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Table of Contents **PEOPLEPC INC.****FORM 10Q****INDEX**  PART I.  FINANCIAL INFORMATION   Item 1.  Condensed Consolidated Financial Statements      Condensed Consolidated Balance Sheets as of March 31, 2002 (unaudited) and December 31, 2001   3   Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2002 and 2001 (unaudited)   4   Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001 (unaudited)   5   Notes to Condensed Consolidated Financial Statements (unaudited)   6Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations   12Item 3.  Qualitative and Quantitative Disclosure about Market Risk   26PART II.  OTHER INFORMATION   Item 1.  Legal Proceedings   27Item 4.  Submission of Matters to a Vote of Security Holders   27Item 6.  Exhibits and Reports on Form 8-K   27SIGNATURES       2 
Table of Contents PART I—FINANCIAL INFORMATION  **ITEM 1.    FINANCIAL STATEMENTS** **PEOPLEPC INC. AND SUBSIDIARIES** **CONDENSED CONSOLIDATED BALANCE SHEET****(in thousands, except per share data)**     **March 31, 2002**   **December 31, 2001**    **(Unaudited)**     **ASSETS**Current Assets:          Cash and cash equivalents  $11,005   $22,497 Restricted cash   2,648    2,181 Accounts receivable, net of allowance for doubtful accounts of $364 and $665 as of March 31, 2002 and December 31, 2001,respectively   4,157    4,254 Prepaid expenses and other current assets   1,055    2,065      Total current assets   18,865    30,997 Accounts receivable, long-term   1,554    1,836 Retained interest in accounts receivable   2,070    2,070 Property and equipment, net   4,757    5,396 Other assets   644    970      Total assets  $27,890   $41,269      **LIABILITIES, MINORITY INTEREST, MANDATORILY REDEEMABLE**Current liabilities:          Accounts payable  $5,704   $8,741 Accrued and other liabilities   8,649    9,188 Current portion of deferred revenue, net   20,720    21,082      Total current liabilities   35,073    39,011 Other long term liabilities   141    141 Deferred revenue, net   18,927    20,964      Total liabilities   54,141    60,116      Minority interest in consolidated subsidiaries   40,003    40,313      Mandatorily redeemable convertible preferred stock   0    21,191      Stockholders’ deficit:    Common stock; $0.0001 par value; 500,000 shares authorized; 553,024 and 115,466 shares issued, and 551,502 and 113,994 sharesoutstanding at March 31, 2002 and December 31, 2001, respectively   55    11 Additional paid-in capital   368,366    342,111 Common Stock in treasury at cost, 1,522 and 1,522 shares at March 31, 2002 and December 31, 2001, respectively   (502)   (502)Deferred stock based compensation   (8,197)   (4,903)Receivable from stockholder   (116)   (116)Accumulated other comprehensive loss   (393)   (325)Accumulated deficit   (425,467)   (416,627)     Total stockholders’ deficit   (66,254)   (80,351)     Total liabilities, minority interest, mandatorily redeemable convertible preferred stock and stockholders’ deficit  $27,890   $41,269       The accompanying notes are an integral part of these condensed consolidated financialstatements. 3 
Table of Contents **PEOPLEPC INC. AND SUBSIDIARIES** **CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS****(in thousands, except per share data)****(Unaudited)**     **Three Months Ended March 31,**    **2002**   **2001** Membership revenues earned  $46,268   $34,506 Other revenues   1,736    2,827      Total revenues   48,004    37,333      Cost of membership revenues earned   43,546    36,514 Cost of other revenues   281    1,422      Total cost of revenues   43,827    37,936      Gross profit (loss)   4,177    (603)     Operating expenses:          Sales and marketing (inclusive of stock-based compensation of $75 and $1,201 for the three months ended March 31, 2002, and2001,respectively)   1,330    8,203 General and administrative (inclusive of stock-based compensation of $1,739 and $4,601 for the three months ended March 31, 2002 and2001, respectively)   11,863    31,382 Other operating income   (1)   (1,873)     Total operating expenses   13,192    37,712      Loss from operations   (9,015)   (38,315)Net interest (income) expense and other expenses   (135)   (309)Minority interest in net loss of consolidated subsidiaries   310    2,436      Net loss   (8,840)   (36,188)     Basic and diluted net loss per share  $(0.03)  $(0.33)     Shares used in computing basic and diluted net loss per share   305,435    109,551  The accompanying notes are an integral part of these condensed consolidated financialstatements. 4 
