<PAGE>

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

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

                                   FORM 10-Q

(Mark One)


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

     For the quarterly period ended September 30, 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: 000-31299

                                  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 executive offices)                (Zip Code))

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

     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 [_]

     The number of shares outstanding as of November 13, 2001 is 114,002,422.


================================================================================
<PAGE>

                                 PEOPLEPC INC.

                                      10Q

                                     INDEX

<TABLE>
<S>                                                                                                                       <C>
PART I.  FINANCIAL INFORMATION

Item 1.  Condensed consolidated Financial Statements

         Condensed Consolidated Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000..............     2

         Condensed Consolidated Statements of Operations for the Three
         and Nine Months ended September 30, 2001 and 2000
         (unaudited)...................................................................................................     3

         Condensed Consolidated Statements of Cash Flows for the Three
         and Nine Months ended September 30, 2001 and 2000
         (unaudited)...................................................................................................     4

         Notes to Condensed Consolidated Financial Statements (unaudited)..............................................     5

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.........................    13

Item 3.  Qualitative and Quantitative Disclosure about Market Risk.....................................................    24


PART II.       OTHER INFORMATION

Item 1.  Legal Proceedings.............................................................................................    37

Item 6.  Exhibits and Reports on Form 8-K..............................................................................    37


SIGNATURES.............................................................................................................    38
</TABLE>

                                                                             -1-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                     September 30,            December 31,
                                                                                        2001                      2000
                                                                                   ----------------          --------------
                                                                                     (Unaudited)
<S>                                                                                <C>                       <C>
                                     ASSETS
Current Assets:
      Cash and cash equivalents..........................................          $         13,837          $      65,493
      Restricted cash....................................................                     4,130                 22,954
      Accounts receivable, net of allowance for doubtful accounts of
      $500 and $3,500 as of September 30, 2001 and December 31, 2000,
      respectively.......................................................                     7,036                 41,864
      Prepaid expenses and other current assets..........................                     2,068                  2,177
                                                                                   ----------------          -------------
      Total current assets...............................................                    27,071                132,488
Accounts receivable, long-term...........................................                     1,880                 11,589
Retained Interest in Accounts Receivable.................................                     2,107                      0
Property and equipment, net..............................................                     6,561                  7,688
Capitalized web site development costs, net..............................                       335                    674
Deposits and other assets................................................                       716                    592
                                                                                   ----------------          -------------
      Total assets.......................................................          $         38,670          $     153,031
                                                                                   ================          =============

                  LIABILITIES, MINORITY INTEREST AND
                         STOCKHOLDERS' DEFICIT
Current liabilities:
      Accounts payable..................................................           $          9,059          $      23,745
      Accrued and other liabilities.....................................                     12,339                 39,193
      Borrowing under line of credit....................................                          0                  5,176
      Current portion of deferred revenues, net.........................                     25,459                 19,047
                                                                                   ----------------          -------------
      Total current liabilities.........................................                     46,857                 87,161
Other long term liabilities.............................................                        195                      0
Deferred revenues, net..................................................                     17,740                 28,121
                                                                                   ----------------          -------------
      Total liabilities.................................................                     64,792                115,282
                                                                                   ----------------          -------------
Commitments (Note 2)
Minority interest in consolidated subsidiaries..........................                     41,264                 46,700
                                                                                   ----------------          -------------
Stockholders' deficit:
      Common stock: $0.0001 par value; 500,000 shares authorized;
      115,486 and 115,159 shares issued, and 113,849 and 114,905
      shares outstanding at September 30, 2001 and December 31,
      2000..............................................................                         11                     11
      Additional paid-in capital........................................                    328,119                350,884
      Common Stock in treasury at cost, 1,637 and 254 shares at
      September 30, 2001 and December 31, 2000..........................                       (306)                  (280)
      Deferred stock-based compensation.................................                     (9,771)               (38,995)
      Receivable from stockholder.......................................                       (116)                   (73)
      Accumulated other comprehensive income............................                        125                      0
      Accumulated deficit...............................................                   (385,448)              (320,498)
                                                                                   ----------------          -------------
Stockholders' deficit...................................................                    (67,386)                (8,951)
                                                                                   ----------------          -------------
Total liabilities, minority interest and stockholders' deficit..........           $         38,670          $     153,031
                                                                                   ================          =============
</TABLE>

        The accompanying notes are an integral part of these condensed
                      consolidated financial statements.

                                                                             -2-
<PAGE>

                                PEOPLEPC, INC.
                CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                     (in thousands, except per share data)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                    Three Months Ended        Nine Months Ended
                                                                                        September 30           September 30,
                                                                                 ----------------------    ----------------------
                                                                                    2001          2000        2001          2000
                                                                                 ---------    ---------    ---------    ---------
<S>                                                                              <C>          <C>          <C>          <C>
Membership revenues earned..................................................     $  45,618    $  10,829    $ 120,868    $  23,901
Other revenues..............................................................         2,386       14,464        7,176       20,325
                                                                                 ---------    ---------    ---------    ---------
      Total revenues........................................................        48,004       25,293      128,044       44,226
                                                                                 ---------    ---------    ---------    ---------
Cost of membership revenues earned..........................................        36,748       26,496      106,335       45,485
Cost of other revenues......................................................           731       13,353        6,263       19,223
                                                                                 ---------    ---------    ---------    ---------
      Total cost of revenues................................................        37,479       39,849      112,598       64,708
                                                                                 ---------    ---------    ---------    ---------
Gross profit (loss).........................................................        10,525      (14,556)      15,446      (20,482)
                                                                                 ---------    ---------    ---------    ---------
Operating expenses:
      Sales and marketing (inclusive of stock-based
      compensation of $1,207 and $3,157 and $2,415 and
      $10,419 for the three and nine months ended
      September 30, 2001 and 2000, respectively.............................         3,898       22,324       17,636       88,532
      General and administrative (inclusive of stock-based
      compensation of $(756) and $8,754 and $4,063 and
      $21,847 for the three and nine months ended
      September 30, 2000 and 2001, respectively)............................        16,934       29,211       72,137       65,474
      Contract cancellation fees............................................             0            0        2,876            0
      Other operating expenses..............................................        (7,598)           0       (9,427)           0
                                                                                 ---------    ---------    ---------    ---------
      Total operating expenses..............................................        13,234       51,535       83,222      154,006
                                                                                 ---------    ---------    ---------    ---------
Loss from operations........................................................        (2,709)     (66,091)     (67,776)    (174,488)
Minority interest in net loss of consolidated subsidiaries..................           719          993        4,778          993
Net Interest income (expense)...............................................           447          925       (1,546)       2,324
Income tax expenses.........................................................          (405)           0         (405)           0
                                                                                 ---------    ---------    ---------    ---------
Net loss....................................................................     $  (1,948)   $ (64,173)   $ (64,949)   $(171,171)
                                                                                 ---------    ---------    ---------    ---------
Dividend related to beneficial conversion feature of
  preferred stock...........................................................             0            0            0      (18,209)
Net loss attributable to common stockholders................................     $  (1,948)   $ (64,173)   $ (64,949)   $(189,380)
                                                                                 =========    =========    =========    =========
Basic and diluted net loss per share........................................     $   (0.02)   $   (0.91)   $   (0.59)   $   (4.17)
                                                                                 =========    =========    =========    =========
Shares used in computing basic and diluted net loss per share...............       111,312       70,164      110,531       45,533
                                                                                 =========    =========    =========    =========
</TABLE>

        The accompanying notes are an integral part of these condensed
                      consolidated financial statements.

