.
Members may also either finance or prepay the cost of shipping charges and
peripheral upgrades. For credit card and electronic debit transactions, there is
an accounts receivable balance while the payments are being processed by the
relevant financial institutions.

In the Company's enterprise employee connectivity programs, membership fees are
generally paid by both the enterprises and the employees in the form of a
co-payment. An employee may make their co-payment by credit card, loan agreement
through a financial institution or electronic debit, and in some cases by
payroll deduction over the membership period. If the employee co-payment is made
by payroll deduction the enterprise will pay the total membership fee at the
time of enrollment and receive the benefit of the payroll deductions over the
membership period.

Shipping charges and peripheral upgrades are exclusively paid for by the
employees. The amount is then either charged to their credit card, financed
through a loan agreement with a third party financial institution or electronic
debit. There is an accounts receivable balance while the payments are being
processed by the relevant financial institutions.

At December 31, 2001, one company accounted for 43% of total accounts
receivable, while two companies accounted for 41% and 23% of total accounts
receivable at December 31, 2000. The Company believes these amounts are
collectible. No member accounted for more than 10% of revenues in the years
ended December 31, 2001 and 2000 and the period from March 2, 1999 (date of
inception) to December 31, 1999.

Advertising costs

Expenses related to advertising and promotion of products are charged to sales
and marketing expense as incurred. Advertising expense for the years ended
December 31, 2001 and 2000 and the period from March 2, 1999 (date of inception)
to December 31, 1999 was $6.1 million, $61.5 million and $38.3 million,
respectively.

Fair value of financial instruments

The carrying amounts of the Company's financial instruments, including cash,
cash equivalents, restricted cash, accounts receivable, accounts payable and
accrued liabilities approximate fair value due to their short maturities.

Capitalized website development costs

In accordance with EITF 00-02, "Accounting for Website Development Costs", the
Company has capitalized certain expenditures incurred in developing the
Company's website which are being amortized on a straight-line basis over two
years. The capitalized cost amounted to $243,000 and $674,000 (net of $680,000
and $249,000 in accumulated amortization) at December 31, 2001 and 2000,
respectively. Capitalized expenditures include the cost of services

                                      -48-

<PAGE>

provided by third parties and internal costs of staff directly involved in the
development of the website.

Property and equipment

Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets: computer
equipment over 2 years, computer software over 5 years, and furniture and
fixtures over 7 years. Leasehold improvements are depreciated on a straight-line
basis over the lesser of their estimated useful lives or the lease term. Repair
and maintenance costs are expensed as incurred.

Impairment of long-lived assets

The Company accounts for long-lived assets under SFAS No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS No. 121"), which requires the Company to review for impairment of
long-lived assets, whenever events or changes in circumstances indicate that the
carrying amount of an asset might not be recoverable. When such an event occurs,
management determines whether there has been an impairment by comparing the
anticipated undiscounted future net cash flows to the related asset's carrying
value. If an asset is considered impaired, the asset is written down to fair
value, which is determined based either on discounted cash flows or appraised
value, depending on the nature of the asset.


Deferred Stock-Based Compensation

Deferred stock-based compensation has been included as a component of
stockholders' deficit and is being amortized by charges to operations over the
vesting period of the related options, generally 4 years, consistent with the
method described in Financial Accounting Standards Board ("FASB") Interpretation
("FIN") No. 28. The Company recognized stock-based compensation of $4.0 million,
net of reversal of stock-based compensation previously amortized related to
unvested shares for terminated employees for the year ended December 31, 2001.
The Company recorded reductions in deferred stock-based compensation relating to
terminated employees of $30.1 million for the year ended December 31, 2001. As
of December 31, 2001, the Company had an aggregate of $4.9 million of deferred
stock-based compensation remaining to be amortized.

Stock-based compensation

The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", ("APB No. 25") and complies
with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Under APB No. 25, compensation expense is based
on the difference, if any, on the date of the grant, between the fair value of
the Company's stock and the exercise price of the option.

The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and EITF No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."

                                      -49-

<PAGE>

The Company uses the Black-Scholes option pricing model to value options granted
to non-employees.


Segment information

Although the Company offers various products and services to its members,
management does not manage its operations by these service lines, but instead
views the Company as one operating segment when making business decisions. The
Company does manage its operations on a geographical basis. Revenues are
attributed to the United States and to all foreign countries based on actual
sales made in those geographic areas. Revenues, loss from operations and
long-lived assets information by geographic area are summarized as follows:

<TABLE>
<CAPTION>
                                                                          Period from
                                                                         March 2, 1999
                                          Year ended December 31,     (Date of Inception)
                                             2001          2000      to December 31, 1999
                                         -----------   -----------   --------------------

<S>                                      <C>            <C>                     <C>
Revenues from External Customers
    United States                        150,110,000    89,348,000              3,443,000
    International                         23,868,000       813,000                     --

                                         -----------   -----------   --------------------
    Total                                173,978,000    90,161,000              3,443,000
                                         ===========   ===========   ====================

Loss from Operations
    United States                         58,772,000   221,814,000             66,656,000
    International                         19,531,000    13,104,000                     --

                                         -----------   -----------   --------------------
    Total                                 78,303,000   234,918,000             66,656,000
                                         ===========   ===========   ====================
</TABLE>

<TABLE>
<CAPTION>
                                                        As of December 31,
                                             2001          2000              1999
                                         -----------   -----------   --------------------

<S>                                      <C>            <C>                     <C>
Long-Lived Assets
    United States                          4,641,000     6,661,000                330,000
    International                            755,000     1,027,000                     --

                                         -----------   -----------   --------------------
    Total                                  5,396,000     7,688,000                330,000
                                         ===========   ===========   ====================
</TABLE>


Income taxes

The Company accounts for income taxes under the provisions of SFAS No. 109
"Accounting for Income Taxes" ("SFAS No. 109"). Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.

                                      -50-

<PAGE>


Net loss per share

Basic net loss per share is computed by dividing net loss available to common
stockholders by the weighted average number of vested common shares outstanding
for the period. Diluted net loss per share is computed giving effect to all
dilutive potential common stock, including options, warrants and preferred
stock. Options, warrants, non-vested common stock and preferred stock were not
included in the computation of diluted net loss per share in the periods
reported because the effect would be antidilutive.
<TABLE>
<CAPTION>
<S>                                                                                                                             <C>
                                                                                                               Period from March 2,
The following table summarized basic and diluted loss per share:                       Years Ended          1999 (Date of Inception)
                                                                                       December 31,                to December 31,
                                                                                ----------------------------------------------------
                                                                                  2001               2000                 1999
                                                                                ----------------------------------------------------
Numerator:
    Loss before cumulative effect of accounting change                           (96,129,000)      (250,403,000)        (66,251,000)
    Cumulative effect of accounting change                                                           (3,844,000)
                                                                                ----------------------------------------------------
Net loss attributable to common stockholders                                     (96,129,000)      (254,247,000)        (66,251,000)
                                                                                ----------------------------------------------------
Denominator:
    Weighted average common shares                                               109,217,000         55,103,000           31,466,000
    Weighted average unvested common shares subject to repurchase                  2,608,000          6,115,000              934,000

                                                                                ----------------------------------------------------
Denominator for basic and diluted calculation                                    111,825,000         61,218,000           32,400,000
                                                                                ----------------------------------------------------

  Basic and diluted net loss per share attributable to common stockholders
     Loss before cumulative effect of accounting change                                (0.86)             (4.09)              (2.04)
     Cumulative effect of accounting change                                                               (0.06)
                                                                                ----------------------------------------------------
     Net loss attributable to common stockholders                                      (0.86)             (4.15)              (2.04)
                                                                                ----------------------------------------------------
</TABLE>

Antidilutive securities not included in net loss per share calculation for the
periods presented are as follows:

                                                            Period from March 2,
                                                               1999 (Date of
                                                                Inception) to
                                      Year Ended December 31,     December 31,
                                        2001           2000          1999
                                    -----------    -----------    -----------
Common stock subject
  to repurchase..............      2,608,000      6,115,000        934,000
Common stock options ...........     10,214,000     18,790,000      9,189,000
Warrants .......................      2,258,000      3,358,000             --
Mandatorily redeemable
  convertible preferred stock...    437,500,000             --         53,817
                                    -----------    -----------    -----------
Total ..........................    452,580,000     28,263,000     63,940,000
                                    ===========    ===========    ===========

Comprehensive Loss

The Company complies with SFAS No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), which requires that an enterprise report and display, by major
components and as a single total, the change in its net assets during the period
from non-owner sources. The comprehensive loss is comprised of net loss and
foreign currency translation adjustments.


Stock split

In October 1999, and again in March 2000, the Company approved a two-for-one
stock split. All share and per share amounts have been restated for such splits.


Accounting for the beneficial conversion feature

In accordance with the FASB's Emerging Issues Task Force ("EITF") issued EITF
Issue No. 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios" ("EITF 98-5"),
the company recorded an additional $3.8 million in connection with the
beneficial conversion feature related to the issuance of series C preferred
stock to Ford Motor Company, Inc., as the original calculation was based on the
proceeds received for rather than the proceeds allocated to the series C
preferred stock.

Recent Accounting Pronouncements

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 addresses
significant issues relating to

                                      -51-

<PAGE>

the implementation of SFAS No. 121, and develops a single accounting method
under which long-lived assets that are to be disposed of by sale are measured at
the lower of book value or fair value less cost to sell. Additionally, SFAS No.
144 expands the scope of discontinued operations to include all components of an
entity with operations that (1) can be distinguished from the rest of the entity
and (2) will be eliminated from the ongoing operations of the entity in a
disposal transaction. SFAS No. 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001 and its provisions are to be
applied prospectively. The Company is currently assessing the impact of SFAS No.
144 on its financial position and results of operations.

In November 2001 the Emerging Issues Task Force ("EITF") issued EITF Issue No.
01-09, "Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products" ("EITF 01-09"). The Company is currently
evaluating the impact of this pronouncement on its financial position and
results of operations and will adopt EITF 01-09 in 2002.

3. Balance Sheet Components:
----------------------------

                                                     Years Ended December 31,
                                                       2001            2000
                                                   ------------    ------------
Property and equipment, net:
Computer equipment .............................   $  1,975,000    $  1,831,000
Computer software ..............................      5,899,000       5,727,000
Furniture and fixtures .........................        653,000         648,000
Leasehold improvements .........................             --          18,000
                                                   ------------    ------------
                                                      8,527,000       8,224,000
Less: Accumulated depreciation .................     (3,131,000)       (536,000)
                                                   ------------    ------------
                                                   $  5,396,000    $  7,688,000
                                                   ============    ============

Accrued and other liabilities:
Overhead and marketing expenditure accrual .....   $  5,089,000    $  8,382,000
Cost of hardware accrual .......................        164,000       6,016,000
Legal accrual ..................................        140,000       2,775,000
Settlement of potential dispute (see note 6) ...             --       7,550,000
Accrued taxes ..................................      1,311,000              --
Internet service provider accrual ..............      1,713,000       4,132,000
Bank advance ...................................             --       3,741,000
Other ..........................................        771,000       6,597,000
                                                   ------------    ------------
                                                   $  9,188,000    $ 39,193,000
                                                   ============    ============


The bank advance was provided by the bank that previously issued a co-branded
credit card with the Company. Net retail sales accumulated on the card have been
deducted from the advance, which was non-interest bearing.

                                      -52-

<PAGE>

Analysis of deferred revenues

<TABLE>
<CAPTION>
                                                                       Period from
                                                                      March 2, 1999
                                                                        (Date of
                                                                      Inception) to
                                        Year Ended December 31,        December 31,
                                         2001             2000             1999
                                    -------------    -------------    -------------
<S>                                 <C>              <C>              <C>
Deferred revenue at the beginning
  of the period .................   $ 309,058,000    $  21,504,000    $          --
Gross sales of memberships ......     153,433,000      339,182,000       22,759,000
Other deferred revenue ..........              --        3,750,000               --
Amortization of deferred revenue     (158,692,000)     (51,628,000)      (1,255,000)
                                    -------------    -------------    -------------
Deferred revenue at the end of
  the period ....................   $ 303,799,000    $ 309,058,000    $  21,504,000
                                    =============    =============    =============
</TABLE>

<TABLE>
<CAPTION>
                                                                            Period from
                                                                           March 2, 1999
                                                                             (Date of
                                                                           Inception) to
                                             Year Ended December 31,        December 31,
                                              2001             2000             1999
                                         -------------    -------------    -------------
<S>                                      <C>              <C>              <C>
Deferred cost of revenue at the
  beginning of the period, net of
  provision for acquisition discounts    $ 261,890,000    $  17,183,000    $         000
Gross cost of sales of membership ....     124,131,000      322,552,000       21,967,000
Change in the gross provision for
  acquisition discounts ..............      10,897,000      (32,902,000)      (1,700,000)
Amortization of deferred cost of
  revenue, net of provision for
  acquisition discounts ..............    (135,165,000)     (44,943,000)      (3,084,000)
                                         -------------    -------------    -------------
Deferred cost of revenue at the end of
 the period, net of provision for
  acquisition discounts ..............   $ 261,753,000    $ 261,890,000    $  17,183,000
                                         =============    =============    =============
</TABLE>

<TABLE>
<CAPTION>
                                                                      Period from
                                                                     March 2, 1999
                                                                       (Date of
                                                                     Inception) to
                                         Year Ended December 31,     December 31,
                                           2001           2000           1999
                                       ------------   ------------   ------------
<S>                                    <C>              <C>              <C>
Net deferred revenue:
Deferred revenue ...................   $303,799,000   $309,058,000   $ 21,504,000
Deferred cost of revenue, net of
  provision for acquisition discount
  ..................................    261,753,000    261,890,000     17,183,000
                                       ------------   ------------   ------------
                                         42,046,000     47,168,000      4,321,000
Less: current portion of deferred
  revenue, net .....................     21,082,000     19,047,000      1,496,000
                                       ------------   ------------   ------------
Long-term deferred revenue, net ....   $ 20,964,000   $ 28,121,000   $  2,825,000
                                       ============   ============   ============
</TABLE>


4. Borrowings under line of credit
----------------------------------

In July 2000, the Company entered into a credit agreement with a bank providing
for a $50.0 million revolving credit facility. The Company did not renew the
credit agreement when it expired in July 2001. As of December 31, 2000, the
Company had a balance of $5.2 million outstanding in regard to this credit
facility (net of issuance cost of $0.6 million). An amount of $0.2 million, $0.5
million and $0 million of issuance cost was amortized during the years ended
December 31, 2001 and 2000 and the period from March 2, 1999 (date of inception)
to December 31, 1999. The interest rate at December 31, 2000 was 9.5%. The
balance was paid in full in fiscal 2001.