Table of Contents **PEOPLEPC INC. AND SUBSIDIARIES** **CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS****(in thousands)****(Unaudited)**     **Three Months Ended March 31,**    **2002**   **2001** **Cash flows from operating activities:**          Net loss  $(8,840)  $(36,188)Adjustments to reconcile net loss to net cash used in operating activities:          Depreciation and amortization   663    773 Amortization of deferred stock-based compensation, net   1,814    5,802 Net increase (decrease) in allowance for doubtful accounts   (301)   1,200 Minority interest in net loss of consolidated subsidiaries   (310)   (2,436)Changes in assets and liabilities:          Accounts receivable   398    8,944 Prepaid expenses and other current assets   1,010    (712)Accounts receivable, long term   282    2,524 Deposits and other assets   243    (94)Accounts payable   (2,623)   335 Accrued liabilities   (953)   (25,514)Deferred revenues   (2,399)   6,890 Other   —      1,195      Net cash used in operating activities   (11,016)   (37,281)     **Cash flows from investing activities:**          Restricted cash   (467)   5,809 Sale (purchase) of property and equipment   59    (1,222)     Net cash provided by (used in) investing activities   (408)   4,587      **Cash flows from financing activities:**          Proceeds from issuance of common stock, net   —      32 Payments on borrowings under a line of credit   —      (530)Purchase of treasury shares   —      (26)     Net cash used in financing activities   —      (524)     Effect of exchange rate changes on cash and cash equivalents   (68)   —        Net decrease in cash and cash equivalents   (11,492)   (33,218)Cash and cash equivalents at beginning of period   22,497    65,493      Cash and cash equivalents at end of period  $11,005   $32,275      **Supplemental non cash investing and financing activity:**          Conversion of preferred stock into common stock  $21,191   $—   Deferred stock-based compensation   6,147    —   Reversal of deferred stock-based compensation upon termination of employment   1,039    —   Interest paid   —      125 Receivable from stockholders   —      68  The accompanying notes are an integral part of these condensed consolidated financialstatements.  5 
Table of Contents **PEOPLEPC INC. AND SUBSIDIARIES** **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)** **1.    Description of Business and Summary of SignificantAccounting Policies** **Description of Business** PeoplePC Inc. (the “Company” or “PeoplePC”) provides a membership package that includes a brand-name computer, unlimited Internet access, customer support and an in-home warranty. Members also havethe opportunity to benefit from discounts and special offers from merchants who participate in PeoplePC’s member commerce program. The Company also operates PeoplePC’s Online program, which provides consumers who do not wish to purchase acomputer with all of the other benefits of a PeoplePC membership for a monthly fee. The Company was incorporated in Delaware on March 2, 1999.  **Unaudited Interim Results** The accompanying unaudited interim condensed consolidated financial statements ofPeoplePC Inc., a Delaware corporation, as of March 31, 2002 and for the three months ended March 31, 2002 and March 31, 2001 reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management, are necessary for afair 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 withthe 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 financialstatements.  These financial statements should be read in conjunction with our annual audited financial statements for the yearended December 31, 2001, 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, 2002.  **Liquidity** The Company’s condensed consolidated financial statements have beenprepared assuming that it will continue as a going concern. The Company has incurred substantial losses and negative cash flows from operations since its inception. Based upon current Membership levels, the Company’s current working capital andexpected cash flows to be generated from operations may not be sufficient to fund operations for the remainder of 2002.  On aconsolidated basis as of March 31, 2002, the Company’s sources of liquidity consisted of $13.7 million in cash and cash equivalents, including $2.6 million in restricted cash. The Company’s net accounts receivable balance as ofMarch 31, 2002 was $5.7 million. Of these amounts, $1.3 million in cash and $0.4 million in accounts receivable balance are held by the Company’s subsidiary, PeoplePC U.K. Limited. Due to legal and other constraints, some or all ofthe cash assets held by PeoplePC U.K. Limited may not be available to fund the Company’s United States operations.  TheCompany has plans to acquire additional revenue-generating PeoplePC Online members through a combination of private label programs, wholesale arrangements, or acquisitions of members from other Internet service providers. There is no guarantee thatthe Company will be able to increase its Membership levels.  