                                                                             -3-
<PAGE>

                                 PEOPLEPC, INC.
                   CONDENSED CONSOLIDATED STATEMENT CASH FLOWS
                                 (in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                                            Nine Months Ended
                                                                                                               September 30,
                                                                                                     -------------------------------
                                                                                                            2001           2000
                                                                                                     ---------------  --------------
<S>                                                                                                  <C>              <C>
Cash flows from operating activities:
Net loss..........................................................................................      $  (64,949)   $  (171,171)
Adjustments to reconcile net loss to net cash used in operating activities
      Depreciation and amortization...............................................................           1,538            491
      Amortization of deferred stock-based compensation...........................................           6,479         32,266
      Loss on sale of accounts receivable.........................................................           1,380             --
      Net increase in allowance for doubtful accounts.............................................           9,000          5,000
      Beneficial conversion feature related to issuance of preferred stock to Ford Motor Company..              --         17,943
      Issuance of common stock warrants and rights................................................              --          8,126
      Issuance cost related to borrowing under line of credit.....................................              --         (1,481)
      Minority interest in net loss of consolidated subsidiaries..................................          (4,778)          (993)
      Changes in assets and liabilities:
      Accounts receivable.........................................................................           9,985        (63,551)
      Prepaid expenses and other current assets...................................................             109           (630)
      Deposits and other assets...................................................................            (124)        (1,234)
      Accounts receivable, long term..............................................................           9,709             --
      Accounts payable............................................................................         (14,686)         7,648
      Accrued liabilities.........................................................................         (27,512)        13,247
      Deferred revenues...........................................................................          (3,969)        24,851
      Retained interest in accounts receivable....................................................          (2,107)           --
      Other.......................................................................................             147             0
                                                                                                     -------------   -----------
      Net cash used in operating activities.......................................................         (79,778)     (129,488)
                                                                                                     --------------  -----------
Cash flows from investing activities:
      Restricted cash.............................................................................          18,824       (14,935)
      Purchase of property and equipment..........................................................            (525)       (4,102)
      Capitalized web site development costs......................................................              --           (96)
      Net cash provided by (used in) investing activities.........................................          18,299       (19,133)
                                                                                                     -------------   -----------
Cash flows from financing activities:
      Sales of accounts receivable................................................................          14,463            --
      Proceeds from issuance of common stock, net.................................................              97         2,980
      Repurchase of common stock..................................................................            (139)           --
      Proceeds from initial public offering, net..................................................             --         79,050
      Proceeds from minority investment in PeoplePC Europe, net...................................             --         50,000
      Proceeds from issuance of Series C preferred stock, net.....................................             --         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...................................................           9,698       200,695
                                                                                                     -------------   -----------
Effect of exchange rate changes on cash and cash equivalents......................................             125            --
Net increase (decrease) in cash and cash equivalents..............................................         (51,656)       52,074
Cash and cash equivalents at beginning of period..................................................          65,493        36,108
                                                                                                     -------------   -----------
Cash and cash equivalents at end of period........................................................   $      13,837        88,182
                                                                                                     =============   ===========
Supplemental noncash investing and financing activity:.
      Receivable from stockholders................................................................   $         116           --
      Tax expense on minority investment contributed..............................................   $         658           --
</TABLE>



The accompanying notes are an integral part of these condensed consolidated
                             financial statements.
                                                                             -4-

<PAGE>

                                PEOPLEPC, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)


1.   Business Activities and Summary of Significant Accounting Policies

Nature 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.

Basis of Presentation

     The consolidated financial statements include the accounts of PeoplePC and
its more than 50 percent owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.

Unaudited Interim Results

     The accompanying unaudited interim condensed consolidated financial
statements of PeoplePC Inc., a Delaware corporation, as of September 30, 2001
and for the three months and nine months ended September 30, 2001 and September
30, 2000 reflect all adjustments, consisting of normal recurring adjustments,
which in the opinion of management, are necessary for a fair presentation of the
results for the interim periods presented. These financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements.

     These financial statements should be read in conjunction with our annual
audited financial statements for the year ended December 31, 2000, which are
included in our annual report on Form 10-K filed with the Securities and
Exchange Commission.

     Operating results for the interim periods presented are not necessarily
indicative of the results that may be expected for the full fiscal year ending
December 31, 2001.

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 will be 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

                                                                             -5-

<PAGE>

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 September 30, 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 and
as a result the related accounts receivable have been excluded from the
accompanying condensed consolidated balance sheet. The Company recognized a
loss on sale of $1.4 million, included in interest expense in May 2001.

Revenue Recognition

     Revenues and the related cost of revenues for the initial membership
package, which includes the personal computer, 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, consumer
membership packages include the personal computer, cost of shipping the personal
computer system, Internet access for four years and participation in a member
commerce program. In addition, consumers can subscribe to an optional extended
warranty. As a result, for consumer membership packages, revenues and the
related cost of revenues for the personal computer and shipping the personal
computer system are 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. 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 of 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. For the three and
nine months ended September 30, 2001, the Company recorded a net amortization of
the acquisition discount previously recorded of $9.7 million and $20.1 million,
including a $7.0 million and $13.7 million reversal of acquisition discount
previously recognized as a result of a reduction in the estimated costs to
provide service over the customer life. The Company recorded a net acquisition
discount of $14.6 million and $19.1 million for the three and nine months ended
September 30, 2000, respectively. The amortization is reflected in cost of
membership revenues earned on the statement of operations. The remaining loss
provision of $12.6 million as of September 30, 2001 is reflected with the
related net deferred revenue on the balance sheet.

                                                                             -6-
<PAGE>

     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.

Comprehensive Loss

     The Company has adopted SFAS No. 130. "Reporting Comprehensive Income",
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. Comprehensive loss was $1.9 million and $64.2 million
for the three months ended September 30, 2001 and 2000, respectively. For the
nine months ended September 30, 2001 and 2000, comprehensive loss was $64.9
million and $171.2 million.

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 Interpretation ("FIN")
No. 28. The Company recognized stock-based compensation of $0.4 million and $6.3
million, net of a $2.2 million and $10.3 million reversal of stock-based
compensation previously amortized related to unvested shares for terminated
employees for the three and nine months ended September 30, 2001. The Company
recorded reductions in deferred stock-based compensation relating to terminated
employees of $2.7 million and $22.5 million for the three and nine months ended
September 30, 2001. As of September 30, 2001, the Company had an aggregate of
$9.8 million of deferred stock-based compensation remaining to be amortized.

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 and long-lived assets information
by geographic area are summarized as follows:

<TABLE>
<CAPTION>
                                             Three months ended                                      Nine months ended
(In thousands)                     September 30, 2001       September 30, 2000          September 30, 2001        September 30, 2000
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>                      <C>                         <C>                       <C>
Revenues from External Customers
   United States                   $       40,345           $      25,293               $     112,029             $      44,226
   International                            7,659                       0                      16,015                         0
                                   --------------------------------------------------------------------------------------------
                                   $       48,004           $      25,293               $     128,044             $      44,226
                                   ============================================================================================
<CAPTION>
                                          As of                  As of
                                   September 30, 2001       December 31, 2000
                                   ------------------------------------------
<S>                                <C>                      <C>
Long-Lived Assets
   United States                   $       5,907            $       7,335
   International                             988                    1,027
                                   ------------------------------------------
                                   $       6,895            $       8,362
                                   ==========================================
</TABLE>

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 potential dilutive common stock, including options, warrants and
preferred stock. The following table sets forth the computation of basic and
diluted net loss per share for the periods indicated:

<TABLE>
<CAPTION>
                                                                            Three Months Ended              Nine Months Ended
                                                                       September 30,   September 30,     September 30, September 30,
                                                                             2001          2000              2001         2000
                                                                      ---------------  -------------   -------------  --------------
<S>                                                                   <C>              <C>             <C>            <C>
Numerator:
      Net loss available to common stockholders......................     $  (1,948)   $ (64,173)         $ (64,949)   $(189,380)
                                                                          =========    =========          =========    =========
Denominator:
      Weighted average common shares.................................       114,015       77,480            114,424       52,005
      Weighted average unvested common shares subject to repurchase..        (2,703)      (7,316)            (3,893)      (6,472)
                                                                          ---------    --------           ---------    ---------
Denominator for basic and diluted calculation........................       111,312       70,164            110,531       45,533
                                                                          =========     ========          =========    =========
Basic and diluted net loss per share.................................     $   (0.02)    $  (0.91)         $   (0.59)   $   (4.17)
                                                                          =========     ========          =========    =========
</TABLE>

                                                                             -7-

<PAGE>

     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.