                                      -53-

<PAGE>

5. Income taxes:
----------------

Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>

                                                                    December 31,
                                                            ----------------------------
                                                                2001             2000
                                                                ----             ----
<S>                                                          <C>              <C>
Deferred tax assets:
        Net operating loss carryforwards                     105,043,705      75,044,805
        Accruals and reserves                                  4,100,234      15,605,442
        Deferred revenue                                       8,323,365       6,314,097
        Deferred compensation                                         --       2,735,707
        Depreciation and amortization                            764,708         117,507
        Foreign net operating loss carryforwards               9,890,228       4,152,343
        Other                                                  1,661,747         607,672
                                                             -----------      ----------

Deferred tax liabilities:
        Capitalized research and development costs              (735,319)       (367,660)

Net deferred tax assets                                      129,048,667     104,209,913
Valuation allowance                                         (129,048,667)   (104,209,913)
</TABLE>

        Management believes that, based on a number of factors, it is more
likely than not that the deferred tax assets will not be utilized, such that a
full valuation allowance has been recorded.

        At December 31, 2001, the Company had approximately $259,857,330 of
federal, $286,099,904 of state and $32,967,427 of foreign net operating loss
carryforwards available to offset future taxable income. Federal and state
carryforwards expire in varying amounts beginning in 2004 until 2021. Under the
Tax Reform Act of 1986, the Company's ability to use its federal and state net
operating loss carryforwards and federal and state tax credit carryforwards to
reduce future taxable income and future taxes, respectfully, is subject to
restrictions attributable to equity transactions that have resulted in a change
in ownership as defined by Internal Revenue Code Section 382. The utilization of
these carryforwards could be severely restricted and could result in significant
amounts of these carryforwards expiring prior to benefitting the Company. The
Company is in the process of evaluating the extent of the limitation.

The principal items accounting for the difference between income tax provision
at the US statutory rate and the provision for the income taxes reflected in the
consolidated statements of operations are as follows:
<TABLE>
<CAPTION>


                                                             December 31,
                                                      ------------------------
                                                       2001    2000    1999
                                                      ------------------------
<S>                                                   <C>     <C>     <C>
Federal statutory rate                                 34%     34%     34%
State taxes                                             6%      6%      6%
Foreign Taxes                                           1%      0%      0%
Deferred Compensation                                  -6%     -6%     -2%
Other                                                   0%      1%     -4%
Increase Valuation Allowance                          -34%    -35%    -34%
                                                      ------------------------
        Effective Tax Rate                              1%      0%      0%
</TABLE>


6. Commitments and contingencies:
---------------------------------

Purchase commitments

The Company relies on Ingram Micro (the "Distributor") to provide some of its
computer products, maintain inventory, process orders, prepare merchandise for
shipment and distribute its products to customers in a timely and accurate
manner. The Distributor purchases inventory on behalf of the Company based on
sales projections made by the Company. The Company takes

                                      -54-

<PAGE>

title to the equipment just prior to shipment to the customer. The Company is
obligated to purchase inventory held by the Distributor purchased on its behalf
to the extent that sales projections are not met. At December 31, 2001, the
Company had approximately $1.6 million in noncancelable purchase commitments
with the Distributor. The Company's agreement with the Distributor expired in
February 2001, however, both parties have continued to perform under the terms
of the contract.

As of December 31, 2001, the Company is also obligated to purchase $0.1 million
of products from IBM. The Company expects to sell all products that it has
committed to purchase from the Distributor and IBM.

In December 2001, the Company entered into a long-term relationship with a
major telecommunications company. Under this agreement, the Company received
$2.0 million of incentive payments in December 2001 and will receive
approximately $3.0 million in incentive payments during fiscal year 2002. The
Company records incentives as an offset to cost of revenues. The future minimum
annual contractual spending commitments for the six years after December 31,
2001 are $5.0 million, $3.0 million, $8.0 million, $8.0 million, $8.0 million
and $9.0 million.

Leases

The Company leases office space under 7 operating leases expiring between 2002
and 2009, of which 2 leases can be renewed in 2004 for an additional period of 5
years. Rent expense was $2.6 million, $1.6 million and $0.3 million for the
years ended December 31, 2001 and 2000 and the period from March 2, 1999 (date
of inception) to December 31, 1999. The Company recognizes rent expense on a
straight-line basis over the lease period and has accrued for rent expense
incurred but not paid. The Company also leases copiers under 2 operating leases
expiring in 2005.

Future lease payments under operating leases, as of December 31, 2001 are as
follows:

                                                                Operating Leases
                                                                ----------------

Years ending December 31,
2002 ....................................................          $2,525,000
2003 ....................................................          $2,538,000
2004 ....................................................          $2,441,000
2005 ....................................................          $  536,000
Thereafter ..............................................          $  820,000
Total ...................................................          $8,860,000

Contingencies

In 1999, the Company recorded a loss reserve of $15.6 million relating to the
estimated cost of resolving a potential dispute over computers that did not
conform to our specificiations. During 2000, the Company reached an agreement
with Ingram Micro to liquidate the non-conforming computers, following which the
Company would evenly split the losses associated with these computers. As a
result of this agreement, the Company reduced the loss reserve by $8.0 million
(included in other operating expenses) in 2000. In early 2001, the Company
reached a final settlement with Ingram Micro and paid its share of the loss. As
a result of that settlement, the Company released the remaining provision during
2001, included in other operating expenses. The Company believes the probability
of any future claim from the original equipment manufacturer to be remote.

                                      -55-

<PAGE>

The Company has employment agreements and commitments with certain executive
officers under which the employees would be entitled to receive severance
payment of $1.25 million if their employment were to be terminated under certain
conditions.

7. Other operating (income) expense
-----------------------------------

<TABLE>
<CAPTION>
                                                                                 Period from
                                                                                March 2, 1999
                                                                                  (Date of
                                                                                Inception) to
                                                     Year Ended December 31,     December 31,
                                                       2001           2000           1999
                                                   -----------    -----------    -----------
<S>                                                <C>            <C>            <C>
(Reversal) Provision for settlement of potential
   dispute .....................................   ($4,350,000)   ($8,000,000)   $15,550,000
                                                                                 ===========
Reimbursement from Ford ........................    (6,600,000)            --             --
Other operating expenses .......................     1,329,000      1,100,000             --
Other Operating (income) expense ...............   $(9,621,000)   $(6,900,000)   $15,550,000
                                                   ===========    ===========    ===========
</TABLE>

8. Net interest income and other expense:
-----------------------------------------

<TABLE>
<CAPTION>
                                                                          Period from
                                                                         March 2, 1999
                                                                           (Date of
                                                                         Inception) to
                                              Year Ended December 31,     December 31,
                                                2001           2000           1999
                                            -----------    -----------    -----------
<S>                                         <C>            <C>            <C>
Interest income .........................   $ 1,578,000    $ 3,098,000    $   405,000
Interest expense ........................    (3,559,000)    (2,100,000)            --
Gain on sale of equipment ...............        23,000             --             --
Sales tax ...............................            --     (1,500,000)            --
                                            -----------    -----------    -----------
Net interest income and other expense ...   $(1,958,000)   $  (502,000)   $   405,000
                                            ===========    ===========    ===========
</TABLE>


9. Employee benefit plans:
--------------------------

The Company sponsors a 401(k) defined contribution plan (the "Plan") covering
substantially all eligible employees. The Company has not made any matching
contributions to the plan

10. Minority Interest in Consolidated subsidiaries
--------------------------------------------------

In June 2000, PeoplePC formed a European subsidiary, PeoplePC Europe N.V., a
Netherlands corporation. PeoplePC and PeoplePC Europe N.V. entered into
financing and related agreements with @viso Limited ("@viso"), a United Kingdom
company and a partnership of SOFTBANK Corp. ("SOFTBANK"), a Japanese company and
Vivendi Universal S.A. ("Vivendi"), a French corporation. In the financing,
PeoplePC Europe N.V. received $50.0 million from @viso payable over a two month
period beginning on the closing date in exchange for its 35% interest in
PeoplePC Europe N.V. PeoplePC received a 65% interest in exchange for granting
of an exclusive license to use and exploit its technology and brand in Europe.
The financing closed in July 2001.

                                      -56-

<PAGE>

At December 31, 2001, minority shareholders hold preferred stock in PeoplePC
Europe N.V., a Dutch company, with a par value of EUR.01 as follows:

<TABLE>
<CAPTION>
                                        Series Authorized   Shares Outstanding   Proceeds
                                        -----------------   ------------------   -------
<S>                                          <C>                  <C>            <C>
Series A preferred stock                     100,000              11,667         $35,000
Series B preferred stock                      50,000               5,000          15,000
                                             -------             -------         -------
                                                                                 $50,000
                                                                                 =======
</TABLE>

In connection with the issuance of series B preferred stock and series A
preferred stock to @viso, PeoplePC Europe N.V. ("PeoplePC Europe") granted
SOFTBANK Capital Partners LP a warrant to acquire 2.4 million shares of series A
preferred stock, with an aggregate exercise price of $7.1 million. The warrant
is exercisable and must be exercised immediately prior to (a) an acquisition,
sale or merger of or by PeoplePC Europe resulting in a change in control of
PeoplePC Europe, (b) a merger of PeoplePC Europe with and into the Company, or
acquisition of all of PeoplePC Europe assets or shares by the Company or (c)
PeoplePC Europe's initial public offering, on terms and conditions stated in the
agreement ("liquidity events"). The warrant may not be exercised after the
earlier of (a) fifteen business days following a request by PeoplePC Europe that
SOFTBANK Capital Partners LP exercise such right and (b) the occurrence of a
liquidity event.

Under a Put Option Agreement signed on May 30, 2001, @viso is entitled to sell
all or a portion of its shares of PeoplePC Europe to PeoplePC in exchange for
PeoplePC common stock. Under this agreement, @viso is entitled to receive
between approximately 13.8 million and 29.1 million shares of PeoplePC common
stock based on a formula and the date of exchange. SOFTBANK Capital Partners LP
is entitled to exercise its amended warrant to purchase convertible preferred
stock in PeoplePC Europe. Once the amended warrant is exercised, SOFTBANK
Capital Partners LP will be entitled to sell all or a portion of its shares of
PeoplePC Europe to PeoplePC in exchange for PeoplePC stock. Under this
arrangement, SOFTBANK Capital Partners LP will be entitled to receive between
approximately 1.9 million and 3.5 million shares of PeoplePC common stock based
on a formula on the date of exchange.

PeoplePC Europe has made five loans totaling $35.5 million to fund PeoplePC's
United States operations during fiscal year 2001. These notes are demand notes.
Because the Company controls the board of directors of PeoplePC Europe, the
Company has substantial discretion over the timing of demands made under these
notes. Due to legal and other constraints, some portion of the remaining cash
assets of PeoplePC Europe may not be available for lending to PeoplePC's United
States operations.

11. Mandatorily Redeemable Convertible Preferred Stock:
-------------------------------------------------------

The Company has authorized the issuance of 50,000,000 shares of mandatorily
redeemable convertible preferred stock ("preferred stock"), with a par value of
$0.0001 per share.

In May and October 1999, the Company sold 24,000,000 shares and 29,817,000
shares of its series A and series B preferred stock to investors for total gross
proceeds of $3.0 million and $65.0 million, respectively.

In April 2000, the Company sold 9,468,000 shares of its series C preferred stock
to investors for total gross proceeds of $50.0 million.

In connection with the issuance of series C preferred stock, the Company
recorded, in addition to the charges discussed under Note 8 with respect to
Ford, a dividend of $18.0 million related to the beneficial conversion feature
of the series C preferred stock issued to the other investors.

On closing of the Company's initial public offering in August 2000, the
preferred stock automatically converted into 63,285,000 shares of common stock.

In December 2001, the Company issued and sold a total of 4,375,000 shares of
series B preferred stock at a price of $5.00 per share. The Company received
approximately $21.2 million in cash,

                                      -57-

<PAGE>

net of underwriting discounts, commissions, and other offering expenses. In
connection with the issuance of the series B preferred stock, the Company
recorded a dividend of $21.2 million related to the beneficial conversion
feature of the series B preferred stock issued.

The rights, preferences, privileges and restrictions of the Company's series B
preferred stock are set forth in the series B preferred stock purchase agreement
and the Company's Amended and Restated Articles of Incorporation, and summarized
as follows:

Liquidation

In the event of a liquidation event, dissolution or winding up of the Company,
the holders of series B preferred stock are entitled to a distribution in
preference to holders of Common Stock, at an amount up to series B preferred
stock's, original issue price of $5.00 per share, respectively, plus any
declared but unpaid dividends. In the event that the assets and funds
distributed are insufficient to series B preferred stockholders the full issue
price, then, the entire assets and funds of the Company available for
distribution shall be distributed ratably among the holders of series B
preferred stock. Once the distribution has been paid in full, all of the assets
of the Company available for distribution shall be distributed among the holders
of common stock and the series B preferred stock in proportion to the number of
shares of common stock then held by them, assuming the conversion of the
outstanding shares of series B preferred stock.

Conversion

Each issued share of series B preferred stock is convertible, into 100 shares of
common stock for 1 share of series B preferred stock, and was automatically
converted immediately following the stockholder approval on February 19, 2002,
at a conversion price of $0.05 for each share of series B preferred stock.

Voting

The series B preferred stock is non-voting stock.

                                      -58-

<PAGE>
12. Stockholders' Deficit:
--------------------------

The Company's Articles of Incorporation, as amended, authorize the Company to
issue 500,000,000 shares of $0.0001 par value common stock.

In August 2000, the Company completed its initial public offering and sold
8,500,000 shares of its common stock at a price of $10.00 per share. The Company
received approximately $77.9 million in cash, net of underwriting discounts,
commissions and other offering expenses. Simultaneously with the closing of the
initial public offering, the Company's series A, B and C preferred stock
automatically converted into 63,285,000 shares of common stock. The Company's
shares are now traded on the NASDAQ national market system under the symbol
"PEOP".

In January 2000, the Company entered into an agreement with Delta Air Lines,
Inc. ("Delta") to provide its products and services to Delta employees. The
Company also granted Delta a fully vested warrant exercisable for 0.5 million
shares of the Company's common stock at an exercise price per share of $6.225.
This warrant expired during February 2001. The value of the warrant of $1.5
million is included in sales and marketing expenses in the year ended December
31, 2000, as Delta had no performance requirements and the warrant was
exercisable upon issuance. The warrant was valued using the Black-Scholes Option
Pricing Model with the following assumptions: fair value of the underlying
common stock $6.84; term of option: 3 years; expected dividend rate: 0;
volatility: 50%; interest rate: 7%.