If the Company is unable to increase Membership to generatesufficient operating revenues, further capital investment or other financing will be needed to fund operations. There is no guarantee that additional financing will be available on favorable terms, or at all. The Company may have to sell stock atprices lower than those paid by existing stockholders, and perhaps lower than existing market prices, resulting in dilution of existing stockholders. The Company may have to sell stock or bonds with rights superior to rights of holders of commonstock. Also, any debt financing might involve restrictive covenants that would limit the Company’s operating flexibility. If the Company is not able to raise additional funds, the Company may be required to curtail or discontinue some or all ofits operations.  The Company has already taken steps to improve liquidity, including obtaining additional financing, targetingsales and marketing expenditures on channels with a low acquisition cost per member, consolidation of sales offices and a realignment and reduction of its workforce during the past 12 months. 6 
Table of Contents These factors raise substantial doubt about the Company’s ability to continue as a goingconcern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.  **Principles of Consolidation** These consolidated financial statements include the accounts of the Company and its majority-owned or otherwise controlledsubsidiaries. All significant intercompany balances and transactions have been eliminated. The equity and net loss attributable to minority shareholders’ interests are shown separately in the consolidated balance sheets and consolidatedstatements of operation.  **Estimates** The preparation of financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. On an on-going basis, the Company evaluates its estimates, including those related to allowance for acquisition discounts, membership cancellations and product returns, allowance for doubtful accounts, deferred tax valuationallowance and allowance for settlement of potential disputes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basisfor making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.  **Revenue recognition** In December 1999, theSecurities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue recognition in Financial Statements”. We adopted SAB 101, in the quarter ended December 31, 2000. The adoption ofSAB 101 did not have a material effect on the results of operations or financial position of the Company.  Revenues and therelated cost of revenues for the initial membership package, which generally includes a personal computer, extended warranty, cost of shipping the personal computer system, internet access for the term of the membership, and participation in amember commerce program, are generally deferred and recognized over the term of the membership agreement for members signed up under enterprise deals and consumers up to May 2001. Beginning in May 2001, the extended warranty was offered separatelyas an option in the consumer Membership Package program. This resulted in revenues and the related cost of revenues for the personal computer and shipping the personal computer system being recognized once the right of return has elapsed. Revenuesand any related cost allocated to internet access, the participation in a member commerce program and the extended warranty are deferred and recognized over the four-year term of the membership agreement.  Revenues from the PeoplePC Online program are recognized monthly as services are delivered. Monthly subscriptions to PeoplePC’s online service arerenewable each month and the monthly fees are not refundable.  The Company also offers peripherals and upgrades at the time ofthe 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 areincluded under the line item “Other revenues”, which includes peripherals revenue, the related shipping revenues and revenues from the member commerce program.  In some instances, and in an effort to aggressively enroll new members to build its brand, as well as to develop new channels of distribution, the Company offered pricing on some itsmemberships 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 lossover 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 futureexpenses. 7 
Table of Contents **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 businessdecisions. The Company does manage its operations on a geographical basis. Revenues are attributed to the United States and to all foreign countries based on actual sales made in those geographic areas. Revenues, loss from operations and long-livedassets information by geographic area are summarized as follows (in thousands):     **Three Months Ended March 31,**   **2002**  **2001**Revenues from External Customers      United States  39,557  35,388International  8,447  1,945     Total  48,004  37,333     Loss from Operations      United States  8,123  31,129International  892  7,186     Total  9,015  38,315        **As of March 31, 2002**  **As of December 31, 2001**Long-Lived Assets      United States  4,062  7,102International  695  1,409     Total  4,757  8,511      **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 netloss per share is computed giving effect to all dilutive potential common stock, including options, warrants and preferred stock. Options, warrants, non-vested common stock and preferred stock were not included in the computation of diluted net lossper share in the periods reported because the effect would be antidilutive.  