     Antidilutive securities not included in net loss per share calculation as
of:

                                            September 30,       September 30,
                                                2001                 2000
                                         ------------------     -------------
Non vested common stock                         2,278               6,795
Common stock options                           12,225              14,984
Warrants                                        2,857               3,358
                                               ------              ------
      Total                                    17,360              25,137
                                               ======              ======

2.   Commitments and Contingencies

Leases

     The Company leases office space under 7 operating leases expiring between
2001 and 2005, of which 2 leases can be renewed in 2004 for an additional period
of 5 years. The Company also leases copiers under 2 operating leases expiring in
2005. The Company recognizes rent expense on a straight-line basis over the
lease period and has accrued for rent expense incurred but not paid. Total rent
expense under operating leases was approximately $0.6 million and $1.6 million
and $1.0 million and $1.9 million for the three and nine months ended September
30, 2001 and 2000, respectively.

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 to distribute its products to customers in a timely and
accurate manner. The Distributor purchases inventory from a computer
manufacturer ("the OEM") on behalf of the Company based on sales projections
made by the Company. The Company takes 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. The Company's agreement with Ingram
expired on February 8, 2001 and has not been extended. However, the parties
currently continue their business relationship. At September 30, 2001 and
December 31, 2000, the Company had approximately $1.4 and $1.5 million in non-
cancelable purchase commitments with the Distributor.

     The Company paid $2.9 million to cancel contracts for previous purchase
commitments in June 2001. As of September 30, 2001, the Company had no
outstanding obligation from the OEM. The Company was obligated to purchase
approximately $25.8 million of equipment from the same OEM as of December 31,
2000.

Contingencies

     In 1999, the Company recorded a provision of $15.6 million relating to the
cost of resolving any potential dispute over non-conforming computers. During
2000, the Company reached an agreement with

                                                                             -8-

<PAGE>

Ingram Micro to liquidate the non-conforming computers, following which the
Company would split the losses associated with these computers so that it would
bear half of the loss and Ingram Micro would bear half of the loss. As a result
of this agreement, the Company reduced the provision 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 a portion of the remaining provision for the
three months ended March 31, 2001 related to the Ingram Micro, included in other
operating expenses. At September 30, 2001, the Company believed the probability
of any future claim from the OEM was remote and reversed the remaining $1
million reserve.

Employees

     The Company has employment agreements and commitments with certain
executive officers under which the employees would be entitled to receive
severance payment of $1.5 million if their employment were to be terminated
under certain conditions.

3.   Borrowings under line of credit

     In July 2001, the Company's credit agreement with a bank providing for a
$50.0 million revolving credit facility expired, and the Company paid all
amounts outstanding. The Company did not renew the credit agreement. Financing
under this facility was only available for the purpose of factoring receivables
owed to the Company by Ford Motor Company. The Company paid fees to the lender
for the loan commitment and for underwriting and structuring. The outstanding
balance was $5.2 million (net of issuance cost of $0.7 million) as of December
31, 2000.


4.   Warrant

     On February 21, 2001, the expiration date of the warrant granted to the
Ford Motor Company to purchase 2.9 million shares of the Company's common stock
at $10 per share was extended through July 16, 2003.

5.   Minority Interest in Consolidated Subsidiaries

     In June 2000, PeoplePC formed a European subsidiary, PeoplePC Europe
N.V.("PeoplePC Europe"), a Netherlands corporation. PeoplePC and PeoplePC Europe
entered into financing and related agreements with @viso Limited ("@viso"), a UK
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 received $50 million from @viso payable over a two-month period
beginning on the closing date in exchange for its interest in PeoplePC Europe
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.

     At September 30, 2001, minority shareholders hold preferred stock in
PeoplePC Europe, a Dutch company, with a par value of EUR.01 as follows:

<TABLE>
<CAPTION>
   Series              Shares Authorized       Shares Outstanding           Proceeds
------------         ---------------------   ---------------------    ------------------
<S>                  <C>                      <C>                      <C>
     A                      100,000                  11,667              $     35,000
     B                       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 granted SOFTBANK Capital Partners LP a
warrant to acquire

                                                                             -9-

<PAGE>

2.4 million shares of Series A Preferred Stock, with an aggregate exercise price
of $7.1 million. The warrant will be exercisable and must be exercised (i) no
sooner than six months after the Closing Date or (ii) 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 us in
exchange for PeoplePC 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 the Company 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 and the date of exchange.

     As a result of executing the Put Option Agreement, the Company 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 the Company acquired control of the board of
directors of PeoplePC Europe.

     In addition, PeoplePC Europe has the power to make loans to the Company,
thus allowing use of PeoplePC Europe assets for the combined benefit of the two
companies.

     PeoplePC Europe has made five loans to PeoplePC. The first, in the amount
of $15.0 million in February 2001; the second, in the amount of $6.0 million in
April 2001; the third, in the amount of $4.0 million in April 2001; the fourth,
in the amount $8.5 million in May 2001; and the fifth in the amount of $2.0
million in November, 2001. These notes are demand notes. Although the Company
currently does not have sufficient cash resources to repay the notes, the
Company controls the board of directors of PeoplePC Europe and, therefore, 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 the parent company.

6.   Related party transactions

     During June 2001, the Company entered into a contract with SOFTBANK, under
which it performed certain development work on a time and material basis. The
Company recognized $0.4 million and $0.9 million in revenue for the three and
nine months ended September 30, 2001 related to this agreement, included in
other revenue.

7.   Risks and uncertainties

     The Company is subject to all of the risks inherent in an early stage
company in the Internet access industry. These risks include, but are not
limited to, a limited operating history, limited capital, liquidity, and ability
to raise capital, limited management resources, dependence upon consumer
acceptance, Internet-

                                                                            -10-

<PAGE>

related security risks and the changing nature of the electronic commerce
industry. The Company's operating results may be materially affected by the
foregoing factors.

     The Company's currently available cash, cash equivalents and cash flows to
be generated from operations may not be sufficient to allow it to reach a
position where revenues meet or exceed funding requirements for operations on a
continuing basis. As a result, further capital investment or other financing
may be needed to fund operations. If the Company is not able to raise
additional funds, it may be required to curtail or discontinue some or all of
its operations.

     The Company is currently in discussions to raise additional funds through
strategic relationships, equity financing, debt financing, and other
transactions and arrangements. While to date these discussions have been
encouraging, the Company cannot give assurances 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, which may result 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 could limit the Company's operating flexibility.

     The Company has incurred substantial losses and negative cash flow from
operations since inception. As of September 30, 2001, the Company had a net
capital deficiency of $67.4 million. The Company intends to pursue new
enterprise and other arrangements to increase its revenues and cash flow. The
Company also has taken and intends to take further steps to reduce expenses.
Steps already taken include targeting sales and marketing expenditures on
channels with low acquisition cost per member, consolidation of sales offices
and a realignment and reduction of our workforce. In an effort to further
improve liquidity, the Company sold in May 2001 substantially all of its Delta
Airlines, Inc. receivables and has signed an agreement pursuant to which it may
sell future Delta receivables.

     Any projections of future cash needs and cash flows are subject to
substantial uncertainty. The Company is 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. The Company may seek to raise additional funds through
public or private 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; reduce outstanding debt;
develop new product and service offerings; take advantage of favorable
conditions in capital markets; or respond to competitive pressures.

     The Company's common stock trades on the Nasdaq National Market, which
specifies certain requirements for continued listing of common stock. One of the
requirements is that the minimum closing bid price per share of its common stock
not fall below a specified level for an extended period of time. Another is that
the market value of a Company's public float (the number of shares in public
float times the closing bid price per share) exceed a certain level.