In connection with an agreement with Ford Motor Company ("Ford") to provide
products and services to its employees, Ford purchased 4.7 million shares of
series C preferred stock at $5.246 per share and had the right to purchase
1,905,000 shares of the Company's common stock at $10.00 per share. Because Ford
exercised this right, Ford received a warrant to purchase an additional
2,857,500 shares of the Company's common stock at $10.00 per share. On February
21, 2001, the expiration date of the warrant issued to Ford, the Company
extended the life of the warrant to July 16, 2003. The value of the Right, the
warrant, and the excess of the value of the common stock into which the series C
preferred stock is convertible over the price paid for the preferred stock was
charged to marketing expense in the year ended December 31, 2000, as Ford has no
performance requirements and the rights and the warrant are exercisable upon
issuance.

                                      -59-

<PAGE>

The right and the warrant were valued using the Black-Scholes Option Pricing
Model with the following assumptions:

                                                    Right              Warrant
                                                 ----------          ----------

Number of shares .......................          1,905,000           2,858,000
Fair value of common ...................         $     9.07          $    13.00
Exercise price .........................         $    10.00          $    10.00
Term ...................................           5 months            200 days
Dividend rate ..........................                  0                   0
Volatility .............................                 50%                 50%
Interest rate ..........................                  7%                  7%
Total value ............................         $  515,000          $6,113,000


The excess of the value of the common stock into which the series C preferred
stock is convertible over the price paid for the preferred stock ($17,944,000)
was calculated using the fair value of common stock on the date at which the
terms and conditions of the preferred stock were agreed.

For the years ended December 31, 2001 and 2000, the Company acquired 1,268,000
and 254,000 common shares, at an average unit price of $0.18 and $1.10.


13. Stock Option Plans:
-----------------------

In 1999, the Company adopted the 1999 Stock Option Plan (the "1999 Plan"). As of
December 31, 2001 and 2000, the Company has reserved 21,560,000 shares of Common
Stock for issuance under the Plan.

In 2000, the Company adopted the 2000 Stock Option Plan (the "2000 Plan"). The
Plan provides for the granting of stock options to employees and consultants of
the Company. As of December 31, 2001 and 2000, the Company has reserved
11,875,000 shares and 10,500,000 shares of Common Stock for issuance under the
Plan.

The 1999 and 2000 Plans (individually and commonly known as the "Plan") provide
for the granting of stock options to employees and consultants of the Company.
Options granted under the Plan may be either incentive stock options or
nonqualified stock options. Incentive stock options ("ISO") may be granted only
to Company employees (including officers and directors who are also employees).
Nonqualified stock options ("NSO") may be granted to Company employees,
directors and consultants.

Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date of
grant as determined by the Board of Directors, provided, however, that (i) the
exercise price of an ISO and NSO shall not be less than 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and (ii)
the exercise price of an ISO and NSO granted to a 10% shareholder shall not be
less than 110% of the estimated fair value of the shares on the date of grant,
respectively. Options are exercisable immediately subject to a repurchase right
by the Company which lapses over the original vesting period of the options. To
date, options granted generally vest over four years.

For financial reporting purposes, the Company has determined that the estimated
value of common stock determined in anticipation of the initial public offering
was in excess of the exercise price, which was considered to be the fair market
value as of the date of grant for 12,246,850and 11,509,000 options issued during
the year ended December 31, 2000 and in the period from March 2, 1999 (date of
inception) to December 31, 1999, respectively. In connection with the grants of
such options, the Company has recorded deferred stock based compensation of
$63.5 million and $21.7 million during the year ended December 31, 2000 and
during the period from March 2 (date of inception) to December 31, 1999,
respectively. Deferred stock based

                                      -60-

<PAGE>

compensation will be amortized over the vesting period, which is generally 48
months from the date of grant and $4.0 million, $43.1 million and $3.0 million
were expensed during the years ended December 31, 2001 and 2000 and in the
period from March 2, 1999 (date of inception) to December 31, 1999,
respectively. Future amortization based on options granted through December 31,
2001 is expected to be $3.6 million, $1.2 million and $0.1 million in the years
2002, 2003 and 2004, respectively.

Activity for the years ended December 31, 2001 and 2000 and the period from
March 2, 1999 (date of inception) to December 31, 1999 follows:

<TABLE>
<CAPTION>
                                                       Number of Options
                                                           Issued and       Weighted Average
                                                          Outstanding        Exercise Price
                                                       -----------------    ----------------
<S>                                                        <C>                  <C>
  Options granted .................................        11,509,000             0.0540
  Options exercised ...............................        (2,320,000)            0.0125
                                                           ----------
Outstanding at December 31, 1999 ..................         9,189,000             0.0650
  Options granted .................................        19,778,000             3.4600
  Options exercised ...............................        (8,369,000)            0.3748
  Options cancelled ...............................        (1,808,000)            3.3827
                                                           ----------
Outstanding at December 31, 2000 ..................        18,790,000             3.1813
  Options granted .................................         2,797,000             0.4992
  Options exercised ...............................          (229,000)            0.2200
  Options cancelled ...............................       (11,144,000)            3.7771
                                                           ----------
Outstanding at December 31, 2001 ..................        10,214,000           $ 1.8504
                                                           ==========

Options fully vested at December 31, 2001..........         6,823,860
Options fully vested at December 31, 2000..........         2,770,135
Options fully vested at December 31, 1999..........         1,516,666
</TABLE>





<TABLE>
<CAPTION>
                                              Options Outstanding and Exercisable
                                                       December 31, 2001
                                                           Weighted
                                                            Average
                               Number                      Remaining                   Weighted Average
Range of Exercise Price      Outstanding               contractual Life                 Exercise Price

<S>                          <C>                             <C>                          <C>
$0.0125 ................      2,970,000                      7.73                              0.0125
$0.1400 - $0.3100 ......        671,000                      8.56                              0.2318
$0.3125 ................      1,616,000                      9.26                              0.3125
$1.1 ...................        908,000                      8.20                              1.1000
$1.2188 ................      1,413,000                      8.96                              1.2188
$1.6250 - $3.5000 ......      1,037,000                      8.50                              3.0407
$3.9375 ................        159,000                      8.78                              3.9375
$6.1875 ................        843,000                      8.72                              6.1875
$10.0 ..................        339,000                      8.50                             10.0000
$12.0 ..................        258,000                      8.53                         $   12.0000
                             ----------
                             10,214,000
                             ==========
</TABLE>

                                      -61-

<PAGE>

Shares subject to the company's right of repurchase are 2,608,000 shares and
6,115,000 shares at weighted average prices of $1.78 and $4.34 at December 31,
2001 and 2000, respectively.

14. Employee Stock Purchase Plan
--------------------------------

Under the 2000 Employee Stock Purchase Plan (the "Purchase Plan"), eligible
employees may purchase registered shares of the Company's common stock at a
discount through payroll deductions. The Company's only expense relating to this
plan is for its administration. A total of 6,600,000 shares of common stock were
reserved for issuance under the plan. As of December 31, 2001, 78,000 shares
have been sold to employees under this plan and no shares have been sold to
employees under this plan as of December 31, 2000.


Fair value disclosures
----------------------

The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123").

Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the awards under a
method prescribed by SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                          Period from
                                                                         March 2, 1999
                                                                           (Date of
                                                                         Inception) to
                                            Year Ended December 31,      December 31,
                                             2001            2000            1999
                                        --------------  --------------  --------------
<S>                                     <C>             <C>             <C>
Net loss attributable to shareholder:
  As reported .......................   $   96,129,000  $  254,246,000  $   66,251,000
                                        ==============  ==============  ==============
  Pro forma .........................   $  101,254,000  $  255,342,000  $   66,254,000
                                        ==============  ==============  ==============
Basic and diluted net loss per share:
  As reported .......................   $         0.86  $         4.15  $         2.04
                                        ==============  ==============  ==============
  Pro forma .........................   $         0.91  $         4.17  $         2.04
                                        ==============  ==============  ==============
</TABLE>

                                      -62-

<PAGE>

The Company calculated the fair value of each option grant on the date of grant
using the Black-Scholes options pricing model with the following assumptions:

                                                                    Period from
                                                                   March 2, 1999
                                                                     (Date of
                                                                   Inception) to
                                          Year Ended December 31,  December 31,
                                             2001         2000         1999
                                          ----------   ----------   ----------
Dividend yield                                0%           0%           0%
Weighted average expected option term      5 years      5 years      5 years
                                           =======      =======      =======
Expected volatility                          189%         50%           0%
                                             ====         ===           ==
Risk free interest rate                       5%           5%           5%


The weighted average fair market value of the options granted during the years
ended December 31, 2001 and 2000 and for the period from March 2, 1999 (date of
inception) to December 31, 1999 is $0.40, $9.25 and $1.87, respectively.

15. Related party transactions
------------------------------

During June 2001, the Company entered into negotiations for a contract with
SOFTBANK, under which it performed certain development work on a time and
material basis. The Company recognized $0.9 million in revenue for the year
ended December 31, 2001 related to this agreement.

16. Subsequent Events
    -----------------

On December 17, 2001, the Company sold a total of 4,375,000 shares of series B
preferred stock to certain investors in a private placement. Pursuant to the
terms of the sale, each share of series B preferred stock would convert
automatically into 100 shares of common stock immediately following stockholder
approval. At a Special Meeting of the Stockholders held on February 19, 2002,
the stockholders voted to approve the issuance of 437,500,000 shares of the
Company's common stock upon conversion of the Company's series B preferred stock
sold in the private placement.

On January 28, 2002, the Board of Directors approved amendments to the 2000
Plan, subject to subsequent stockholder approval, to increase the number of
shares of common stock reserved for issuance thereunder by 126,404,000 shares
and to increase the Internal Revenue Code Section 162(m) limits on the number of
options and stock purchase rights granted in any fiscal year of the Company or
in connection with an individual's initial employment with the Company from
2,000,000 to 40,000,000. At a Special Meeting of the Stockholders held on
February 19, 2002, the stockholders voted to approve the amendments to the 2000
Plan.

In addition to approval of the conversion of the series B preferred stock and
the amendments to the 2000 Plan, the stockholders also voted to approve an
amendment to the Company's Amended and Restated Certificate of Incorporation to
increase the number of authorized shares of common stock from 500,000,000 to
750,000,000 and authorized, but did not require, the Company's Board of
Directors to effect a reverse stock split.

                                      -63-

<PAGE>

17. Selected Quarterly Financial Data (unaudited)
-------------------------------------------------

<TABLE>
<CAPTION>
                                                                    Three months ended
                                                   December 31,   September 30,    June 30,   March 31,
                                                          (in thousands, except per share data)
<S>                                                  <C>            <C>           <C>         <C>
2001
Revenues .........................................   $ 45,934       $ 48,004      $ 42,707    $ 37,333
Gross profit (loss) ..............................      4,220         10,525         5,524        (603)
Net loss before cumulative effect of
accounting  change ...............................     (9,987)        (1,948)      (26,813)    (36,188)
Cumulative effect of accounting change ...........         --             --            --          --
Net loss .........................................     (9,987)        (1,948)      (26,813)    (36,188)

Basic and dilute net loss per share:
Loss before cumulative effect of
accounting change ................................      (0.28)         (0.02)        (0.24)      (0.33)
Cumulative effect of accounting change ...........         --             --            --          --
Net loss per share ...............................      (0.28)         (0.02)        (0.24)      (0.33)

2000
Revenues .........................................   $ 45,934       $ 25,293      $ 11,048    $  7,886
Gross profit (loss) ..............................     (8,677)       (14,556)       (2,735)     (3,191)
Net loss before cumulative effect of
accounting change ................................    (61,008)       (64,188)      (71,465)    (35,535)
Cumulative effect of accounting change ...........     (3,844)            --            --          --
Net loss .........................................    (64,852)       (64,188)      (71,465)    (35,535)

Basic and dilute net loss per share:
Loss before cumulative effect of
accounting change ................................      (0.56)         (0.91)        (2.16)      (1.08)
Cumulative effect of accounting change ...........      (0.04)            --            --          --
Net loss per share ...............................      (0.06)         (0.91)        (2.16)      (1.08)

1999
Revenues .........................................   $  3,443       $     --      $     --    $     --
Gross loss .......................................     (3,591)            --            --          --
Net loss before cumulative effect of
accounting change ................................    (59,707)        (6,264)         (280)         --
Cumulative effect of accounting change ...........         --             --            --          --
Net profit (loss) ................................    (59,707)        (6,264)         (280)         --

Basic and dilute net loss per share:
Loss before cumulative effect of
accounting change ................................      (0.75)         (0.19)        (0.01)         --
Cumulative effect of accounting change ...........         --             --            --          --
Net loss per share ...............................      (0.75)         (0.19)        (0.01)         --
</TABLE>

                                      -64-

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholders of PeoplePC Inc.

Our report on the financial statements of PeoplePC Inc. and its subsidiaries is
included on page 66 of this Annual Report on Form 10-K. In connection with our
audits of such financial statements, we have also audited the financial
statement schedule listed on page 36 of this Annual Report on Form 10-K.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.