The following table summarized basic and dilutedloss per share (in thousands, except per share data):     **Three Months Ended March 31,**    **2002**   **2001** Numerator:        Net loss  (8,840)  (36,188)     Denominator:        Weighted average common shares  307,429   114,809 Weighted average unvested common shares subject to repurchase  (1,994)  (5,258)     Denominator for basic and diluted calculation  305,435   109,551      Basic and diluted net loss per  (0.03)  (0.33)     8 
Table of Contents Antidilutive securities not included in net loss per share calculation for the periodspresented are as follows (in thousands):     **As of March 31,**   **2002**  **2001**Common stock subject to repurchase  1,869  4,401Common stock options  6,020  14,247Warrants  0  2,858     Total  7,889  21,506      **2.    Commitments and contingencies:** **Purchase commitments** The Company relies onIngram Micro (the “Distributor”) to provide some of its computer products, maintain inventory, process orders, prepare merchandise for shipment and distribute its products to customers in a timely and accurate manner. The Distributorpurchases inventory 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 Distributorpurchased on its behalf to the extent that sales projections are not met. At March 31, 2002, the Company had approximately $0.2 million in noncancelable purchase commitments with the Distributor. The Company’s agreement with the Distributorexpired in February 2001; however, both parties have continued to perform under the terms of the contract. The Company expects to sell all products that it has committed to purchase from the Distributor.  In December 2001, the Company entered into a long-term relationship with a major telecommunications company. Under this agreement, the Company received$1.5 million of incentive payments in three months ended March 31, 2002 and will receive an additional $1.5 million in incentive payments during the remainder of fiscal year 2002. The Company records incentives as an offset to cost of revenues. Thefuture minimum annual contractual spending commitments for the remainder of fiscal 2002 and the following five years are $4.9 million, $3.0 million, $8.0 million, $8.0 million, $8.0 million and $9.0 million.  **Leases** The Company leases office space under 6operating leases expiring between 2002 and 2009, of which 2 leases can be renewed in 2004 for an additional period of 5 years. Rent expense was $1.0 million and $0.5 million for the three months ended March 31, 2002 and 2001. The Company recognizesrent expense on a straight-line basis over the lease period and has accrued for rent expense incurred but not paid. The Company also leases copiers under 2 operating leases expiring in 2005.  Future lease payments under operating leases, as of March 31, 2002 are as follows (in thousands):     **Operating Leases**Years ending December 31,    Remainder of 2002  $1,2142003  $1,4202004  $1,2812005  $129   Total  $4,044    **Contingencies** The Company has employment agreements and commitments with certain executive officers under which the employees would be entitled to receive severance payment of $1.25 million if theiremployment were to be terminated under certain conditions. 9 
Table of Contents **Existing Litigation** On April 22, 2002, SupportSoft, Inc. (“SupportSoft”) filed a complaint against the Company in the Superior Court of the County of Santa Clara, California, alleging that the Company is in breach of itsobligations under a Master License Agreement dated September 29, 2000 between SupportSoft and the Company (the “Master License Agreement”). The Master License Agreement relates to customer service software that the Company is no longerusing. The complaint alleges that the Company has not paid approximately $200,000 that it was obligated to pay with respect to license, support, maintenance, and service fees relating to the first annual period under the Master License Agreement.Further, the complaint alleges that the Company is obligated to pay to SupportSoft $1,250,000 relating to the second year of the Master License Agreement, and $2,500,000 relating to the third year of the Master License Agreement.  The Company has not yet filed an answer to the complaint, but intends to contest vigorously the allegations made in the lawsuit. Among otherrelief, the Company will seek rescission of the Master License Agreement and a refund of approximately $950,000 paid to SupportSoft during 2000 and 2001. In addition, the Company will seek a declaration that it is not obligated under the MasterLicense Agreement to pay any further amounts to SupportSoft.  **3.    Minority Interest in Consolidated Subsidiaries:** In June 2000, PeoplePC formed a European subsidiary, PeoplePC Europe N.V., a Netherlands corporation. PeoplePC and PeoplePCEurope N.V. entered into financing and related agreements with @viso Limited (“@viso”), a United Kingdom company and a partnership of SOFTBANK Corp. (“SOFTBANK”), a Japanese company and Vivendi Universal S.A.(“Vivendi”), a French corporation. In the financing, PeoplePC Europe N.V. received $50.0 million from @viso payable over a two month period beginning on the closing date in exchange for its 35% interest in PeoplePC Europe N.V. PeoplePCreceived 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 March 31, 2002, minority shareholders hold preferred stock in PeoplePC Europe N.V., a Dutch company, with a par value of EUR.01 as follows (in thousands):      **Series Authorized**  **Shares Outstanding**  **Proceeds**Series A preferred stock  100,000  11,667  $35,000Series B preferred stock  50,000  5,000   15,000                $50,000          In connection with the issuance of series B preferred stock and series Apreferred stock to @viso, PeoplePC Europe N.V. (“PeoplePC Europe”) granted SOFTBANK Capital Partners LP a warrant to acquire 2.4 million shares of series A preferred stock, with an aggregate exercise price of $7.1 million. The warrant isexercisable and must be exercised immediately prior to (a) an acquisition, sale or merger of or by PeoplePC Europe resulting in a change in control of PeoplePC Europe, (b) a merger of PeoplePC Europe with and into the Company, or acquisition of allof PeoplePC Europe assets or shares by the Company or (c) PeoplePC Europe’s initial public offering, on terms and conditions stated in the agreement (“liquidity events”). The warrant may not be exercised after the earlier of (a)fifteen business days following a request by PeoplePC Europe that SOFTBANK Capital Partners LP exercise such right and (b) the occurrence of a liquidity event.  Under a Put Option Agreement signed on May 30, 2001, @viso is entitled to sell all or a portion of its shares of PeoplePC Europe to PeoplePC in exchange for PeoplePC common stock. Under this agreement, @viso isentitled 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 convertiblepreferred stock in PeoplePC Europe. Once the amended warrant is exercised, SOFTBANK Capital Partners LP will be entitled to sell all or a portion of its shares of PeoplePC Europe to PeoplePC in exchange for PeoplePC stock. Under this arrangement,SOFTBANK Capital Partners LP will be entitled to receive between approximately 1.9 million and 3.5 million shares of PeoplePC common stock based on a formula on the date of exchange.  PeoplePC Europe has made five loans totaling $35.5 million to fund PeoplePC’s United States operations during fiscal year 2001. These notes are demand notes. Because the Companycontrols the board of directors of PeoplePC Europe, the Company has substantial discretion over the timing of demands made under these notes. Due to legal and other constraints, some portion of the remaining cash assets of PeoplePC Europe may not beavailable to fund PeoplePC’s United States operations. 10 
Table of Contents **4.    Mandatorily Redeemable Convertible Preferred Stock:** The Company has authorized the issuance of 50,000,000 shares of mandatorily redeemable convertible preferred stock (“preferred stock”), with apar value of $0.0001 per share.  In December 2001, the Company issued and sold a total of 4,375,000 shares of series B preferredstock at a price of $5.00 per share. The Company received approximately $21.2 million in cash, net of underwriting discounts, commissions, and other offering expenses. In connection with the issuance of the series B preferred stock, the Companyrecorded a dividend of $21.2 million related to the beneficial conversion feature of the series B preferred stock issued.  Pursuant to the terms of the series B preferred stock, each share converted into 100 shares of common stock immediately following stockholder approval on February 19, 2002.  **5.    Common stock and stock options:** On January 28, 2002 theCompany granted options to purchase 102 million shares of common stock with an exercise price of $0.15. The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board(“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, (“APB No. 25”) and complies with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No.123”). Under APB No. 25, the Company measured the compensation expense in relation to this grant as the difference between the fair value of the Company’s stock on the date of the grant, being $0.21, and the exercise price of the option.The deferred stock-based compensation of $6.1 million has been included as a component of stockholders’ deficit and is being amortized by charges to operations over the three-year vesting period of the options consistent with the methoddescribed in Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 28.  