     On July 9, 2001, the Nasdaq staff informed the Company that it was not in
compliance with Nasdaq's market value of public float requirement, and it has
until October 8, 2001 to come into compliance.

     In addition, on July 10, 2001, the Company received a notice from the staff
of The Nasdaq Stock Market that the Company's common stock had failed to
maintain the minimum bid price required for continued listing on The Nasdaq
National Market. On July 17, the Company requested a hearing before

                                                                            -11-
<PAGE>

Nasdaq's Listing Qualification panel. The Company had submitted its written
appeal and made an oral presentation to the Listing Qualification Panel on
August 30, 2001.

     On September 27, 2001, the Nasdaq announced that it was implementing an
across-the-board moratorium on the minimum bid and public float requirements for
continued listing on Nasdaq. As a result, the Nasdaq dismissed its proceeding
seeking to delist the Company's stock. Commencing January 2, 2002, the Company
will again become subject to the Nasdaq listing requirements, and if the Company
fails to meet those requirements Nasdaq will be able to commence a new
proceeding.

     The result of delisting from the Nasdaq National Market could be a
reduction in the liquidity of any investment in its common stock and may have an
adverse effect on the trading price of its common stock. Delisting could also
reduce the ability of holders of its common stock to purchase or sell shares as
quickly and as inexpensively as they have done historically. This lack of
liquidity would make it more difficult for the Company to raise capital in the
future. Delisting could also adversely affect the Company's relationships with
vendors and customers.

                                                                            -12-
<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

        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 the Company's assumptions about the future do not materialize or
prove to be incorrect, the Company's 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 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; 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 revenue-generating activities; our expectations
regarding the cost of expanding our international operations; and other risks
described from time to time in PeoplePC's Securities and Exchange Commission
periodic reports and filings.

          The Company assumes 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,
including the company's annual report on Form 10-K filed on April 2, 2001 and
the Preliminary Proxy Statement filed on April 17, 2001

          The following discussion of our financial condition and results of
operations should 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 September 1999, we had no revenues and our operating
activities consisted primarily of developing relationships with vendors,
suppliers and merchants.

          We currently operate principally in the United States, the United
Kingdom, and France. We have established foreign subsidiaries to support our
international operations. We closed our Singapore subsidiary in September,
2001.

          The service and coverage offered through our U.S. dial-up network
(nearly 7,000 access numbers) now exceeds that of AOL, MSN, and Earthlink in the
number of area codes served and local access numbers offered.
                                                                            -13-
<PAGE>

          PeoplePC UK, our European operating subsidiary, began distributing
products to Vivendi Universal employees in France in January 2001. We currently
have over 91,000 Vivendi employees as members. Vivendi Universal has indicated
to the Company that it wishes to extend the program to Vivendi Universal
employees in additional countries, including 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 the Company that the extension of the program will be delayed beyond
the fourth quarter of 2001. The Vivendi Universal program is open to all
employees for a nominal employee co-payment, while the remainder of the program
expenses are subsidized by Vivendi Universal. We receive payment for the entire
membership package from Vivendi Universal when the package is sold to an
employee.

          The rollout of the Ford Model E employee connectivity program is
substantially complete in the United States. PeoplePC and Ford have amended
their Model E Program agreement to end their supply relationship for the sale of
computers and Internet connectivity. PeoplePC and Ford will continue to work
together under the terms of the agreement to provide 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 PeoplePC in the amount of $6.6
million for the costs incurred in preparing to roll out the Model E Program
internationally. The payment was received and deposited on July 18, 2001 and was
recorded as a reduction in expenses for the three months ended September 30,
2001.

          We began distributing products to Cinergy Services, Inc. in the United
States in June 2001, and now have over 6,000 Cinergy employees as members. The
Cinergy program is open to all employees of Cinergy for an employee co-payment.
In the case of employees who already own PCs, Cinergy will subsidize the cost of
ISP services for three years.

          We began offering ISP service to the U.S. employees of Bertelsmann,
Inc. in August 2001 under a co-branding/co-marketing agreement with Bertelsmann.
The ISP offering is co-branded with Bertelsmann "Planet B" elements, and is
available to employees of Bertelsmann's operating units in North America.

          We entered into a co-marketing agreement with Motivano, the employee
benefits and human resources service company, to offer PeoplePC's bundled
computer-and-ISP-service packages to Motivano's client companies and their one
million employees. We also entered into a co-marketing agreement with Health
Alliance Plan to offer discounts on PCs and Internet connectivity to HAP's
600,000 members, 6,000 affiliated physicians and 1,000 employees.

          In August 2001, AAA of Southern New England began marketing a co-
branded PeoplePC membership bundle and ISP service to its 1.8 million affiliated
members.

          In September 2001, we launched a program to distribute products to the
United States employees of Ingersoll-Rand. Ingersoll-Rand and PeoplePC will
market the products to Ingersoll-Rand employees through a series of road shows
and distribution of other marketing collateral.

          In the third quarter, we completed the roll-out of the Powergen
employee connectivity program in the UK. Powergen, a leading UK supplier of gas,
electric and telephone services, subsidized the program that is providing the
company's more than 5,000 employees with all-in-one home computing packages.

          Also in the quarter, we completed the launch of key technology and
implementation solutions for Yahoo Japan Corporation's Internet broadband
service, making it possible for Yahoo Japan to sign more than 130,000 members
between July and September and accommodate over 560,000 new applications.

          Membership revenues consist of revenues earned from the sale of
membership bundles; the related charges for shipping the systems; and revenues
earned from the sale of PeoplePC Online memberships, which include all of our
Internet related services but do not include a computer system. Although we
receive revenue from the sale of membership bundles at the time of the member's
enrollment, we generally defer the revenue and amortize it over the life of the
membership contract. Beginning in May 2001, consumer membership packages include
the personal computer, cost of shipping the personal computer system, Internet
access for four years and participation in a member commerce program. In
addition, consumers can subscribe to an optional extended warranty. Revenue and
the related cost of revenues for the personal computer and shipping the personal
computer system are recognized once the right of return has elapsed. Revenues
and the

                                                                            -14-
<PAGE>

related cost of Internet access, the participation in a member commerce program
and the extended warranty are deferred and recognized over the life of the
membership contract. We intend to continue to pursue members through enterprise
agreements and our consumer programs to increase our membership revenues. We
expect that memberships obtained through enterprise agreements will provide a
significant portion of membership revenues in the future.

          Other revenues consist of revenues from the sale of upgraded monitors;
the sale of printers; additional shipping revenues related to upgraded monitors;
the sale of printers; revenues from merchants, content partners and suppliers;
and revenues from development consulting services. Other revenues are recorded
in the period earned because these products, which are not requested by all
members, are separately identifiable transactions and the related earnings
process is completed at that time. We expect to increase our revenues from
merchants, content partners and suppliers in the future.

          In May 2001, we transitioned certain programs to a 48-month term
membership, in conjunction with a 48 month financing arrangement offered by
MBNA. This transition also included a change in computer manufacturer from IBM
to Hewlett Packard. The warranty on IBM products was a 3-year manufacturer's
warranty. When the product line shifted to Hewlett Packard, Service Net became
the warranty provider and the warranty became a 1-year onsite warranty. In
addition, we began to offer 3-year warranty upgrade, which, if purchased, would
bring the length of warranty in line with the membership term of 48 months.

Results of Operations

          Three months ended September 30, 2001 and 2000

     Revenues

          Membership Revenues Earned. Membership revenues earned include
membership revenues, related shipping revenues, revenues from PeoplePC Online
memberships, and recognition of membership revenues previously deferred. Gross
membership revenues decreased 86% to $16.8 million for the three months ended
September 30, 2001 from $124.4 million for the three months ended September 30,
2000. Revenues recognized from our online program included in gross membership
revenues at $1.7 million for both the three months ended September 30, 2001 and
September 30, 2000. Because we recognize most membership revenues over the term
of the membership agreement, $11.2 million of membership revenues was deferred
for the three months ended September 30, 2001, while $123.9 million was deferred
for the three months ended September 30, 2000. Membership revenues earned
include the recognition of $40.0 million and $10.3 million in revenues
previously deferred for the three months ended September 30, 2001 and September
30, 2000, respectively.