/s/ PricewaterhouseCoopers LLP

April 1, 2002 San Francisco, California

                                      -65-

<PAGE>

<TABLE>
<CAPTION>
                                      PEOPLEPC INC. AND SUBSIDIARIES
                   FINANCIAL STATEMENT SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                              (in thousands)

                                                  BALANCE AT     CHARGES TO   AMORTIZATION,    BALANCE AT
                                                 THE BEGINNING   COSTS AND    WRITE-OFFS AND     THE END
CLASSIFICATION                                    OF THE YEAR     EXPENSES       PAYMENTS      OF THE YEAR

<S>                                                <C>            <C>             <C>           <C>
Year ended December 31, 2001
   Allowance for doubtful accounts                   (3,500)        (9,836)       12,671            (665)
   Allowance for sales returns                            0           (450)          450               0
   Allowance for acquisition discount               (29,808)        10,897         9,732          (9,179)
   Deferred tax valuation allowance                (104,210)       (23,670)            0        (127,880)
   Allowance for settlement of potential
 dispute                                             (7,550)         4,350         3,200               0

                                                   --------       --------      --------        --------
                                                   (145,068)       (18,709)       26,053        (137,724)
                                                   ========       ========      ========        ========

Year ended December 31, 2000
   Allowance for doubtful accounts                        0         (3,500)            0          (3,500)
   Allowance for sales returns                            0              0             0               0
   Allowance for acquisition discount                (1,653)       (32,902)        4,747         (29,808)
   Deferred tax valuation allowance                 (22,566)       (81,644)            0        (104,210)
   Allowance for settlement of potential
 dispute                                            (15,600)         8,000             0          (7,550)

                                                   --------       --------      --------        --------
                                                    (39,819)      (109,996)        4,747        (145,068)
                                                   ========       ========      ========        ========

Period from March 2, 1999 (date of inception) to
December 31, 1999
   Allowance for doubtful accounts                        0              0             0               0
   Allowance for sales returns                            0              0             0               0
   Allowance for acquisition discount                     0         (1,700)           47          (1,653)
   Deferred tax valuation allowance                       0        (22,566)            0         (22,566)
   Allowance for settlement of potential
 dispute                                                  0        (15,600)            0         (15,550)

                                                   --------       --------      --------        --------
                                                          0        (39,866)           47         (39,819)
                                                   ========       ========      ========        ========
</TABLE>

                                      -66-

<PAGE>

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to fluctuations in interest rates and market values of our
investments. Our exposure to fluctuations in interest rates and market values of
our investments relates primarily to our short-term investment portfolio, which
is included in cash and cash equivalents and short-term investments. We have not
used derivative financial instruments in our investment portfolio. We invest our
excess cash in highly liquid commercial paper and U.S. Government debt
securities with maturities of less than one year, and, by policy, we limit the
amount of credit exposure to any one issuer. Due to the short-term nature of our
investments, the impact of interest rate changes would not generally be expected
to have a significant impact on the value of these investments. The effect of
interest rate and investment risk on us has not been significant. Investments in
both fixed rate and floating rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall.

We have limited our investments to short-term, highly rated, fixed income
facilities such as repurchase agreements collateralized by government securities
and A-1/P-1 commercial paper. We intend to maintain our current investment
policy, which is designed to preserve principal while at the same time
maximizing the after-tax income we receive from our investments without
significantly increasing risk. Some of the securities that we may invest in may
be subject to market risk. This means that a change in prevailing interest rates
may cause the principal amount of the investment to fluctuate. For example, if
we hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the principal
amount of our investment will probably decline. To minimize this risk in the
future, we intend to maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, money market
funds, government and non-government debt securities.

Based on our average outstanding credit balance and the fact that we hold no
derivative instruments and do not earn significant foreign sourced income,
changes in interest rates or currency exchange rates do not generally have a
direct effect on our financial position. In addition, we have primarily operated
in the United States and substantially all purchases and sales to date have been
made in U.S. dollars. Foreign currency exchange rates, however, may affect the
cost of our personal computers, printers and monitors purchased from our foreign
suppliers, thereby indirectly affecting consumer demand for our products and our
net revenues. In addition, to the extent that changes in interest rates and
currency exchange rates affect general economic conditions, we would also be
affected by such changes.

Risk Factors

You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks not presently known to us or that
we currently believe are immaterial may also impair our business operations. If
any of the following risks actually occurs, our business, financial condition or
operating results could be seriously impaired. In such case, the trading price
of our common stock could decline, and you may lose all or part of your
investment.

We may need to raise additional financing to fund our operations.
----------------------------------------------------------------

In part because of the delay in the roll-out of the Vivendi employee program in
the United States, we do not expect to generate positive cash flow from
operations until at least the third quarter of 2002. We currently believe that
a significant factor in achieving positive cash flow status will be our ability
to complete one or more acquisitions of monthly subscribers from an existing
Internet service providers. Completing such a transaction may require additional
cash infusions into the Company, if we are not able to use Company stock as
purchase consideration. If we are unable to complete such an acquisition, or if
our business plan does not develop as we anticipate, the Company may be required
to raise additional capital in order to fund its operations. Such funds may not
be available on acceptable terms, if at all. If we are unable to raise
additional funds, we may have to severely curtail or discontinue some or all of
our operations. The timing of our reaching cash flow positive status may be
affected by a number of the risk factors described in this prospectus.

Our funding plan also depends on the Vivendi employee program rolling out in the
United States during the first half of 2002. While we are optimistic that the
U.S. Vivendi rollout will occur

                                      -67-

<PAGE>

during this timeframe, the launch of the program depends upon decisions made by
Vivendi, and there is no guarantee that the program's schedule will be to our
advantage.

Potential sources of additional funds may include financing transactions,
including the issuance of equity or debt securities, obtaining credit
facilities, or other financing mechanisms. The trading price of our common stock
and the downturn in the U.S. stock and debt markets could make it more difficult
for us to obtain financing through the issuance of equity or debt securities in
the future. If we issue additional equity securities to raise funds, the
ownership percentage of our existing stockholders would likely be materially
reduced. The Company may have to sell stock at prices lower than those paid by
existing stockholders, and perhaps lower than existing market prices. New
investors may demand rights, preferences or privileges senior to those of
existing holders of our common stock. If we issue debt securities to raise
funds, the debt would be senior to equity in its claim on assets. The terms of
any debt issued could impose restrictions on our operations.

We may be unable to execute on our business plan if we fail to complete
-----------------------------------------------------------------------
acquisitions of members through the purchase of other businesses.
----------------------------------------------------------------

Acquiring monthly subscribers from other Internet service providers is an
important element of our business plan. While we are conducting discussions
with a number of potential targets, there is no assurance that we will be able
to complete a transaction. Because of our low stock price, we may not be able to
use our stock as purchase consideration. If we have to use cash as purchase
consideration, we will likely require additional capital investment, which may
not be available on acceptable terms or at all. Even if it is available, such
investment may be severely dilutive to existing shareholders. Acquisitions of
members also raise a variety of operating difficulties that may be difficult or
expensive to solve.

We may lose members if we are unable to offer consumer financing for our bundle
-------------------------------------------------------------------------------
programs.
--------

Our consumer credit vendor, MBNA, has given notice that it is terminating its
program with PeoplePC effective April 30, 2001. We are currently in discussions
with MBNA and other credit providers regarding replacement of the MBNA program.
There is no assurance that we will be able to convince MBNA to reconsider its
decision, or, if not, to find a replacement consumer financing partner. If we
cannot replace MBNA, we will likely continue to offer our bundle products
without a financing option. Customers would be required to pay the entire
purchase price of the bundle by credit card. This could affect our ability to
sell bundle products through our consumer and channel programs. The financing
option is not typically offered in a subsidize enterprise employee connectivity
program. Approximately, 75% of consumer purchasers of our bundle products use
the financing option.

Our financial condition may make it difficult to complete transactions with
---------------------------------------------------------------------------
large companies.
---------------

The success of our business depends in part on our ability to enter into
contracts with large companies and organizations for the continuing provision
of Internet connectivity services. Some of these companies and organizations
may be reluctant to enter into long-term contracts with us due to concerns over
our financial condition.

                                      -68-

<PAGE>

We will likely move our listing from the Nasdaq National Market to the Nasdaq
-----------------------------------------------------------------------------
SmallCap Market. The effect of this move on the trading price of our common
----------------------------------------------------------------------------
stock is unpredictable.
----------------------

We are currently out of compliance with the standards for listing on the Nasdaq
National Market. We intend to apply for listing on the Nasdaq SmallCap Market,
which has listing standards that are easier to meet. The effect this change may
have on our stock price is not known. There is no assurance that we will be able
to meet the continuing standards for listing on the NASDAQ SmallCap Market.

We may implement a reverse stock split. The effect of a reverse split on the
----------------------------------------------------------------------------
trading price of our common stock is unpredictable.
--------------------------------------------------

Although we have secured approval from our shareholders to conduct a reverse
stock split in the range of 1-to-15 to 1-to-20, our board of directors has
decided not to implement the reverse stock split at this time. However, the
board of directors could decide at any time to implement the reverse stock
split. Although the theoretical effect of a reverse stock split should be to
increase the per share price of common stock, the actual price effect of a
reverse stock split is difficult to predict. It is possible that the post-split
trading price of our stock could be below the level one would expect based on
the proportional effect of the split alone.

We have a limited operating history.
-----------------------------------

The Company's business prospects are difficult to predict because of our limited
operating history, unproven business model and rapidly evolving business
strategies and markets. The Company was incorporated in March 1999 and began
doing business in October 1999.

Connectivity programs with large companies are important to our success; our
----------------------------------------------------------------------------
ability to close and execute on such programs is not assured.
------------------------------------------------------------

We expect that a significant portion of our future revenues will come from
connectivity programs directed at employees and customers of large companies. A
company's willingness to undertake a connectivity program may be affected by
general economic conditions and by particular business conditions affecting the
company. The slowdown in the U.S. economy may cause companies to defer decisions
to undertake connectivity programs. Connectivity program deals are complex and
the sales cycle is long. In addition, companies may be reluctant to enter into
long-term relationships with companies like ours having limited financial
resources. Further, the success of a connectivity program depends on
satisfactory resolution of contractual issues such as the willingness of a
company to subsidize an employee purchase, purchase prices and terms, vendor
relationships, financing arrangements, levels of service to be provided,
taxation of employee benefits, logistical arrangements and other factors. The
execution of a connectivity program is subject to operational risks such as
delivery arrangements, supply forecasting, Customer Care experience, and many
other factors. These operational factors affect our costs and the speed with
which a program may be implemented. There is no assurance that we will be able
to close and execute connectivity programs at the rates and with the results
envisioned by our business model. The income tax treatment of connectivity
programs where enterprises provide computers to their employees on a subsidized
basis is uncertain with regard to both the enterprise and its employees and
depends on a number of factors. To the extent a program is not tax-free, the
entire amount of the subsidy could be considered taxable wages, subject to
applicable withholding rules. Our inability to structure an enterprise program
that is both tax-free in a particular country and desirable to an enterprise
could hinder our ability to enter into new connectivity program agreements,
particularly in some countries outside the United States where we are unfamiliar
with, and have not operated under, the local tax laws. There is no guarantee
that we will be able to find satisfactory solutions everywhere, and we may
experience unexpected delays in

                                      -69-

<PAGE>

structuring and implementing our programs. In countries where the tax cost of an
employee program is too high, local enterprises may be unwilling to enter into
agreements with us.

Our business would be harmed if we are unable to generate anticipated revenues
------------------------------------------------------------------------------
from our private label and co-branded ISP business.
--------------------------------------------------

We expect that an important source of future revenues will be offerings of
private label or co-branded ISP services through enterprise partners. The
private label or co-branded ISP service line of business is a relatively new
type of business arrangement. It is not certain that we will be able to conclude
significant private label or co-branded ISP deals with large companies. The
speed with which such programs could be implemented is also uncertain. If we are
unable to conclude such deals, or the implementation of the programs is delayed,
our revenues and operating results will suffer.

We rely on Ingram Micro for distribution services for sales of computer/service
-------------------------------------------------------------------------------
bundles; our business would be harmed if Ingram Micro stopped providing
-----------------------------------------------------------------------
distribution services and we could not find a replacement distributor.
---------------------------------------------------------------------

We rely on Ingram Micro, Inc. to provide some of our computer products, maintain
inventory, process orders, prepare merchandise for shipment and distribute our
products to individual consumer customers in a timely and accurate manner.
Ingram Micro's failure to supply and fulfill our computer products could reduce
our revenues and harm our business. Our agreements with Ingram Micro expired on
February 28, 2001. The term of the agreement has not been extended. However, the
parties currently continue their business relationship, although either party
could terminate the relationship at any time. We work actively with Ingram Micro
and third party computer suppliers to identify the types of computers, the
specifications and prices of the computers that will be offered to our members.
Ingram Micro's failure to deliver computers could cause significant delays in
our ability to fulfill our customers' orders, and we may not be able to locate
another distributor that can provide comparable fulfillment, processing and
shipping services in a timely manner, on acceptable commercial terms, if at all.

We rely on computer suppliers to supply and deliver computers; our business
---------------------------------------------------------------------------
would be harmed if they failed to perform.
-----------------------------------------

From time to time, we may enter into agreements with computer suppliers
providing for the supplier to direct ship to our members. If the supplier is
unable or unwilling to supply sufficient numbers of computers to meet our
requirements, or fails to ship our orders on a timely basis, our reputation and
our revenues may be harmed. In the past, this type of failure on the part of
computer suppliers has caused us to experience problems with shipment of
computers and customers have cancelled their memberships and requested refunds.

                                      -70-

<PAGE>

Our ISP network is built on multiple contractual relationships with wholesale
-----------------------------------------------------------------------------
suppliers of ISP service; our success depends on our ability to successfully
----------------------------------------------------------------------------
manage these relationships.
--------------------------

We rely on UUNET Technologies, Inc., an MCI WorldCom company, Genuity Solutions,
Inc., Qwest, Inc., and others to provide Internet access service to our members
in the United States. Our business would be harmed if UUNET, Genuity or any
other Internet access provider in the future does not provide our members with
reliable Internet access, or terminates service in particular geographical
localities not served by other providers. Our business will also be harmed if we
are unable to manage these contractual relationships successfully. Finally,
wholesale ISP costs comprise an important part of our cost structure. Our
business could be harmed if prices in the wholesale ISP market increase.

Our agreement with UUNET expires in April 2002, but will be renewed for an
additional year unless either party provides notice of its intent not to renew
60 days prior to the end of the term. Either party may terminate the agreement
at any time for material breach, provided that the other party is provided a
60-day cure period. Our agreement with Genuity expires in July 2003. Either
Genuity or we may terminate the agreement at any time for material breach,
provided that the other party is provided a 30-day cure period. Both UUNET and
Genuity may suspend performance if their user policies are violated.

We rely on multiple third parties to provide customer service and technical
---------------------------------------------------------------------------
support as well as a hardware warranty covering parts and labor and in-home
---------------------------------------------------------------------------
technical service. If these parties do not provide reliable, high-quality
-------------------------------------------------------------------------
service, and we are unable to satisfactorily replace these services in a
------------------------------------------------------------------------
reasonable time, our reputation and our business will be harmed.
---------------------------------------------------------------

We depend on third-party vendors to render certain services to members. If
existing vendors cannot or will not provide these services at commercially
reasonable prices and reasonable payment terms and we are not able to find
suitable alternative vendors, our business would be harmed. Low-quality service
could harm our reputation and brand name, and demand for our products would
decline. In addition, we may need to spend money and expend other resources to
remedy these problems.

Our business is subject to competition.
--------------------------------------

The markets for personal computers, Internet access and other online services
are highly competitive. Existing or future competitors may develop or offer
products or services that are comparable or superior to ours at a lower price,
which could significantly harm our business. We compete for customers with the
following types of companies:

     .    providers of online services, such as AOL and MSN;

     .    vendors that offer product and services bundles that include a
          computer, Internet access and customer service in a single offering
          and provide a multi-year payment plan, such as Gateway;

     .    vendors of personal computers that integrate Internet access and
          service with their products, such as Apple, Compaq, Dell and Gateway;
          and

     .    combinations of computer vendors and Internet service and content
          providers.