The Companyrecognized stock-based compensation of $1.8 million and $5.8 million, net of reversal of stock-based compensation previously amortized related to unvested shares for terminated employees for the three months ended March 31, 2002 and 2001,respectively. The Company recorded reductions in deferred stock-based compensation relating to terminated employees of $1.0 million for the three months ended March 31, 2002. As of March 31, 2002, the Company had an aggregate of $8.2 million ofdeferred stock-based compensation remaining to be amortized. 11 
Table of Contents **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 uncertaintiesdiscussed 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 futureoperations; 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. Thesestatements 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, theCompany’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 expand our online program, enter into new enterprise agreements and expand our membership; our ability to generate, throughoperating revenues or through the proceeds of equity or debt financing, sufficient cash to implement our business plan and continue operations; our ability to provide consumer financing for the purchase of our products and services; the willingnessof 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; ourability to generate revenues from merchant partners, our ability to acquire members through acquisitions of other ISPs; the timing of acquisition of enterprise program members; our ability to improve pricing and eliminate acquisition discounts; ourability to generate revenues through our member commerce program and other activities; the cost of our international operations; and other risks described in this report and from time to time in PeoplePC’s Securities and Exchange Commissionperiodic reports and filings.  The Company assumes no obligation to update these forward-looking statements to reflect eventsthat 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 theSecurities and Exchange Commission.  The following discussion of our financial condition and results of operations should alsobe 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, andon a commercial basis in October 1999. Until October 1999, we had no revenues and our operating activities consisted primarily of developing relationships with vendors, suppliers and merchants. As of March 31, 2002, we had approximately 501,000Members who had purchased our Membership Packages and approximately 82,000 PeoplePC Online Members.  Our business model evolvedduring 2001 in response to the changing marketplace and economic conditions. We had originally focused on growing our Membership by selling Membership Packages consisting of a personal computer and prepaid Internet access service for the term of theMembership. We sold Membership Packages through our Consumer Program, through Employee Connectivity Programs sponsored by large employers, and through Channel Programs with large affiliate organizations. The Membership Packages were sold near, at,or below cost, and we had planned to generate profits from the sale of advertising, merchandising, and other “monetization” activities directed at our growing base of Members. We intended to fund our growth in part through ourMembers’ prepayment of the service portion of the Membership Packages.  Our goal is still to grow our Membership throughmultiple channels involving marketing partners. However, our business model now looks to generate profits not primarily through monetization of Members but rather through the sale of our Internet access service through monthly subscriptions. Thischanged emphasis was made possible, in part, by our development of a low-cost Internet infrastructure, giving us the opportunity to offer the service for sale at a high margin.  Although we are still selling our programs through large corporate sponsors, the business rationale for the corporate programs has changed. Many of our corporate sponsors previouslylooked at our service as an employee benefit. Now, the majority of our sponsors anticipate receiving a monthly revenue stream by working with us to sell monthly ISP subscriptions to their customers and members. We sell our ISP service for a monthlyprice that provides us with a positive margin, even after payment of a commission to the sponsoring organization. In addition to receiving a new revenue stream, the sponsoring companies obtain a customizable online platform that they can use formarketing and cross-selling activities. 12 