          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 83% to $2.4 million for the
three months ended September 30, 2001, of which $0.9 million was related to the
sale of upgrades and peripherals and $0.4 million was related to services
provided to SOFTBANK. For the three months ended September 30, 2000, other
revenues were $14.5 million, $14 million of which were related to the sales of
upgrades and peripherals. The decrease in other revenues is primarily due to the
fact that no peripherals or upgrades are offered under the Vivendi Universal
program, which was being implemented in the latter period, as compared with the
implementation of enterprise programs in the earlier period in which peripherals
and upgrades were offered.

                                                                            -15-
<PAGE>

     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 membership revenue decreased 94% to $6.9 million for
the three months ended September 30, 2001 compared to $125.3 million for the
three months ended September 30, 2000. Because we recognize most system hardware
and software cost of revenues over the term of the membership agreement, $7.3
million of cost of membership revenues was deferred for the three months ended
September 30, 2001, while $122.8 million of cost of revenues was deferred for
the three months ended September 30, 2000. Cost of membership revenues earned
included the recognition of $37.1 million and $9.5 million in costs previously
deferred for the three months ended September 30 2001 and September 30, 2000,
respectively. The cost of providing Internet service to our members included in
cost of membership revenue $5.5 million and $3.8 million for the three months
ended September 30, 2001 and September 30, 2000, respectively. Cost of
membership revenues for the three months ended September 30, 2001 also includes
a $9.7 million net amortization of acquisition discount previously recognized,
$7.0 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 three months ended September 30, 2000, cost of revenues
includes a net provision of $14.6 million for the amount by which our estimated
cost of membership exceeds the related current and future membership revenue.

          Cost of Other Revenues. The cost of other revenues for the three
months ended September 30, 2001 decreased by 95% to $0.7 million from $13.4
million for the three months ended September 30, 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 restocking fees. These
costs are not significant for the periods reported.

     Operating Expenses

          Sales and Marketing. Sales and marketing expense includes 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 expense decreased by
83% to $3.9 million for the three months ended September 30, 2001, $0.6 million
of which was related to fees paid for third-party advertising. For the three
months ended September 30, 2000, sales and marketing expense was $22.3 million,
$17.7 million of which was related to fees paid for third-party advertising.
Sales and marketing expense includes the amortization of deferred stock-based
compensation of $1.2 and $3.1 million for the three months ended September 30,
2001 and September 30, 2000, respectively. We have shifted the focus of our
sales and marketing program to more efficient enterprise and affinity channels
and more effective targeted marketing. As a result, sales and marketing expenses
have decreased in absolute dollars and as a percentage of revenues.

          General and Administrative. General and administrative expenses
includes 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 expense decreased by 42% to $16.9 million for the three
months ended September 30, 2001 and included approximately $0.6 million of
facilities expense and $4.9 million paid to outside consultants, contractors and
other professionals for services rendered. For the three months ended September
30, 2000, general and administrative expense was $29.2 million including
approximately $1.0 million of facilities expense and $8.9 million paid to
outside consultants, contractors and other professionals for services

                                                                            -16-
<PAGE>

rendered. General and administrative expense included stock-based compensation
amounting to $0.7 million and $8.7 million for the three months ended September
30, 2001 and September 30, 2000, respectively.

          Other operating expenses. For the three months ended September 30,
2001, other operating expenses consists of a reimbursement of $6.6 million from
Ford Motor Company for the costs incurred in preparing for the international
roll out of the Ford program and the reversal of the remaining $1.0 million
accrual established in 1999 to cover any potential exposure related to non-
conforming computers held on our behalf by our distributor. For the three months
ended September 30, 2000, these costs were not significant.

     Minority share interest in net loss of consolidated subsidiaries

          The minority interest in net loss of consolidated subsidiaries of $0.7
million for the three months ended September 30, 2001 represents 35% of $2.0
million net loss of the consolidated subsidiaries. For the three months ended
September 30, 2000, the minority interest in net loss of consolidated
subsidiaries of $1.0 million represents 35% of $2.8 million net loss of the
consolidated subsidiaries.

     Net interest income/expense

          Interest income from cash equivalents and restricted cash was $0.8
million for the three months ended September 30, 2001. Interest income from cash
equivalents and restricted cash was $0.9 million for the three months ended
September 30, 2000.

     Income tax expense

          Income tax expense for the three months ended September 30, 2001
consists of an accrual of $0.4 million for any potential Dutch Corporate Income
Tax. 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 in the United States of America for the
three months ended September 30, 2001. We have provided a full valuation
allowance on our deferred tax assets.

     Net Loss

          Net loss for the three months ended September 30, 2001 decreased 97%
to $1.9 million from $64.2 million for the three months ended September 30,
2000. For the three months ended September 30, 2001, the net loss was primarily
attributable to operating expenses of $13.2 million exceeding the gross profit
of $10.5 million. For the three months ended September 30, 2000, $14.6 million
of net loss was attributable to cost of revenues exceeding revenues, $39.6
million was attributable to the operating expenses, $11.9 million was
attributable to the amortization of deferred stock-based compensation, and $14.6
million was attributable to a provision for acquisition discounts.

Nine months ended September 30, 2001 and 2000

     Revenues

          Membership Revenues Earned. Membership revenues earned include
membership revenues, related shipping revenues, revenues from PeoplePC Online
memberships, and recognition of membership revenues

                                                                            -17-
<PAGE>

previously deferred. Gross membership revenues decreased 28% to $143.6 million
for the nine months ended September 30, 2001 from $200.2 million for the nine
months ended September 30, 2000. Revenues recognized from our online program
included in gross membership revenues increased by 23% to $5.3 million for the
nine months ended September 30, 2001 from $4.3 million for the nine months ended
September 30, 2000. Because we recognize most membership revenues over the term
of the membership agreement, $127.9 million of membership revenues was deferred
for the nine months ended September 30, 2001, while $194.9 million was deferred
for the nine months ended September 30, 2000. Membership revenues earned include
the recognition of $105.2 million and $18.6 million in revenues previously
deferred for the nine months ended September 30, 2001 and September 30, 2000,
respectively.

          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 65% to $7.2 million for the
nine months ended September 30, 2001, of which $4.0 million was related to the
sale of upgrades and peripherals, $2.2 million was related to our merchant
commerce program, and $0.9 million was related to service provided to SOFTBANK.
For the nine months ended September 30, 2000, other revenues were $20.3 million,
$19.8 million of which were related to the sales of upgrades. The decrease in
other revenues is primarily due to the fact that no peripherals or upgrades are
offered under the Vivendi Universal program.

     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 membership revenue decreased by 42% to $114.3
million for the nine months ended September 30, 2001 from $196.6 million for the
nine months ended September 30, 2000. Because we recognize most system hardware
and software cost of revenues over the term of the membership agreement, $102.0
million of cost of membership revenues was deferred for the three months ended
September 30, 2001, while $187.5 million of cost of revenues was deferred for
the nine months ended September 30, 2000. Cost of membership revenues earned
included the recognition of $94.0 million and $16.9 million in costs previously
deferred for the nine months ended September 30, 2001 and September 30, 2000,
respectively. The cost of providing Internet service to our members included in
cost of membership revenue is $18.2 million and $8.8 million for the nine months
ended September 30, 2001 and September 30, 2000, respectively. Cost of revenues
for the nine months ended September 30, 2001 also includes a reduction of $20.1
million related to the net amortization of acquisition discount previously
recognized, $13.7 million of which was the reversal of the acquisition discount
reserve resulting from a change in the estimate of future costs due to decreased
ISP expenses. For the nine months ended September 30, 2000, cost of revenues
includes a net provision of $19.1 million for the amount by which our estimated
current and future cost of membership exceeds the related current membership
revenue.