                                      -71-

<PAGE>

Many of our current and potential competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources and
substantially larger customer bases than we do. In addition, many of our
competitors have nationally known brands, well-established relationships and
extensive knowledge of the markets in which we compete. Our competitors may be
able to use these advantages to expand their offerings more quickly, adapt to
new or emerging technologies more quickly, enter commercial relationships to
bundle products and services or address consumer needs, devote greater resources
to the marketing and sale of their offerings and adopt more aggressive pricing
and incentive programs.

Our quarterly operating results are unpredictable, resulting in volatility in
-----------------------------------------------------------------------------
the trading price of our common stock.
-------------------------------------

Our quarterly operating results may vary significantly from quarter to quarter
due to a number of factors. Slight variations in the costs of our computer
systems, Internet access or our other operating expenses could significantly
affect our operating margins in future periods. In addition, because our
operating expenses are based on our expectations of future revenues, unexpected
quarterly fluctuations in revenue could significantly harm our operating
results, particularly if our revenues are lower than anticipated. If our
operating results in any future period do not meet the expectations of
investors, the price of our common stock could decline. Further, these adverse
results could have both short- and long-term effects on our stock price and
could affect the long-term viability of our enterprise. Some of the factors that
could affect our quarterly and long-term operating results include:

     .    our ability to achieve and maintain a low-cost business model and
          manage the third-party relationships necessary to do so;

     .    our ability to generate additional revenues from commerce
          opportunities with our member base;

     .    the popularity of the computer systems we sell;

     .    our key suppliers' ability to manufacture sufficient quantities of the
          computer systems we offer; and

     .    general economic conditions, as well as those specific to the
          Internet, technology and related industries.

The foregoing factors are only partially within our control and, in the case of
external factors such as general economic conditions and market- specific
conditions, are not within our control. Our limited operating history makes it
difficult for us to predict trends accurately in our business and to plan our
operations accordingly.

Our business is affected by varying telecommunications infrastructures.
----------------------------------------------------------------------

Our business model depends on our ability to offer our customers a membership
that includes Internet access. The telecommunications infrastructure in
countries in which we wish to conduct business may make it difficult to provide
Internet access as part of an integrated offering. Alternatively, the
telecommunications infrastructure in foreign countries may encourage free
Internet access, which may result in numerous competitors and decrease the value
of our offering to consumers.

                                      -72-

<PAGE>

Fluctuations in our workforce and management structure could have an adverse
----------------------------------------------------------------------------
effect on our business.
----------------------

The fluctuations in our workforce and management structure have placed, and will
continue to place, a significant strain on our management systems,
infrastructure, resources and planning and management processes. We will not be
able to implement our business strategy without an effective planning and
management process. In addition, we will not be able to increase revenues or
control costs unless we continue to improve our operational, financial and
managerial controls and reporting systems and procedures, train and manage our
work force and manage multiple relationships with third parties. We have
recently undergone several reductions in force, as we have tailored our
workforce to the fluctuating demands of our business. In some cases, these
reductions have been accompanied by restructuring of our operations and
management. Such reductions in force and restructuring also place a significant
strain on our management systems, infrastructure, resources and planning and
management processes.

If we lose senior management and key personnel or are unable to attract and
---------------------------------------------------------------------------
retain skilled employees when needed, we may not be able to implement our
-------------------------------------------------------------------------
business strategy.
-----------------

Our future success depends on the skills, experience and performance of our
senior management and key personnel, particularly of our Chief Executive
Officer, Nick Grouf, and our Chief Operating Officer, Daniel Kohler. We must
retain these individuals and be able to attract and retain additional key
personnel when needed in the future. Competition for individuals with business
and technical expertise is high, especially in the San Francisco Bay Area where
our operations are located. If we lose key personnel or if we are not able to
attract and retain additional personnel when needed, we may be unable to
successfully introduce new products and services or otherwise implement our
business strategy. We grant stock options as a method of attracting and
retaining employees, to motivate performance and to align the interests of
management with those of our stockholders.

We need to refresh our products and services as technology changes to remain
----------------------------------------------------------------------------
competitive.
-----------

The personal computer and Internet access markets are both characterized by
rapid ongoing technological change, changes in user requirements and preferences
and frequent new service introductions involving new processes and technologies
and evolving industry standards that could render our existing products and
services obsolete. As a result, we must regularly introduce new products and
services, including new personal computer configurations and enhanced Internet
services, to maintain consumer interest in our products and services. The market
may not accept the new computer products or services that we introduce. In
addition, the introduction of new products or services by us or our competitors
may adversely affect the sale of, or revenue from, our existing products or
services. If we do not have access to new technology in the future, we may not
be able to effectively incorporate new technology into our products or deliver
new products or features in a timely and cost-effective manner, which could
adversely affect demand for our products and services.

Our business may be harmed if the security of our systems is compromised.
------------------------------------------------------------------------

The secure transmission of confidential information over the Internet is
essential to maintaining consumer confidence in our business. Any
misappropriation of confidential information, whether during the transmission of
data or while it is stored on our servers or the servers of merchants

                                      -73-

<PAGE>

participating in our member commerce program, could damage our reputation,
expose us to a risk of loss, litigation or liability, and deter people from
using the Internet. We currently ask consumers to provide us with registration
and other information and we rely on encryption and authentication technology to
transmit this confidential information securely. Our computer servers may be
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions. We incur substantial expense to protect against and remedy security
breaches and their consequences, but we may not be able to prevent such security
breaches. Our insurance policies may not be adequate to reimburse us for losses
caused by security breaches.

Our business may be harmed if our servers are damaged by natural disasters and
------------------------------------------------------------------------------
similar catastrophic events.
---------------------------

We depend on the efficient and uninterrupted operations of our Web servers and
other hardware systems. Most of our Web servers and other hardware systems are
not redundant and are located at the facilities of a third party in Sunnyvale,
California. Our Web servers and other hardware systems are vulnerable to damage
from earthquakes, fire, floods, power loss, telecommunications failures and
similar events. If any of these events results in damage to our Web servers or
other hardware systems, we may be unable to deliver our services to our
customers until the damage is repaired. In such a case, we may lose customers
and participating merchants, as well as incur substantial costs in repairing any
damage.

Our business may be harmed if we are unable to protect our intellectual
-----------------------------------------------------------------------
property.
--------

We rely on a combination of trademark, trade secret and copyright law and
contractual restrictions to establish and protect our intellectual property.
These afford only limited protection. We have filed for U.S. trademark
registrations for "PeoplePC" and other trademarks. It is also possible that our
competitors or others will adopt service names similar to ours, thereby impeding
our ability to build brand identity and possibly leading to customer confusion.
In addition, there could be potential trade name or trademark infringement
claims brought by owners of other registered trademarks or trademarks that
incorporate variations of the term PeoplePC or our other trademark applications.
Enforcement of trademark rights against unauthorized use, particularly over the
Internet and in other countries, may be impractical or impossible.

We may be required to enforce our intellectual property rights in litigation,
-----------------------------------------------------------------------------
which may be costly and time-consuming.
--------------------------------------

Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to obtain and use information that we regard as proprietary, such as
technology used to operate our Web site, our content, our trademarks and our
domain names. Litigation may be necessary to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. Further, our operations providers and the
merchants participating on our Web site may be engaged in litigation in the
future that would require our involvement. We may become subject to claims by
third parties that we have infringed their intellectual property rights. We
could be involved in these claims even in instances where our connection with
the intellectual property in dispute arises only as a licensee from other
companies. In addition, third parties may assert lawsuits or claims against us,
including those related to product liability, Internet content, privacy, safety
and health and employment matters. Litigation is expensive and time consuming
regardless of the merits of the claim and could divert management's attention
from our business. Moreover, we cannot predict the outcome of any litigation.
Lawsuits, claims or proceedings may result in liability to us.

                                      -74-

<PAGE>

Our business may be harmed if defects occur in the products we sell.
-------------------------------------------------------------------

The design and production of personal computer components is highly complex. We
rely on third-party suppliers to provide us with high-quality products. If any
of the personal computers or peripherals we distribute contain defective
components, we could experience delays in shipment of these products and
increased costs. Further, the design of software is highly complex, and software
often contains defects that may be undiscovered for long periods of time. If our
third-party software providers fail to design effective software, or if defects
in the software or in the personal computer products we distribute are
discovered after we have shipped our products in volume, our business could be
harmed.

Amortization of stock-based compensation will increase future losses.
--------------------------------------------------------------------

For financial reporting purposes, we have determined that the estimated value of
common stock was in excess of the exercise price, which exercise price was
considered to be the fair market value as of the date of grant for 23.1 million
options issued to employees through December 31, 2001. In connection with the
grant of such options, we have recorded net deferred stock-based compensation of
$21.7 million and $63.5 million during the years ended December 31, 2000 and
1999. Stock-based compensation expense will decrease our earnings over the
period of amortization. Deferred stock-based compensation will be amortized over
the vesting period, which is generally 48 months from the date of grant.
Stock-based compensation for the years ended December 31, 2001 and 2000 and the
period from March 2, 1999 (date of inception) to December 31, 1999 was $4.0
million, $43.1 million and $3.0 million. We recorded reductions in deferred
stock-based compensation relating to terminated employees of $30.1 million for
the year ended December 31, 2001. As of December 31, 2001, the Company had an
aggregate of $4.9 million of deferred stock-based compensation remaining to be
amortized.

The balance is expected to be amortized as follows:

                                                 Deferred Stock-Based
          Period                                 Compensation
          ------------------------------------   --------------------------
                  2002                                         $3.6 million
                  2003                                         $1.2 million
                  2004 and thereafter                          $0.1 million

In April 2000, we raised $49.7 million in gross proceeds from the sale of
9,468,252 shares of series C preferred stock. Ford Motor Company purchased
4,765,650 shares of series C preferred stock in connection with this financing
and other investors purchased 4,702,602 shares. Ford also received the right to
purchase 1,905,000 shares of common stock in a private placement effected at the
closing of our initial public offering at the same price per share as our
initial public offering. Ford exercised this right in full. Because Ford
exercised this right, Ford also received a warrant to purchase 2,857,500 shares
of common stock, exercisable at the same price per share as our initial public
offering of $10.00, at any time for a period of 200 days following the date of
our initial public offering, August 21, 2000. On February 21, 2001, the
expiration of the warrant issued to Ford Motor Company was extended to July 16,
2003. In relation to Ford, the value of the right, the warrant and the excess of
the value of the common stock into which the series C preferred stock is
exercisable over the price paid for the series C preferred stock is $24.5
million, and has been charged to sales and marketing expense in the second
quarter of 2000. These rights and equity have been granted to Ford in order to
gain access to Ford's employees as potential

                                      -75-

<PAGE>

members and to entice Ford to purchase membership packages. As Ford has no
future performance requirements and no minimum purchase commitments with respect
to the membership packages, the charge has been expensed when incurred. The
series C preferred stock converted into common stock on a 1-to-1 basis upon the
closing of our initial public offering on August 21, 2000. In the fiscal year
ended December 31, 2000, we incurred a dividend of $22.0 million as a result of
a beneficial conversion feature of preferred stock issued to the other
investors. This dividend has been calculated as the difference between the price
paid by the investors and our initial public offering price per share of $10.00.

Our business could be harmed by unforeseen legal developments or regulation of
------------------------------------------------------------------------------
the Internet.
------------

The law relating to our Internet business and operations is evolving, and no
clear legal precedents have been established. For example, tax authorities in a
number of states are currently reviewing the appropriate tax treatment of
companies engaged in electronic commerce, and new state tax regulations may
subject us to additional state sales or other taxes. The adoption of any new
Internet laws and regulations or the application of existing laws and
regulations to the Internet and electronic commerce could decrease the demand
for our products and services, increase the cost of doing business or prevent
our transaction of business in specific jurisdictions. In addition, the
applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. We could be found
in violation of federal, state or foreign civil or criminal law and, even if we
could successfully defend such claims, our defense could occupy significant
amounts of management's time, harm our business reputation and negatively affect
our operating results and financial condition.

We cannot guarantee that an active market will develop for our stock.
--------------------------------------------------------------------

We cannot predict the extent to which an active market for our common stock will
develop or how liquid that market will eventually become. Since the initial
public offering of our common stock, the volume of our common stock traded on
the Nasdaq National Market has decreased to very low levels. Low trading volumes
may cause the price of our common stock to fall. We cannot predict how the
trading market for our common stock will be affected by our proposed move to the
Nasdaq SmallCap market.

Our stock price has declined and may continue to be depressed and volatile in
-----------------------------------------------------------------------------
the future.
----------

The stock markets in general, and the Nasdaq National Market and technology
companies in particular, have experienced extreme price and volume fluctuations.
Since the initial public offering of our common stock, our stock price has
declined from its initial public offering price of $10.00 per share in August
2000 to $0.22 per share on December 31, 2001. In addition, if we are delisted
from the Nasdaq Stock Market, it may seriously impact the market price and
volatility of our common stock in the future, regardless of our actual operating
performance. We may also be sued in a securities class action lawsuit, which
could be costly, divert our resources and seriously harm our business.

Our principal stockholders can exercise a controlling influence over our
------------------------------------------------------------------------
business and affairs.
--------------------

As of December 31, 2001, our directors, executive officers and 5% or greater
principal stockholders together controlled approximately 94.5% of our common
stock assuming the conversion of all preferred stock purchased by certain of
these stockholders on December 17, 2001 and assuming the exercise of any options
that these stockholders have the right to exercise within 60 days of December
31, 2001. If these stockholders acted or voted together, they would have the
power to elect our directors and to exercise a controlling influence over all
matters

                                      -76-

<PAGE>

requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. This concentration of ownership may delay
or prevent a change in control of our company, even when a change may be in the
best interests of our stockholders. In addition, the interests of these
stockholders may not always coincide with our interests as a company or the
interests of other stockholders. Accordingly, these stockholders could cause us
to take action or omit to take action, even if doing otherwise would benefit our
stockholders as a whole.

Substantial future sales of our common stock in the public market may depress
-----------------------------------------------------------------------------
our stock price.
---------------

Our stockholders hold a substantial number of shares of our common stock that
they will be able to sell in the public market in the future. An additional
509,586,575 shares will be eligible for sale in the public market upon the
effective date of our registration statement on form S-3, which was filed on
January 16, 2002 and which we anticipate will be declared effective on April 2,
2002. Sales of a substantial number of shares of our common stock could cause
our stock price to fall, especially if the trading volume of our stock remains
low. In addition, the sale of these shares in the public market could impair our
ability to raise capital through the sale of additional stock.