Table of Contents We also plan to wholesale our ISP service through other ISP service providers. In thisstructure, we will provide our service to the ISP service provider for resale to the provider’s customers. We will charge the service provider a wholesale price, which we would set at a level to provide us with an acceptable margin. The serviceprovider will then resell our service to its customers at a retail price.  **Revenues, Cost of Revenues and Cash Flows** To place our financial statements in context, one must appreciate how our business plan has evolved. From our inception through most of 2001, we focusedon marketing our Membership Package programs. Our income statements reflect the sale of computer/service packages that have a relatively high purchase price, high cost, and low margin. We expect that monthly PeoplePC Online subscriptions willprovide a significant portion of Membership revenues in the future, as we continue to de-emphasize the Membership Package programs. We expect that this service, in comparison to the sale of Membership Packages, will on a unit basis produce a lowerbut recurring cash flow, lower initial costs, and comparatively higher margins.  A proper understanding of our financialstatements also requires distinguishing between the differing accounting treatments accorded to revenues derived from the sale of a Membership Package and sale of the PeoplePC Online service.  *Membership Packages* To understand the financialeffect of the sale a Membership Package, it is important to distinguish cash flows associated with the sale from the recognition of revenue from the sale. When we sell a Membership Package, we receive the entire purchase price and shipping fees upfront in cash. The cost of purchasing and shipping the computer hardware comprise a large part of the cost of Membership Package revenues. We pay our hardware and distribution vendors immediately. The difference between the Membership Packagepurchase price and the hardware cost is the amount of cash available to pay for the ISP and other services we promise to provide to the member over the three- or four-year Membership term. The cost of providing the services portion of the MembershipPackage is incurred and paid out over the three- or four-year Membership term, as the Member uses the ISP and other services.  Most Membership Package revenue and the costs of producing that revenue have been deferred and are being recognized ratably during the three-or four-year term of the Membership. Thus, the revenue and cost of revenues numbers that appear inour financial statements include significant previously deferred revenues and expenses related to Membership Packages that were sold in prior periods. Our deferral of revenues and costs is unrelated to the actual cash positions and cash flowsrelated to the Membership Package transactions. In the view of management, the most critical factors in our business at this stage of its development relate to cash reserves and cash flows. Said another way, our single most important near-termfinancial goal is attaining positive cash flow, so that the business can become self-funding.  The up-front revenue receivedfrom our original three-year $24.95 per month entry-level consumer Membership Package and from the Ford and Delta enterprise programs was less than our estimated total current and expected future cost of providing services and performing under theapplicable agreements. The amount by which our total current and expected future costs exceed our membership revenues from these programs was recorded as a loss provision, or acquisition discount. During 2001, we ceased to offer acquisitiondiscounts in our Membership Package Enterprise and Consumer Programs. During the second through fourth quarters of 2001, we were able to reduce our loss provision, as our estimate of our future cost to provide Internet access to these Members hassubstantially decreased.  *PeoplePC Online Service* Our PeoplePC Online service is generally sold on a monthly subscription basis, and revenues are earned from monthly subscription fees. The principle cost of these revenues is the cost ofproviding Internet access. Both revenues from PeoplePC Online and the cost of those revenues are recorded as services are provided and related costs are incurred, except in the case of Members who purchase a 12-month prepaid subscription. Revenuesfrom sales of 12-month prepaid subscriptions will be recognized on a monthly basis over the term of the subscription. Monthly PeoplePC Online Members may cancel their Membership at any time.  *Other Revenues* When we sell Membership Packages, wegenerate “other revenues,” which are revenues from the sale of upgraded monitors, printers and other peripherals and additional shipping revenues related to upgraded monitors and the sale of printers and other peripherals. 13 