          Cost of Other Revenues. The cost of other revenues for the
nine months ended September 30, 2001 decreased by 67% to $6.3 million from $19.2
million for the nine months ended September 30, 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 restocking fees
totaling $3.2 million and $1.2 million for the nine months ended September 30,
2001 and September 30, 2000, respectively. The decrease in cost of other
revenues is primarily due to the fact that no peripherals or upgrades are
offered under the Vivendi Universal program.

                                                                            -18-
<PAGE>

     Operating Expenses

          Sales and Marketing. Sales and marketing expense includes 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 expense decreased
by 80% to $17.6 million for the nine months ended September 30, 2001, $5.5
million of which was related to fees paid for third-party advertising. For the
nine months ended September 30, 2000, sales and marketing expense was $88.5
million, $49.6 million of which was related to fees paid for third-party
advertising and $26.0 million of which was related to a charge taken in
connection with the warrants and rights granted to Ford and Delta. Sales and
marketing expense includes the amortization of deferred stock-based compensation
of $2.4 million and $10.4 million for the nine months ended September 30, 2001
and September 30, 2000, respectively. We have shifted the focus of our sales and
marketing program to more efficient enterprise and affinity channels and more
effective targeted marketing. As a result, we expect sales and marketing
expenses to decrease in absolute dollars and as a percentage of revenues.

          General and Administrative. General and administrative expense
includes 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 expense increased by 10% to $72.1 million for the nine months
ended September 30, 2001, including approximately $1.6 million of facilities
expense and $20.1 million paid to outside consultants, contractors and other
professionals for services rendered. For the nine months ended September 30,
2000, general and administrative expense was $65.5 million, including
approximately $1.9 million of facilities expense and $20.4 million paid to
outside consultants, contractors and other professionals for services rendered.
General and administrative expense included stock-based compensation amounting
to $4.1 million and $21.8 million for the nine months ended September 30, 2001
and September 30, 2000, respectively. The increase in general and administrative
expense is primarily due to the expansion of our international operations.

          Contract cancellation fee. For the nine months ended September 30,
2001, we paid $2.6 million to cancel contracts with two original equipment
manufacturers

          Other operating expenses. For the period ended September 30, 2001,
other operating expenses consists 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, the credit 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 $4.4 million and other operating
expenses of $1.1 million.

     Minority interest in net loss of consolidated subsidiaries

          The minority interest in net loss of consolidated subsidiaries of $4.7
million for the nine months ended September 30, 2001 represents 35% of the $13.4
million net loss of the consolidated subsidiaries. For the nine months ended
September 30, 2000, the minority interest in net loss of consolidated
subsidiaries of $1.0 million represents 35% of the $2.8 million net loss of the
consolidated subsidiaries.

     Net interest income/expense

          Interest income from cash equivalents and restricted cash was $1.5
million for the nine months ended September 30, 2001. Interest expense was $3.0
million, $1.4 million of which was attributable to a discount

                                                                            -19-
<PAGE>

related to the sale of receivables from Delta Airlines, Inc. and $0.8 million
was related to the Chase Manhattan Bank line of credit for the nine months ended
September 30, 2001. Net interest income from cash equivalents and restricted
cash was $2.3 million for the nine months ended September 30, 2000.

     Income tax expense

     Income tax expense for the nine months ended September 30, 2001 consists
of an accrual of $0.4 million for any potential Dutch Corporate Income Tax. 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 in the United States of America for the nine months
ended September 30, 2001. We have provided a full valuation allowance on our
deferred tax assets.

     Net Loss

          Net loss for the nine months ended September 30, 2001 decreased 66% to
$64.9 million from $189.4 million for the three months ended September 30, 2000.
Significant components of net loss for the three months ended September 30, 2001
were revenues exceeding cost of revenues by $15.4 million, operating expenses of
$73.9 million, amortization of deferred stock-based compensation of $6.5
million, and the net amortization of acquisition discount of $20.1 million. For
the nine months ended September 30, 2000, $20.5 million of net loss was
attributable to cost of revenues exceeding revenues, $154.0 million was
attributable to operating expenses, $32.3 million was attributable to the
amortization of deferred stock-based compensation, $19.1 million was
attributable to a provision for acquisition discounts, $26.0 million was
attributable to a charge taken in connection with the warrants and rights
granted to Ford and Delta and $18.2 million was attributable to the beneficial
conversion feature of preferred stock.

     Liquidity and Capital Resources

          As of September 30, 2001, our sources of liquidity, on a consolidated
basis, consisted of $18.0 million in cash and cash equivalents, including $4.1
million in restricted cash. Our net accounts receivable balance as of September
30, 2001 was $7.0 million. Of these amounts, $7.3 million in cash and $2.8
million in accounts receivable balance ($5.3 million and $2.8 million,
respectively, after effect is given to the $2 million loan made in November,
2001 from PeoplePC Europe N.V. to PeoplePC, is held by our subsidiary, PeoplePC
U.K. Limited. Due to legal and other constraints, some or all of the cash assets
held by our European Subsidiaries may be unavailable for use by PeoplePC.

          Our currently available cash, cash equivalents and cash flows to be
generated from operations may not be sufficient to allow us to reach a position
where revenues meet or exceed funding requirements for operations on a
continuing basis. As a result, further capital investment or other financing may
be needed to fund operations. If we are not able to raise additional funds, we
may be required to curtail or discontinue some or all of our operations.

          We are currently in discussions to raise additional funds through
strategic relationships, equity financing, debt financing, and other
transactions and arrangements. While to date these discussions have been
encouraging, we cannot give assurances 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, which will result in dilution of existing stockholders. We may
have to sell stock or bonds with rights superior to rights of

                                                                            -20-
<PAGE>

holders of common stock. Also, any debt financing might involve restrictive
covenants that would limit our operating flexibility.

          Net cash used in operating activities was $79.8 million for the nine
months ended September 30, 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, general and
administrative expenses, 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 $18.3 million for the
nine months ended September 30, 2001. Net cash provided by investing activities
for this period consisted primarily of a decrease of $18.8 million in accounts
collateralizing letter of credit agreements securing future inventory.

          Net cash provided by financing activities was $9.7 million for the
nine months ended September 30, 2001. Net cash received from financing
activities for this period consisted of $14.5 million for the sale of Delta
Airlines, Inc. receivables 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 September 30, 2001, we had a net capital
deficiency of $67.4 million. We intend to pursue new enterprise and other
arrangements to increase revenues and cash flow. We also have taken and intend
to take further steps to reduce expenses. Steps already taken include targeting
sales and marketing expenditures on channels with low acquisition cost per
member, consolidation of sales offices and a realignment and reduction of our
workforce. In an effort to further improve liquidity, we sold in May 2001
substantially all of our Delta Airlines, Inc. receivables and have signed an
agreement pursuant to which we may sell future Delta receivables.

          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 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; reduce outstanding debt; 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 September 30, 2001, we had
approximately $1.4 million noncancelable purchase commitments with Ingram Micro.

          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 fiscal 2000, we reached an

                                                                            -21-
<PAGE>

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. In early 2001, we reached
a final settlement with Ingram Micro and paid our share of the loss. During the
quarter ended September 30, 2001, we reversed the remaining $1.0 million in the
reserve 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 U.K. company owned
by 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 restrictions, thus allowing use
of PeoplePC Europe assets for the combined benefit of the two companies. Due
to legal and other constraints, some of cash assets held by PeoplePC's European
subsidiaries (which are consolidated in the Company's financial statements for
purposes of this report) may be unavailable for purposes of funding the
Company's U.S. operations and for general corporate purposes.

          PeoplePC Europe has made five loans to us. The first, in the amount of
$15.0 million in February 2001; the second, in the amount of $6.0 million in
April 2001; the third, in the amount of $4.0 million in April 2001; the fourth,
in the amount $8.5 million in May 2001, and the fifth in the amount of $2.0
million in November, 2001. These notes are demand notes. Although we do not
currently have sufficient cash resources to repay the notes; we control the
board of directors of PeoplePC Europe and, therefore, have substantial
discretion over the timing of demands made under these notes.