Our charter documents and Delaware law could make it more difficult for a third
-------------------------------------------------------------------------------
party to acquire us, and discourage a takeover.
----------------------------------------------

Provisions of our certificate of incorporation, bylaws, and Delaware law could
make it more difficult for a third party to acquire us, even if doing so would
be of benefit to our stockholders.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Quantitative and qualitative disclosure about market risk is set forth on page
67.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is submitted as a separate section of this
Form 10-K. See Index to Consolidated Financial Statements and Schedules on page
36 for a listing of financial statements and schedules provided.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

                                      -77-

<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

                                    DIRECTORS


Our Board of Directors currently has six members, divided into three classes
serving staggered terms of three years. Currently, there are two directors in
Class I, two directors in Class II and two directors in Class III. Below is
information on our directors. This information is current as of March 15, 2002.

             Incumbent Class II Directors Whose Terms Expire in 2002

         The Class II directors have terms that expire in 2002 and the
re-election of these directors will be considered at the 2002 Annual Meeting of
Stockholders.

         Name                                     Age    Position
         ----                                     ---    --------
         John Sculley.........................     62    Director
         Ronald D. Fisher.....................     54    Director


         John Sculley has served as a director since May 1999. Since February
1994, Mr. Sculley has served as a partner of Sculley Brothers LLC, a venture
capital firm. From November 1993 to February 1994, Mr. Sculley served as the
Chief Executive Officer of Spectrum Information Technologies, Inc. From 1983 to
1993, Mr. Sculley served as the Chief Executive Officer of Apple Computer, Inc.
Mr. Sculley earned a B.S. in Architecture from Brown University and an M.B.A.
from the Wharton School at the University of Pennsylvania.

         Ronald D. Fisher has served as a director since October 1999. Since
October 1995, Mr. Fisher has served as the Vice Chairman of SOFTBANK Holdings
Inc., a technology holding company. From January 1990 to February 1996, Mr.
Fisher was the Chief Executive Officer of Phoenix Technologies, Ltd., a
developer and marketer of system software products for personal computers. Mr.
Fisher is a director of Key3Media, Inc., Global Sports, Inc., E*Trade, SOFTBANK
Inc. and InsWeb Corp. Mr. Fisher earned a Bachelor of Commerce from the
University of Witwatersand in South Africa and an M.B.A. from Columbia
University.

         PeoplePC's directors listed below are not up for election this year and
will continue in office for the remainder of their terms or earlier in
accordance with PeoplePC's Bylaws.

             Incumbent Class III Director Whose Terms Expire in 2003

         Name                                     Age    Position
         ----                                     ---    --------
         Nick Grouf............................    33    Chairman of the Board,
                                                         Chief Executive Officer
                                                         and Director

         Lee Feldman ..........................    34    Director

                  In February 2002, the Board of Directors adopted resolutions
         to create an additional directorship position on the Board. Mr. Feldman
         was appointed the new director.

         Nick Grouf, one of our co-founders, has served as our Chairman of the
Board and Chief Executive Officer since our founding in March 1999. From January
1999 to March 1999, Mr. Grouf served as a Partner and Entrepreneur-in-Residence
at SOFTBANK Technology Ventures, now known as Mobius Venture Capital, Inc., a
venture capital firm. Prior to joining SOFTBANK Technology Ventures, Mr. Grouf
co-founded and served as President and Chief

                                      -78-

<PAGE>

Executive Officer of Firefly Network, Inc., a provider of personalization
technologies for the Internet. Mr. Grouf earned a B.A. from Yale University and
an M.B.A. from Harvard University.

         Lee Feldman has served as a director since February 2002. Mr. Feldman
has been a partner at SOFTBANK Capital Partners LP since October 2001. Prior to
joining SOFTBANK Capital Partners LP, Mr. Feldman served as the Vice President
of Strategy and Investments for SOFTBANK International Ventures from March 2000
to October 2001. Mr. Feldman served as Vice President of Corporate Development
at Ziff-Davis from April 1998 to October 2001 and Vice President of Corporate
Development at PBC, Inc. from December 1996 to April 1998. Mr. Feldman received
his B.A. and J.D. from Columbia University.


Incumbent Class I Directors Whose Terms Expire in 2004

         Name                                     Age    Position
         ----                                     ---    --------
         Michael J. Price......................    44    Director
         Bradley A. Feld.......................    36    Director

         Michael J. Price has served as a director since October 1999. Since
November 2001, Mr. Price has served as the Vice-Chairman of Evercore Partners,
an advisory and private equity firm. From July 1998 to October 2001, Mr. Price
was Co-Chairman of FirstMark Communications Europe S.A., a broadband
communications company in Europe. From March 1987 to March 1998, Mr. Price
served first as a Vice President and then as a Managing Director of Lazard
Freres & Co. L.L.C., where he founded its Global Telecommunications and
Technology practice. Mr. Price is a director of Amdocs Ltd. and SpectraSite. Mr.
Price earned B.A. in economics from the Wharton School at the University of
Pennsylvania and an M.B.A. from Harvard University.

         Bradley A. Feld has served as a director since March 1999. Since 1997,
Mr. Feld has served as managing director of Mobius Venture Capital, formerly
known as SOFTBANK Technology Ventures, a venture capital firm. Prior to joining
Mobius Venture Capital, Mr. Feld was the Chief Technology Officer of AmeriData.
Mr. Feld has also served as a director of RainDance Communications, Inc. since
January 1998 and Interliant, Inc. since December 1997. Mr. Feld earned a B.S.
and an M.S. from the Sloan School of Management at the Massachusetts Institute
of Technology.

                               EXECUTIVE OFFICERS

         Our executive officers as of March 15, 2002 are as follows:

                     Name               Age         Position with PeoplePC
         ----------------------------   ---    ---------------------------------
         Nick Grouf..................    33    Chief Executive Officer
         Daniel Kohler...............    45    Chief Operating Officer and
                                               Executive Vice President,
                                               International
         Mary E. Humiston............    37    Chief Administrative Officer
         Charles P. Ortmeyer.........    51    Senior Vice President and General
                                               Counsel
         Michael Glogowsky...........    54    Chief Financial Officer

         Nick Grouf, one of our co-founders, has served as our Chief Executive
Officer and a director since our founding in March 1999. Mr. Grouf served as
Chairman of the Board from March 1999 through December 2001. From January 1999
to May

                                      -79-

<PAGE>

1999, Mr. Grouf served as a Venture Partner and Entrepreneur-in-Residence at
SOFTBANK Technology Ventures, a venture capital firm. In 1995, Mr. Grouf
co-founded and served as President and Chief Executive Officer of Firefly
Network, Inc., a provider of personalization technologies for the Internet,
which was acquired by Microsoft Corporation in April 1998. Mr. Grouf earned a
B.A. from Yale University and an M.B.A. from Harvard Business School.

         Daniel Kohler has served as our Chief Operating Officer since July
1999. From August 1998 to July 1999, Mr. Kohler served as Senior Vice President
of Operations and Administration of Ty, Inc., a toy manufacturer and
distributor. From May 1994 to August 1998, Mr. Kohler served as Vice President
of Catalog Operations of Office Max, Inc. Mr. Kohler earned a B.A. from the
University of Pittsburgh and an M.B.A. from Keller Graduate School.

         Mary E. Humiston has served as our Chief Administrative Officer since
March 2001. Prior to becoming Chief Administrative Officer, Ms. Humiston served
as PeoplePC's Vice President of Human Resources & Administration from October
1999 to March 2001. Prior to coming to PeoplePC, Ms. Humiston served as the
Senior Director Executive and Field Recruiting for The Gap, Inc. from January
1997 to October 1999. Ms. Humiston also served as the Human Resources Manager
and Corporate Auditor of General Electric Company from January 1990 to January
1997. Ms. Humiston earned a B.S. from Siena College and an M.B.A. from
Rensselear Polytechnic Institute.

         Charles P. Ortmeyer has served as our Senior Vice President and General
Counsel since July 2000. Mr. Ortmeyer joined PeoplePC from Howard, Rice,
Nemerovski, Canady, Falk, & Rabkin, a Professional Corporation, where he
practiced for 17 years, the last 12 as a director and shareholder. He has served
as Chairman of the Financial Institutions Committee of the State Bar (Business
Law section). Currently, he is a member of the American Bar Association, the
State Bar of California and the San Francisco Bar Association. He is co-author
of Securities Regulations Forms, a four-volume treatise on documentation
published by Clark Boardman Callaghan. Mr. Ortmeyer earned his B.A. and J.D.
from the University of California, Berkeley, where he was a member of Order of
the Coif, and the Supreme Court Editor of the California Law Review. After
graduation from Boalt Hall, he served two years as a law clerk to Judge Betty B.
Fletcher, United States Court of Appeals for the Ninth Circuit.

         J. Michael Glogowsky has served as Chief Financial Officer since April
2001. Mr. Glogowsky was the Vice President of Finance and Treasurer at PeoplePC
since November 1999. From October 1998 to September 1999, Mr. Glogowsky was
Director of Finance at AirTouch Communications, Inc., a global wireless
communications company which merged with Vodafone. He was Director of the Merger
Planning Group at SBC Corp., an international telecommunications provider, from
March 1997 to September 1998. Mr. Glogowsky was Director of Financial Planning
and Analysis at Pacific Telesis, the largest telecommunications provider in
California, from 1990 to 1997. Mr. Glogowsky earned a B.A. from Michigan State
University and an M.B.A. from University of California at Berkeley.

             SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Exchange Act requires our executive officers and
directors, and persons who own more than 10% of our common stock, to file
certain reports regarding ownership of, and transactions in, our securities with
the SEC. Such officers, directors and 10% stockholders are also required by SEC
rules to furnish us with copies of all Section 16(a) forms that they file.

                                      -80-

<PAGE>

         Based solely on our review of the copies of such forms furnished to us,
or written representations from certain reporting persons, we believe that
during fiscal year 2001 all of the reporting persons complied with the filing
requirements.

ITEM 11. EXECUTIVE AND DIRECTOR COMPENSATION

                             EXECUTIVE COMPENSATION

Summary Compensation Table

         The following Summary Compensation Table sets forth information
regarding the compensation that we paid during the last three fiscal years to
our Chief Executive Officer and our four next most highly compensated executive
officers who earned more than $100,000 in the fiscal year ended December 31,
2001.

<TABLE>
<CAPTION>
                                                                    Long-Term
                                                                  Compensation
                                                                  ------------
                                                                     Awards
                                            Annual Compensation    Securities
                                   Fiscal   -------------------    Underlying       All Other
   Name and Principal Position      Year    Salary($)  Bonus($)    Options(#)    Compensation($)
--------------------------------   ------   ---------  --------    ----------    ---------------
<S>                                 <C>      <C>       <C>            <C>                     <C>
Nick Grouf .....................    2001     $204,167  $130,955            --                 --
    Chairman of the Board           2000     $150,000  $158,729            --                 --
    Chief Executive Officer         1999     $126,731        --            --                 --

Daniel Kohler ..................    2001     $336,710  $ 95,000            --                 --
    Chief Operating Officer         2000     $300,000        --       850,000                 --
                                    1999     $131,154        --       800,000                 --

Charles P. Ortmeyer ............    2001     $225,000  $ 80,000            --                 --
    Senior Vice President and       2000     $117,692  $  3,000       625,000                 --
    General Counsel                 1999           --        --            --                 --

Mary E. Humiston ...............    2001     $225,000  $ 33,500            --                 --
    Chief Administrative Officer    2000     $156,250        --       150,000                 --
                                    1999     $ 30,962        --       300,000                 --

Michael Glogowsky ..............    2001     $192,917  $ 91,750        30,000                 --
    Chief Financial Officer         2000     $114,583        --       100,000                 --
                                    1999     $ 18,718        --       150,000                 --
</TABLE>

                                      -81-

<PAGE>

                        Option Grants in Last Fiscal Year

         The following table provides information relating to stock options
awarded during the fiscal year ended December 31, 2001 to our Chief Executive
Officer and each of our four most highly compensated executive officers who
earned more than $100,000 during fiscal year ended December 31, 2001. All such
options were awarded under the Company's 1999 and 2000 Stock Plan.

<TABLE>
<CAPTION>
                                                         Individual Grants
                                      --------------------------------------------------------
                                                     Percent of
                                                        Total                                    Potential Realizable Value
                                        Number of      Options                                   At Assumed Rates of Stock
                                       Securities     Granted to                                   Price Appreciation for
                                       Underlying      Employees      Exercise                         Option Term (1)
                                         Options       in Fiscal     Price Per      Expiration   --------------------------
               Name                   Granted(#)(2)     2001(%)    Share($)(3)(4)      Date        5%($)           10%($)
-----------------------------------   -------------   ----------   --------------   ----------   --------         --------
<S>                                         <C>          <C>            <C>          <C>           <C>             <C>
Nick Grouf.........................              0        --              --            --          --               --
Daniel Kohler......................              0        --              --            --          --               --
Mary E. Humiston...................              0        --              --            --          --               --
Charles P. Ortmeyer................              0        --              --            --          --               --
Michael Glogowsky..................         30,000       1.1            0.31         05/31/11      6,300           15,000
</TABLE>

--------------------
(1)  Potential realizable value is based on the assumption that the Common Stock
     of the Company appreciates at the annual rate shown (compounded annually)
     from the date of grant until the expiration of the ten year option term.
     These numbers are calculated based on the requirements promulgated by the
     Securities and Exchange Commission and do not reflect the Company's
     estimate of future price growth.
(2)  1/4th of such shares are released from our repurchase option one year from
     the release start date and a further 1/48th of such shares are subsequently
     released from our repurchase option each month thereafter.
(3)  Options were granted at an exercise price equal to the fair market value of
     the Company's Common Stock on the date of grant.
(4)  Exercise price may be paid in cash, check, promissory note, by delivery of
     already-owned shares of the Company's Common Stock subject to certain
     conditions, delivery of a properly executed exercise notice together with
     irrevocable instructions to a broker to deliver promptly to the Company
     amount of sale or loan proceeds required to pay the exercise price, a
     reduction in the amount of any Company liability to an optionee, or any
     combination of the foregoing methods of payment or such other consideration
     or method of payment to the extent permitted under applicable law.