                                                                            -22-
<PAGE>

          In July 2001, our credit agreement with The Chase Manhattan Bank
providing for a $50 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 September 30, 2001, there was no balance outstanding in
regard to this credit facility.

          The non-cancelable purchase commitments at September 30, 2001 included
approximately $1.4 million to Ingram Micro. 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 September 30, 2001, this deposit amounted to
approximately $0.6 million.

          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.

Effects of Recent Accounting Pronouncements

          In July 2001, the FASB issued two Statements; Statement 141, Business
Combinations (SFAS No. 141), and Statement 142, Goodwill and Other Intangible
Assets (SFAS No. 142). SFAS No. 141 revises accounting treatment for business
combinations requiring the use of purchase accounting and prohibiting the use of
pooling-of-interests method for all business combinations initiated after June
30, 2001. SFAS No. 142 revises the accounting for goodwill and other intangible
assets by not allowing amortization of goodwill and establishing accounting for
impairment of goodwill and other intangible assets. SFAS No. 142 will be
effective for fiscal years beginning after December 15, 2001 or the beginning of
our fiscal year 2002. We have not yet evaluated the effects of these changes on
our consolidated financial statements.

                                                                            -23-
<PAGE>

Item 3.  Qualitative and Quantitative Disclosure 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, changes in interest rates or currency exchange
rates do not generally have a significant effect on our financial position.
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.

                                                                            -24-
<PAGE>

                  Risk Factors That May Affect Future Results

     You should carefully consider the following risks and uncertainties before
making an investment decision. The following listing is not comprehensive, but
rather describes those risks and uncertainties that we currently consider
material. If any of the following risks are resolved adversely to the Company,
our business, financial condition or operating results could be seriously
harmed. If this happens, the trading price of our common stock could decline,
and you may lose all or part of your investment.

Risks Related to Our Business

  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 Kingdom, Germany, and the United States, we do not expect
to generate positive cash flow from operations until at least the first quarter
of 2002, and the timing of our reaching cash flow positive status may be
affected by a number of the risk factors described in this report. Our current
cash reserves may not be sufficient to fund the Company's operations until that
time. As a result, 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.

     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, as well as our existing
debt leverage, 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 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.

  Enterprise connectivity programs 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. And 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

                                                                            -25-
<PAGE>

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 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 member
commerce and other revenues.

     Our business model assumes that we will derive revenues from member
commerce and other revenue-producing activities. The opportunities for
generating revenues from Internet advertising and commerce have diminished
industry-wide since December 2000. It is not certain that we will be able to
generate the member commerce and other revenues envisioned by our business
model.

  We rely on MBNA to provide consumer financing; our business would be harmed if
MBNA discontinued providing financing and we could not find a replacement
consumer finance vendor.

     Our acquisition of expected new consumer members depends on our ability to
provide a source of consumer financing. MBNA America Bank, N.A. is currently our
sole provider of consumer financing. Our agreement may be terminated by either
party upon 90 days notice. Either party may terminate our agreement for a
material breach following a 45-day cure period. If MBNA terminated our agreement
and we were unable to find alternative financing arrangements, our consumer
programs will suffer.

  We rely on Ingram Micro for distribution services; 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. 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 termination of or failure to renew or otherwise
deliver computers under our contract 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.
Our agreements with Ingram

                                                                            -26-
<PAGE>

Micro expired on February 28, 2001. The term of the agreement has not been
extended. However, the parties currently continue their business relationship.

  We rely on OEMs 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
OEMs has caused us to experience problems with shipment of computers and
customers have cancelled their memberships and requested refunds.

  We rely on outside vendors for many of the services we provide to members; our
business would be harmed if any of the vendors failed to perform.

     We rely on UUNET Technologies, Inc., an MCI WorldCom company, Genuity
Solutions, Inc. and others to provide Internet access service to our members in
the United States. If UUNET, Genuity or any other Internet access provider in
the future does not provide our members with reliable Internet access, our
business would be harmed. 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 computer suppliers to supply and sometimes ship
computers to members. If existing suppliers cannot or will not provide the
products we require at commercially reasonable prices and reasonable payment
terms and we are not able to find suitable alternative suppliers, our business
would be harmed. Moreover, we may not be able to monitor or control effectively
the quality of the computers manufactured by our suppliers or the speed and
accuracy of their distribution. Low-quality products, slow distribution or
similar inadequacies may 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.

  We may need infusions of additional capital as our enterprise business
expands.

     Ingram Micro purchases and HP separately manufactures inventory on our
behalf based on sales projections made by us. We are obligated to purchase
inventory held by Ingram Micro or manufactured by HP on our behalf. At September
30, 2001, we had approximately $1.4 million in noncancelable purchase
commitments with Ingram Micro and HP. Our capital commitments may increase as we
obtain additional members under enterprise programs. To the extent we are not
able to obtain such financing or payment terms, our capital requirements may
increase substantially and our business would be harmed.

                                                                            -27-
<PAGE>

  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 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.

  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.

     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:

                                                                            -28-
<PAGE>

     .   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.

     Seasonal fluctuations may also affect our quarterly operating results.
Historically, demand for personal computers and consumer retail sales over the
Internet have been significantly stronger in the fourth quarter of each year and
weaker in the first and second quarters of each year. Because we expect to
derive most of our revenue from the sale of membership packages that include
computer systems and related services and from the sale of products and services
by merchants participating in our member commerce program, we believe our
business could be subject to the seasonal impact of this cycle.

  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.

  Our operating results may be affected by exchange rate fluctuation and legal
and regulatory requirements in the different countries in which we operate.

     If we are compensated for our services overseas in U.S. dollars, we may
need to convert these funds into the local currency in order to pay our
employees and certain foreign taxes. Alternatively, if we are compensated for
our services in the applicable local currency, we may need to convert that
currency into U.S. dollars in order to pay costs that we incur in U.S. dollars
and U.S. taxes. In either event, fluctuations in currency exchange rates could
adversely affect our revenues and operating margins.

  We may incur expenses to comply with foreign laws and our intellectual
property may have less protection due to the differing regulatory requirements
of countries in which we may conduct business.

     The legal and regulatory requirements of countries in which we may conduct
business in the future may differ from those in the United States, particularly
in the areas of communications, data-protection privacy, lending, tax and labor
laws. As a result, we may incur additional legal expenses to comply with these
laws and regulations. In addition, laws relating to the protection and
enforcement of intellectual

                                                                            -29-
<PAGE>

property rights in many countries are not as advanced and offer significantly
less protection than those in the United States.

  Our business could be affected by adverse political and economic events in the
countries in which we operate.

     Several countries in which we wish to conduct business have experienced
political and economic instability in the past and may continue to experience
such instability in the future. Such instability could slow our growth in
countries in which we would like to do business.

  Tariffs, high taxes and trade barriers may harm our international operations.

     There may be tariffs, high taxes or trade barriers in certain countries in
which we wish to do business that may significantly increase our operating
costs, reduce our revenues or make our products unattractive in these countries.
If the operating costs in these countries are too high, we may need to revise
our business model, and we may be unable to compete successfully in these
markets.

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

     Our growth has 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, expand, train and manage our work force and manage multiple
relationships with third parties. Some of our senior management have no prior
management experience at public companies, and we cannot be sure that we will be
able to manage our expansion effectively.

     On the other hand, 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. Due to the decline in the trading
price of our common stock, a substantial portion of the stock options held by
our employees have an exercise price that is higher than the

                                                                            -30-
<PAGE>

current trading price of our common stock, and therefore these stock options may
not be effective in helping us to retain valuable employees.

  We need to refresh the Company's products and services as technology changes.

     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. There can
be no assurance that any new computer products or services that we introduce
will be accepted by the market. 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
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,
etc.

     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 12 other trademarks. We also have applied to
register marks in 27 countries. We may be unable to secure these registrations.
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

                                                                            -31-
<PAGE>

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.

  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 September 30, 2001. In connection
with the grant of such options, we have recorded net deferred stock-based
compensation of $21.7 million during fiscal 1999 and $63.5 million during fiscal
2000. 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. $3.0
million was expensed in the period ended December 31, 1999 and $43.1 million was
expensed in the year ended December 31, 2000. We recognized stock-based
compensation of $0.4 million and $6.3 million, net of $2.2 million and $10.3
million reversal of stock-based compensation amortized related to unvested
shares for terminated employees for three and nine months ended September 30,
2001. We recorded reductions in deferred stock-based compensation relating to
terminated employees of $2.7 million and $22.5 million for the three and nine
months ended September 30, 2001. As of September 30, 2001, the Company had an
aggregate of $9.8 million of deferred stock-based compensation remaining to be
amortized.

                                                                            -32-
<PAGE>

     The balance is expected to be amortized as follows:

                                                    Deferred Stock-Based
                  Period                                Compensation
     ----------------------------------------  -------------------------------
     Remainder of year ending December 31,
           2001                                $2.2 million
           2002                                $5.8 million
           2003                                $1.9 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 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.

Terrorist attacks and threats of or actual war may negatively impact our
business.

     Terrorist attacks in New York City and Washington, D.C. on September 11,
2001 have disrupted commerce throughout the United States. The continued threat
of terrorism within the U.S. and the potential for military action and
heightened security measures in response to this threat may cause significant
disruption to commerce throughout the world. To the extent that this disruption
results in delays or cancellations of customer orders, a general decrease in
corporate spending on Internet services and products, or our inability to
effectively service our customers or market our services and products, our
business and results of operations could be materially and adversely affected.

The recent terrorist attacks in the U.S. could adversely affect the price and
liquidity of our stock.

     Following the recent terrorists attacks in the United States, and in
particular in New York City on September 11, 2001, there has been substantial
volatility in the national equity markets. The attacks may have affected the
price of our shares traded on The Nasdaq National Market. Any significant
military or other response by the U.S. or its allies, future terrorists attacks
or the anticipation of any such actions or events may

                                                                            -33-
<PAGE>

have a further adverse impact on the U.S. and world economies and thus may
adversely impact demand for our services, and the liquidity and price of our
shares.

Risks Related to Our Industry

     Our business model assumes continued demand for personal computers.

          Our business model depends in part on the continued strong demand for
personal computers. The personal computer market is characterized by rapid new
product and technology introductions and generally declining prices for existing
products. Demand for personal computers may be significantly reduced if
consumers perceive little technological advantage in new products or believe
that the price of a new product is not worth the perceived technical advantage.
Alternatively, if individuals view anticipated changes as significant, such as
the introduction of a new operating system or microprocessor architecture,
overall market demand for personal computers may decline because potential
members may postpone their purchases until release of the new product or in
anticipation of lower prices on existing products following the introduction of
new models. Reduced demand could result in excessive inventories and it could
take several quarters to sell this inventory, which could delay the introduction
of new products.

     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.

Risks Related to Market Volatility

     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.

     If we fail to maintain our listing on The Nasdaq National Market, the
ability to buy or sell our common stock may be materially impaired.

          Our common stock trades on the Nasdaq National Market, which specifies
certain requirements for the continued listing of common stock. One of these
requirements is that the minimum closing bid price per share not fall below a
specified level for an extended period of time. Another is that the market value
of a

                                                                            -34-
<PAGE>

company's public float (the number of shares in public float times the closing
bid price per share) exceed a certain level.

          On July 9, 2001, the Nasdaq staff informed us that we were not in
compliance with Nasdaq's market value of public float requirement, and that we
have until October 8, 2001 to come into compliance. In addition, on July 10,
2001, we received a notice from the staff of The Nasdaq Stock Market that our
common stock had failed to maintain the minimum bid price required for continued
listing on The Nasdaq National Market.

          On September 27, 2001, the Nasdaq announced that it was implementing
an across-the-board moratorium on the minimum bid and public float requirements
for continued listing on Nasdaq. As a result, the Nasdaq dismissed its
proceeding seeking to delist our common stock. Commencing January 2, 2002, we
will again become subject to the Nasdaq listing requirements, and if we fail to
meet those requirements Nasdaq will be able to commence a new proceeding

          There can be no assurance that we will meet the appropriate minimum
bid price and public float requirements after January 2, 2002. If we are not in
compliance with these requirements, the Nasdaq again may inform us that we have
a specified period of time to come into compliance and if we fail to come into
compliance our common stock could be delisted from the Nasdaq National Market.
In the event our common stock is delisted from the Nasdaq National Market, we
may attempt to have our common stock traded on the NASD over-the-counter
Bulletin Board. If our common stock is delisted, it would seriously limit the
liquidity of our common stock and impair our potential to raise future capital
through the sale of our common stock, which could have a material adverse effect
on our business. Delisting could also reduce the ability of holders of our
common stock to purchase or sell shares as quickly and as inexpensively as they
have done historically, and may have an adverse effect on the trading price of
our common stock. Delisting could also adversely affect our relationships with
vendors and customers.

    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 $0.32 per share on November 12, 2001. These factors 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 September 30, 2001, our directors, executive officers and 10% or
greater principal stockholders together controlled approximately 60.5% of our
common stock. In addition, on February 16, 2001, we entered into a memorandum of
agreement with certain of our principal stockholders providing them with an
option to put shares of PeoplePC Europe N.V. held by them to PeoplePC in
exchange for PeoplePC stock. The transaction was finalized when the parties
entered into the Put Option Agreement and collateral agreements on May 30,
2001. If these options were fully exercised, our directors, executive officers
and principal stockholders could control as much as 69.2% of our common stock.
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
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

                                                                            -35-
<PAGE>

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. As of
September 30, 2001, [96,891,356] shares were eligible or will be eligible in the
future for sale in the public market, in some cases subject only to the volume,
manner of sale and notice requirements of Rule 144 of the Securities Act of
1933. In addition, holders of put options pursuant to the Put Option Agreement
dated May 30, 2001 may acquire up to approximately 32.6 million shares of
PeoplePC common stock in exchange for shares of PeoplePC N.V. After August 15,
2001, these holders may require PeoplePC to register the shares so they can be
sold in the public market. 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.

                                                                            -36-
<PAGE>

PART II

Item 1.  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 currently involved in
any material legal proceedings.

Item 6.  Exhibits and Reports on Form 8-K

EXHIBIT INDEX

(a)  Exhibits

         Exhibit Number                           Description
---------------------------   --------------------------------------------------
10.1                          Promissory Note from PeoplePC Inc. to PeoplePC
                              Europe N.V. dated November 9, 2001.

10.2+                         Amendment No. 3 dated July 18, 2001 to Master
                              Agreement dated April 5, 2001, between PeoplePC,
                              Inc. and Ford Motor Company

10.3++                        Retention Agreement between PeoplePc and Mary
                              Humiston dated June 29, 2001.

10.4++                        Retention Agreement between PeoplePC and Nick
                              Grouf dated June 29, 2001.

10.5                          Retention Agreement between PeoplePC and Michael
                              Bailey dated July 30, 2001.

----------------
+  Incorporated by reference to previously filed exhibit to the Quarterly Report
    on Form 10-Q (File No. 000-31299) of PeoplePC Inc. on July 15, 2001.
++ To correct previously filed exhibit to the Quarterly Report on Form 10-Q
    (File No. 000-31299) of PeoplePC Inc. for the period ended June 30, 2001
    (filed July 15, 2001).

(b)  Reports on Form 8-K

     Current report on Form 8-K filed July 24, 2001.

     Amendment to Form 8-K filed July 24, 2001, filed July 25, 2001.

                                                                            -37-
<PAGE>

                                   SIGNATURE

     Pursuant to the requirements of the Securities Act of 1934, this report has
been signed and thereunto duly authorized, in the City of San Francisco, State
of California, on November 14, 2001.



                                    PEOPLEPC, INC

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

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

                                                                            -38-