                 Aggregate Option Exercises in Last Fiscal Year
                        and Fiscal Year-End Option Values

         The following table sets forth, as to our Chief Executive Officer and
each of our four most highly compensated executive officers who earned more than
$100,000 during fiscal year ended December 31, 2001, information concerning the
number of shares subject to exercisable stock options as of December 31, 2001.
Also reported are values for "in-the-money" options that represent the positive
spread between the respective exercise prices of outstanding stock options and
the fair market value of the Company's Common Stock as of December 31, 2001.

<TABLE>
<CAPTION>
                                                                         Number of Securities
                                                                        Underlying Unexercised         Value of Unexercised
                                                                              Options at              In-the-Money Options at
                                         Shares                            December 31, 2001          December 31, 2001($)(1)
                                      Acquired on        Value        ---------------------------   ---------------------------
                Name                  Exercise (#)   Realized($)(2)   Exercisable   Unexercisable   Exercisable   Unexercisable
-----------------------------------   ------------   --------------   -----------   -------------   -----------   -------------
<S>                                        <C>             <C>          <C>              <C>            <C>            <C>
Nick Grouf.........................        0               --             --             --             --             --
Daniel Kohler......................        0               --           250,000          --             --             --
Mary E. Humiston...................        0               --            90,000          --             --             --
Charles P. Ortmeyer................        0               --           625,000          --             --             --
Michael Glogowsky..................        0               --            80,000          --             --             --
</TABLE>
---------------
(1)  Fair market value of the Company's Common Stock at fiscal year-end ($0.225
     based on the last reported sale price of the Company's Common Stock on
     December 31, 2001) minus the exercise price.
(2)  Fair market value of the Company's Common Stock on the date of exercise
     minus the exercise price.

                                      -82-

<PAGE>

     The 1999 and 2000 Stock Plans provide that in the event we merge with or
into another corporation, or we sell all or substantially all of our assets,
each outstanding option shall be assumed or substituted by the successor
corporation. If the successor corporation refuses to assume or substitute for
the option, then all outstanding options will become fully vested and
exercisable.

     The 2000 Employee Stock Purchase Plan provides that in the event we merge
with or into another corporation, or we sell all or substantially all of our
assets, each outstanding option shall be assumed or substituted by the successor
corporation. If the successor corporation refuses to assume or substitute for
the option, then any purchase periods in progress will be shortened by setting a
new exercise date, and any offering periods then in progress shall end on the
new exercise date.

     For information regarding stock options granted to executive officers since
December 31, 2001, see Item 13, "Certain Relationships and Related
Transactions."

                             DIRECTOR COMPENSATION

     Our directors do not currently receive any cash compensation for their
service as directors except for reimbursement for reasonable travel expenses in
connection with attendance at board and committee meetings. Current and future
directors are eligible for option grants under our incentive plans. For
information regarding stock options granted to directors since the beginning of
the last fiscal year, see Item 13, "Certain Relationships and Related
Transactions."

                          EMPLOYMENT-RELATED CONTRACTS

         We have employment agreements with our Chief Executive Officer and each
our four most highly compensated executive officers under which the employee
would be entitled to receive monthly incentive bonuses for those calendar
months, if any, that the employee meets specified individual performance
targets. If the employee is terminated without Cause, as defined in the
agreement, or resigns from his or her position for Good Reason, as defined in
the agreement, we will provide a severance payment to the employee equivalent to
a certain number of months, depending on the employee's position, of the
employee's base salary on his or her last day of employment.

           COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
                            IN COMPENSATION DECISIONS

The Compensation Committee was formed on March 30, 2000, and the members of the
Compensation Committee are Messrs. Sculley and Feld. No interlocking
relationship exists between any member of our Board of Directors or Compensation
Committee and any member of the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past. No member of the Compensation Committee is or was formerly an officer or
an employee of the Company or its subsidiaries.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         PeoplePC has one class of stock outstanding, designated common stock,
$0.0001 par value. As of March 15, 2002, 551,502,422 shares of our common stock
were issued and outstanding.

                                      -83-

<PAGE>

                             PRINCIPAL STOCKHOLDERS

         The following table sets forth information regarding the beneficial
ownership of our common stock as of March 15, 2002, by the following individuals
or groups:

         .    each person, or group of affiliated persons, that we know
              beneficially owns more than 5% of our outstanding stock;

         .    each of our current directors;

         .    our Chief Executive Officer and each of our four most highly
              compensated executive officers in the fiscal year ended December
              31, 2001; and

         .    all of our executive officers and current directors as a group.

         The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Exchange Act, and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under such
rule, beneficial ownership includes any shares as to which the individual or
entity has voting power or investment power and any shares that the individual
has the right to acquire within 60 days of March 15, 2002 through the exercise
of any stock option or other right. Unless otherwise indicated in the footnotes,
each person or entity has sole voting and investment power (or shares such
powers with his or her spouse) with respect to the shares shown as beneficially
owned. Except as otherwise noted, the address for each stockholder on this table
is c/o PeoplePC Inc., 100 Pine Street, Suite 1100, San Francisco, California
94111.

                                      -84-

<PAGE>

         The percentage of beneficial ownership is based on 551,502,422 shares
of common stock outstanding as of March 15, 2002.

<TABLE>
<CAPTION>
                                                                                      Approximate
                                                                                      Percentage
                              Name                                 Number of Shares    Ownership
----------------------------------------------------------------   ----------------   -----------
<S>                                                                  <C>                 <C>
5% Stockholders
Entities affiliated with SOFTBANK Corp.(1) .....................     415,004,784         71.2%
     c/o Ronald D. Fisher
     1188 Centre Street
     Newton Center, MA 02459

Beny Alagem ....................................................      60,000,000         10.9%
     c/o Sam Surloff
     2842 Motor Avenue
     Los Angeles, CA 90064


Directors and Executive Officers
Ronald D. Fisher(1) ............................................     415,004,784         71.2%
     1188 Centre Street
     Newton Center, MA 02459

Bradley A. Feld(2) .............................................      22,977,004          4.2%
     200 N. Evelyn Street, Suite 200
     Mountain View, CA 94043

Nick Grouf(3) ..................................................      58,561,334          9.9%

John Sculley(4) ................................................      13,327,526          2.4%
     90 Park Avenue, 32nd Floor
     New York, NY 10016

Michael Price(5) ...............................................       9,220,000          1.7%
     Evercore Partners
     65 East 55th Street, 33rd Floor
     New York, NY 10022

Lee Feldman                                                                    0          *

Dan Kohler(6) ..................................................      12,230,000          2.2%

Charles P. Ortmeyer(7) .........................................       3,125,000          *

Mary E. Humiston(8) ............................................       2,150,000          *

J. Michael Glogowsky(9) ........................................       1,980,000          *

All directors and executive officers as a group(10 persons) ....     536,595,648         79.8%
</TABLE>

---------------
*     Less than 1%

(1)  Includes 191,597,963 shares held by SOFTBANK Capital Partners LP, over
     which SOFTBANK Capital Partners LP shares voting and dispositive power as
     described below, 188,306,066 shares held by SOFTBANK Capital LP, over which
     SOFTBANK Capital LP shares voting and dispositive power as described below,
     and 3,425,173 shares held by SOFTBANK Capital Advisors Fund LP, over which
     SOFTBANK Capital Advisors Fund LP shares voting and dispositive power as
     described below. SOFTBANK Capital Partners LP, SOFTBANK Capital LP and
     SOFTBANK Capital Advisors Fund LP each have shared voting and dispositive
     power over their respective shares. Also includes up to 3,334,226 shares
     issuable to SOFTBANK Capital Partners LP upon exercise of a warrant to
     purchase shares of PeoplePC Europe NV Series A Preferred Stock and upon the
     subsequent exercise of a put option to sell the shares of PeoplePC Europe
     NV Series A Preferred Stock to the Company in exchange for the Company's
     common stock; as described below, SOFTBANK Capital Partners LP shares
     voting and dispositive power over up to the entire amount of these shares;
     SOFTBANK Capital LP shares voting and dispositive power over up to
     1,638,405 of these shares and SOFTBANK Capital Advisors Fund shares voting
     and dispositive power over up to 28,774 of these shares. Also includes up
     to 28,341,356 shares issuable to @viso Limited, a joint venture of which
     50% is owned by SB Holdings (Europe) Ltd., upon exercise of the put option
     held by @viso Limited pursuant to a Put Option Agreement signed on May 30,
     2001; SB Holdings (Europe) Ltd. shares voting and dispositive power over up
     to the entire amount of these shares.

     SOFTBANK Capital Partners LLC is the general partner of SOFTBANK Capital
     Partners LP, SOFTBANK Capital LP and SOFTBANK Capital Advisors Fund LP;
     accordingly, securities beneficially owned by SOFTBANK Capital Partners LP,
     SOFTBANK Capital LP and SOFTBANK Capital Advisors Fund LP may be regarded
     as being beneficially owned by SOFTBANK Capital Partners LLC. Securities
     beneficially owned by SOFTBANK Capital Partners LLC may be regarded as
     being beneficially owned by SOFTBANK Capital Partners Investment Inc., Mr.
     Ronald D. Fisher and Mr. Charles R. Lax. In addition, because Mr. Charles
     R. Lax is a managing director of STV IV LLC, he may be regarded as being
     the beneficial owner of the securities beneficially owned by STV IV LLC, as
     described in footnote 3 hereto. SOFTBANK Capital Partners Investment Inc.
     is a wholly-owned subsidiary of SOFTBANK Holdings Inc.; accordingly,
     securities beneficially owned by SOFTBANK Capital Partners Investment Inc.
     may be regarded as being beneficially owned by SOFTBANK Holdings Inc.
     SOFTBANK Holdings Inc. and SB Holdings (Europe) Ltd. are wholly-owned
     subsidiaries of SOFTBANK Corp.; accordingly, securities beneficially owned
     by SOFTBANK Holdings Inc. and SB Holdings (Europe) Ltd. may be regarded as
     being beneficially owned by SOFTBANK Corp. Securities beneficially owned by
     SOFTBANK Corp. may be regarded as being beneficially owned by Mr. Masayoshi
     Son, the President and Chief Executive Officer of SOFTBANK Corp. Each of
     the above persons and entities has shared voting power over the shares of
     which it may be regarded as being a beneficial owner; each of the above
     persons and entities has shared dispositive power over the shares of which
     it may be regarded as being a beneficial owner. Mr. Ronald D. Fisher serves
     on our Board of Directors. Mr. Ronald D. Fisher

                                      -85-

<PAGE>

     does not hold any options to purchase any shares of our capital stock.

(2)  Includes 22,545,036 shares held by SOFTBANK Technology Ventures IV LP, over
     which SOFTBANK Technology Ventures IV LP shares voting and dispositive
     power as described below, and 431,968 shares held by SOFTBANK Technology
     Advisors Fund LP, over which SOFTBANK Technology Advisors Fund LP shares
     voting and dispositive power as described below.

     STV IV LLC is the general partner of SOFTBANK Technology Ventures IV LP and
     SOFTBANK Technology Advisors Fund LP; accordingly, securities owned by
     SOFTBANK Technology Ventures IV LP and SOFTBANK Technology Advisors Fund LP
     may be regarded as being beneficially owned by STV IV LLC. Mr. Bradley A.
     Feld, Mr. Charles R. Lax, Ms. Jo Ann Heidi Roizen, Mr. D. Rex Golding, Mr.
     E. Scott Russell and Mr. Gary E. Rieschel are managing directors of STV IV
     LLC; accordingly, securities owned by STV IV LLC may be regarded as being
     beneficially owned by Mr. Bradley A. Feld, Mr. Charles R. Lax, Ms. Jo Ann
     Heidi Roizen, Mr. D. Rex Golding, Mr. E. Scott Russell and Mr. Gary E.
     Rieschel. In addition, because of Mr. Charles R. Lax's interest in SOFTBANK
     Capital Partners LLC, Mr. Charles R. Lax may be regarded as being the
     beneficial owner of the securities beneficially owned by SOFTBANK Capital
     Partners LLC as described in footnote 1 hereto. Mr. Bradley A. Feld may be
     regarded as being the beneficial owner of 22,977,004 shares of common
     stock, over which he has shared voting and dispositive power. Mr. Bradley
     A. Feld does not hold any options to purchase any shares of our capital
     stock.

(3)  Includes 18,561,334 shares issued pursuant to a restricted stock purchase
     agreement. A portion of these shares are subject to repurchase by us, which
     right lapses progressively over time. Also includes 40,000,000 shares
     issuable upon exercise of outstanding options within 60 days of March 15,
     2002.

(4)  Includes 1,020,000 shares issued upon exercise of options granted in July
     1999. A portion of these shares are subject to repurchase by us, which
     right lapses progressively over time. Also includes 8,000,000 shares
     issuable upon exercise of outstanding options within 60 days of March 15,
     2002. The number of shares beneficially owned by Mr. Sculley also includes
     4,307,526 shares held by Sculley Brothers LLC. Mr. Sculley, a partner of
     Sculley Brothers LLC, serves on our Board of Directors.

(5)  Includes 1,060,000 shares issued upon exercise of options granted in July
     1999. A portion of these shares are subject to repurchase by us, which
     right lapses progressively over time. Also includes 8,000,000 shares
     issuable upon exercise of outstanding options within 60 days of March 15,
     2002. The number of shares beneficially owned by Mr. Price also includes
     80,000 shares held as custodian for Attie Price and 80,000 shares held as
     custodian for Jeffrey Price under the NJUTMA.

(6)  Includes 1,480,000 shares issued upon exercise of options granted in August
     1999 and February 2000. A portion of these shares are subject to repurchase
     by us, which right lapses progressively over time. Also includes 10,750,000
     shares issuable upon exercise of outstanding options within 60 days of
     March 15, 2002. If exercised, a portion of these shares are subject to
     repurchase by us, which right lapses progressively over time.

(7)  Includes 3,125,000 shares issuable upon exercise of outstanding options
     within 60 days of March 15, 2002. If exercised, a portion of these shares
     are subject to repurchase by us, which right lapses progressively over
     time.

(8)  Includes 360,000 shares issued upon exercise of options granted in October
     1999 and February 2000. A portion of these shares are subject to repurchase
     by us, which right lapses progressively over time. Also includes 1,790,000
     shares issuable upon exercise of outstanding options within 60 days of
     March 15, 2002. If exercised, a portion of these shares are subject to
     repurchase by us, which right lapses progressively over time.

(9)  Includes 200,000 shares issued upon exercise of options granted in October
     1999 and February 2000. A portion of these shares are subject to repurchase
     by us, which right lapses progressively over time.

                                      -86-

<PAGE>

     Also includes 1,780,000 shares issuable upon exercise of outstanding
     options within 60 days of March 15, 2002. If exercised, a portion of these
     shares are subject to repurchase by us, which right lapses progressively
     over time.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Stock Option Grants to Executive Officers and Directors

     The table below summarizes recent option grants to our executive officers
and directors under our 2000 Stock Plan following the fiscal year ending
December 31, 2001.

<TABLE>
<CAPTION>
                                                  Start Date for
                                                   Release from      Number         Number of        Aggregate
                                                    Repurchase      of Shares    Optioned Shares      Purchase
Officer, Directors and 5% Stockholders                Option        Optioned    Exercised to Date     Price(1)
-----------------------------------------------   --------------   ----------   -----------------   -----------
<S>                                                  <C>           <C>                  <C>         <C>
Nick Grouf(2)                                        01/28/02      43,740,000           0           $ 6,561,000
Daniel Kohler(2) ..............................      01/28/02      10,500,000           0           $ 1,575,000
Mary Humiston(2) ..............................      01/28/02       1,700,000           0           $   255,000
Charles Ortmeyer(2) ...........................      01/28/02       2,500,000           0           $   375,000
Michael Glogowsky(2)...........................      01/28/02       1,700,000           0           $   255,000
Michael J. Price(3) ...........................      01/28/02       8,000,000           0           $ 1,200,000
John Sculley(3) ...............................      01/28/02       8,000,000           0           $ 1,200,000
</TABLE>

---------------
(1)  Assumes exercise to purchase all shares subject to the option at an
     exercise price of $0.15 per share.
(2)  1/36th of the shares are released from our repurchase option each month
     from the release start date. In addition, upon a change of control, an
     additional 12.5% of shares that continue to be subject our right of
     repurchase shall be immediately released from our repurchase option.
(3)  1/4th of such shares are released from our repurchase option six months
     from the release start date, an additional 1/4th of such shares are
     released from our repurchase option twelve months from the release start
     date and the remaining 1/2 of such shares will be subsequently released
     from our repurchase option ratably over 36 months. In addition, upon an
     involuntary termination following a change of control, all shares that
     continue to be subject to our right of repurchase shall be immediately
     released from our repurchase option.

     Issuance of Series B Preferred Stock

     On December 17, 2001, we sold 4,375,000 shares of series B preferred stock
at $5.00 per share (the "Private Placement"). Pursuant to the terms of a
Registration Rights Agreement dated December 17, 2001, we were required to file
a registration statement with the Securities and Exchange Commission (the "SEC")
to register the resale of the common stock issuable upon conversion of the
series B preferred stock. The registration statement on Form S-3 was filed with
the SEC on January 16, 2002. The purchasers of the series B preferred stock
included, among others:

<TABLE>
<CAPTION>
                                                                        Shares of
                                                       Shares of       Common Stock
                                                        Series B           upon          Aggregate
Investor                                             Preferred Stock   Conversion(1)   Purchase Price
--------                                             ---------------   -------------   --------------
<S>                                                     <C>             <C>              <C>
SOFTBANK Technology Ventures Entities (2).........         50,000         5,000,000      $   250,000
SOFTBANK Capital Entities (3).....................      3,600,000       360,000,000      $18,000,000
</TABLE>
---------------
(1)  Each share of series B preferred stock was converted into one hundred
     shares of common stock upon stockholder approval obtained at a special
     meeting of the stockholders held on February 19, 2002.
(2)  Represents purchase on December 17, 2001 of:

                                      -87-

<PAGE>

     .    49,060 series B shares by SOFTBANK Technology Ventures IV LP; and
     .    940 series B shares by SOFTBANK Technology Advisors Fund LP.
(3)  Represents purchase on December 17, 2001 of:
     .    1,799,928 series B shares by SOFTBANK Capital Partners LP;
     .    1,769,004 series B shares by SOFTBANK Capital LP; and
     .    31,068 series B shares by SOFTBANK Capital Advisors Fund LP.

     STV IV LLC is the general partner of SOFTBANK Technology Ventures IV LP and
SOFTBANK Technology Advisors Fund LP; accordingly, securities owned by SOFTBANK
Technology Ventures IV LP and SOFTBANK Technology Advisors Fund LP may be
regarded as being beneficially owned by STV IV LLC. Mr. Bradley A. Feld, a
member of our Board of Directors, is a managing directors of STV IV LLC.

     SOFTBANK Capital Partners LLC is the general partner of SOFTBANK Capital
Partners LP, SOFTBANK Capital LP and SOFTBANK Capital Advisors Fund LP;
accordingly, securities beneficially owned by SOFTBANK Capital Partners LP,
SOFTBANK Capital LP and SOFTBANK Capital Advisors Fund LP may be regarded as
being beneficially owned by SOFTBANK Capital Partners LLC. Securities
beneficially owned by SOFTBANK Capital Partners LLC may be regarded as being
beneficially owned by Mr. Ronald D. Fisher, a member of our Board of Directors.

     Employment Contracts with Executive Officers

     We have employment agreements with our Chief Executive Officer and each our
four most highly compensated executive officers under which the employee would
be entitled to receive monthly incentive bonuses for those calendar months, if
any, that the employee meets specified individual performance targets. If the
employee is terminated without Cause, as defined in the agreement, or resigns
from his or her position for Good Reason, as defined in the agreement, we will
provide a severance payment to the employee equivalent to a certain number of
months, depending on the employee's position, of the employee's base salary on
his or her last day of employment.

     Contract with SOFTBANK Corp.

     During June 2001, we entered into negotiations for a contract with SOFTBANK
Corp., under which we would perform certain development work on a time and
material basis. We recognized $0.9 million in revenue for the year ended
December 31, 2001 related to this agreement.

     SOFTBANK Capital Partners LLC is the general partner of SOFTBANK Capital
Partners LP, SOFTBANK Capital LP and SOFTBANK Capital Advisors Fund LP;
accordingly, securities beneficially owned by SOFTBANK Capital Partners LP,
SOFTBANK Capital LP and SOFTBANK Capital Advisors Fund LP may be regarded as
being beneficially owned by SOFTBANK Capital Partners LLC. Securities
beneficially owned by SOFTBANK Capital Partners LLC may be regarded as being
beneficially owned by Mr. Ronald D. Fisher, a member of our Board of Directors.

     SOFTBANK Capital Partners LLC is affiliated with SOFTBANK Capital Partners
Investment Inc., which is a wholly-owned subsidiary of SOFTBANK Holdings Inc.
SOFTBANK Holdings Inc. is a wholly-owned subsidiary of SOFTBANK Corp.

                                      -88-

<PAGE>

     Put Option Transaction

Under a Put Option Agreement dated May 30, 2001, @viso Limited is entitled to
sell all or a portion of its shares of PeoplePC Europe N.V. to the Company in
exchange for shares of PeoplePC common stock. Under this arrangement, @viso
Limited is entitled to receive between 13,750,000 and 29,146,132 shares of
PeoplePC common stock based on a formula and the date of exchange. SOFTBANK
Capital Partners LP is entitled to exercise its warrant to purchase convertible
preferred stock in PeoplePC Europe N.V. The exercise price of the warrant is
$7.1 million $2.05 per share of PeoplePC common stock, and as a result it is
unlikely that the warrant will be exercised in the foreseeable future. If the
warrant were exercised, SOFTBANK Capital Partners LP would be entitled to sell
all or a portion of its shares of PeoplePC Europe N.V. to us in exchange for
PeoplePC stock. Under this arrangement, SOFTBANK Capital Partners LP would be
entitled to receive between 1,850,000 and 3,481,928 shares of PeoplePC capital
stock based on a formula and the date of exchange. These put options will
terminate in April 2006.

SOFTBANK Capital Partners LLC is the general partner of SOFTBANK Capital
Partners LP, SOFTBANK Capital LP and SOFTBANK Capital Advisors Fund LP;
accordingly, securities beneficially owned by SOFTBANK Capital Partners LP,
SOFTBANK Capital LP and SOFTBANK Capital Advisors Fund LP may be regarded as
being beneficially owned by SOFTBANK Capital Partners LLC. Securities
beneficially owned by SOFTBANK Capital Partners LLC may be regarded as being
beneficially owned by Mr. Ronald D. Fisher, a member of our Board of Directors.


PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) FINANCIAL STATEMENTS

The financial statements (including notes thereto) listed in the Index to
Consolidated Financial Statements and Schedule on page 36 are filed within this
Annual Report on Form 10-K.

(a)(2) FINANCIAL STATEMENT SCHEDULE

The financial statement schedule of PeoplePC Inc. listed in the Index to the
Consolidated Financial Statements and Financial Statement Schedule is filed
within this Annual Report on Form 10-K.

(a)(3) EXHIBITS

The exhibits listed on the accompanying index to exhibits below are filed as
part of, or incorporated by reference into, this Form 10-K.

(b)  REPORTS ON FORM 8-K

None.

                                      -89-

<PAGE>

(c)  EXHIBITS

Exhibit
Number                            Description of Document
------                            -----------------------

3.1++++     Amended and Restated Certificate of Incorporation of PeoplePC as
            filed with the Delaware Secretary of State on February 19, 2002.
3.2*        Bylaws of PeoplePC.
3.3***      Certificate of Designation of Rights, Preferences and Privileges of
            Series A Preferred Stock of PeoplePC.
3.4         Certificate of Designation of Rights, Preferences and Privileges of
            Series B Preferred Stock of PeoplePC as filed with the Delaware
            Secretary of State on December 14, 2001.
9.1         Voting Agreement dated December 17, 2001.
10.1*       1999 Stock Plan and forms of agreements thereunder.
10.2++++    2000 Stock Plan, as amended, and forms of agreements thereunder.
10.3*       2000 Employee Stock Purchase Plan.
10.4*       Sales Finance Agreement, dated as of February 29, 2000, between
            PeoplePC and MBNA America Bank, N.A.
10.5*       Form of Indemnification Agreement.
10.6*       Office Lease, dated as of June 3, 1999, between PeoplePC and Pine
            Street Investors, L.L.C.
10.7*       First Amendment to Office Lease, dated as of January 14, 2000,
            between PeoplePC and Pine Street Investors, L.L.C.
10.8*       Amended and Restated Investor Rights Agreement, dated April 5, 2000.
10.9**      Addendum to Master Services and Supply Agreement dated September 29,
            2000 between PeoplePC and Ford Motor Company.
10.10+      Memorandum of Agreement by and among PeoplePC, PeoplePC Europe N.V.,
            SOFTBANK Technology Venture IV LP, SOFTBANK Technology Advisors Fund
            LP, @viso Limited, SOFTBANK Capital Partners LP, SOFTBANK Capital
            Advisors Fund LP and Nick Grouf dated February 22, 2001.
10.11+      Promissory Note from PeoplePC Inc. to PeoplePC Europe N.V. dated
            February 22, 2001.
10.12++     Amendment No. 3 dated July 18, 2001 to Master Agreement dated April
            5, 2001 between PeoplePC and Ford Motor Company.
10.13++     Put Option Agreement dated May 30, 2001 by and among PeoplePC,
            PeoplePC Europe N.V., SOFTBANK Technology Venture IV LP, SOFTBANK
            Technology Advisors Fund LP, @viso Limited, SOFTBANK Capital
            Partners LP, SOFTBANK Capital Advisors and Nick Grouf.
10.14++     Retention Agreements between PeoplePC and each of Nick Grouf, Dan
            Kohler, Wayne Gattinella, Chuck Ortmeyer, Mary Humiston and Michael
            Glogowsky dated June 29, 2001.
10.15+++    Promissory Note from PeoplePC to PeoplePC Europe N.V. dated November
            9, 2001.
10.16+++    Retention Agreement between PeoplePC and Michael Bailey dated July
            30, 2001.
10.17       Series B Preferred Stock Purchase Agreement between PeoplePC and the
            purchasers of series B preferred stock dated December 17, 2001.
10.18       Registration Rights Agreement between PeoplePC and the purchasers of
            series B preferred stock dated December 17, 2001.
10.19       Amended Ford Model E Program Agreement.
21.1        Subsidiaries of the Registrant.
23.1        Consent of PricewaterhouseCoopers LLP.

*    Previously filed as an exhibit to the Registrant's Registration Statement
     on Form S-1 (File No. 333-34114) on April 5, 2000.
**   Previously filed as an exhibit to the Registrant's Quarterly Report on Form
     10-Q for the period ended September 30, 2000 (File No. 000-31299) on
     November 14, 2000.
***  Previously filed as an exhibit to the Registrant's Annual Report on Form
     10-K405 for the fiscal year ended December 31, 2000 (File No. 000-31299) on
     April 2, 2001.
+    Previously filed as an exhibit to the Registrant's Quarterly Report on Form
     10-Q for the period ended March 30, 2001 (File No. 000-31299) on May 15,
     2001.
++   Previously filed as an exhibit to the Registrant's Quarterly Report on Form
     10-Q for the period ended June 30, 2001 (File No. 000-31299) on August 14,
     2001.
+++  Previously filed as an exhibit to the Registrant's Quarterly Report on Form
     10-Q for the period ended September 30, 2001 (File No. 000-31299) on
     November 14, 2001.
++++ Previously filed as an exhibit to the Registrant's Registration Statement
     on Form S-8 (File No. 333-83134) on February 21, 2002.


     PeoplePC, PeopleShop, PeoplePal, and their respective logos are among the
trademarks and/or service marks of PeoplePC Inc. in the U.S. and other
countries. All other names are trademarks and/or registered trademarks of their
respective owners.

                                      -90-

<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.

                                       PEOPLEPC INC.

                                       By: /s/ NICK GROUF
                                       ----------------------------
                                       Nick Grouf
                                       Chief Executive Officer


                                       By: /s/ MICHAEL GLOGOWSKY
                                       ----------------------------
                                       Michael Glogowsky
                                       Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated:

Signature                                     Title               Date

/s/ NICK GROUF                 Chairman, Chief Executive
-------------------------      Officer and Director               April 1, 2002
Nick Grouf                     (Principal Executive Officer)

/s/ MICHAEL GLOGOWSKY          Chief Financial Officer            April 1, 2002
-------------------------      (Principal Financial Officer)
Michael Glogowsky

/s/ RONALD D. FISHER           Director                           April 1, 2002
-------------------------
Ronald D. Fisher

/s/ JOHN SCULLEY               Director                           April 1, 2002
-------------------------
John Sculley

/s/ MICHAEL J. PRICE           Director                           April 1, 2002
-------------------------
Michael J. Price

/s/ BRADLEY A. FELD            Director                           April 1, 2002
-------------------------
Bradley A. Feld

/s/ LEE FELDMAN                Director                           April 1, 2002
-------------------------
Lee Feldman

                                      -91-