Table of Contents Also included in “other revenues” are revenues from our PeopleShop service, andMember commerce program revenues from merchants, content partners and suppliers. Member commerce program revenues are recognized in the period when a transaction occurs because the transactions are not requested by all members, are separatelyidentifiable transactions, and the related earnings process is completed at that time. We do not expect revenues from these sources to be significant for us for fiscal 2002.  The cost of other revenues consists of the cost of peripherals and the incremental cost of upgrades; the cost to pick, pack, and ship peripherals and upgrades; and other costs ofrevenues such as costs associated with returns. The cost of other revenues is recorded in the period incurred. We anticipate that the cost of our Member commerce program revenues will be minimal in 2002.  **Foreign Operations** We currently operateprincipally in the United States, the United Kingdom, and France. Our operations in France are primarily focused on servicing the Vivendi Universal account, and we do not anticipate actively marketing our products and services in France in fiscal2002. We expect that our primary foreign activity during fiscal 2002 will take place in the United Kingdom.  Although we offervarious products and services to our Members, we do not manage operations by these service lines. Instead, we view our company as one operating segment when making business decisions. We do manage our operations on a geographical basis. Revenues areattributed to the United States and to all foreign countries based on actual sales made in those geographic areas. Revenues, loss from operations and long-lived assets information by geographic area are summarized as follows (in thousands):       **Three Months Ended March 31,**     **2002**    **2001**Revenues from External Customers          United States    39,557    35,388International    8,447    1,945         Total    48,004    37,333         Loss from Operations          United States    8,123    31,129International    892    7,186         Total    9,015    38,315              **As of March 31,**    **As of December 31,**     **2002**    **2001**Long-Lived Assets          United States    4,062    7,102International    695    1,409         Total    4,757    8,511          **Results of Operations** ***Three months ended March 31, 2002 and March 31, 2001*** *Revenues* *Membership Revenues Earned.* Membership revenues earned includes revenues from the sale ofMembership Packages, related shipping revenues, revenues from PeoplePC Online Memberships, and recognition of Membership revenues previously deferred. Gross Membership sales decreased by 90% to $7.0 million for the three months ended March 31, 2002,from $71.0 million for the three months ended March 31, 2001. Revenues recognized from our PeoplePC Online programs were $2.0 million and $1.8 million for the three months ended March 31, 2002 and 2001, respectively. Because we generally recognizerevenues from the sale of Membership Packages over the term of the Membership, $2.4 million of gross sales of memberships was deferred in the three months ended March 31, 2002, while $66.7 million of gross sales of memberships was deferred in thethree months ended March 31, 2001. Membership revenues include the recognition of $41.7 and $30.3 million in Membership sales previously deferred for the three months ended March 31, 2002 and 2001, respectively. 14 
Table of Contents Starting in 2001, large companies became more reluctant to commit to subsidized employeeconnectivity programs involving Membership Packages. Subsidized employee programs accounted for a material portion of our sales of Membership Packages during the three months ended March 31, 2001. The general downturn in the economy during 2001 alsocontributed to the decrease in gross Membership sales through our Consumer Program.  On December 26, 2001, we received noticefrom our finance partner, MBNA America Bank, N.A., that effective May 17, 2002 it wished to terminate the arrangement under which it provided financing to consumers wishing to purchase one of our Membership Packages through our Consumer Program. Weare in discussions with MBNA and other credit providers regarding continuation of our financing program, but it is not certain that we will be able to successfully conclude these discussions. If we are unable to offer consumer financing, sales ofMembership Packages through our Consumer Program would be negatively affected. 75% of our sales of Membership Packages through our Consumer Program involved financing in 2001. However, with our shift in emphasis away from Membership Packages, we donot believe that any such negative effect would have a significant impact on our future results.  *OtherRevenues.*    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 developmentservices. Other revenues decreased by 39% to $1.7 million for the three months ended March 31, 2002, of which $0.3 million was related to the sale of upgrades and peripherals and $1.4 million was related to revenues from merchants, content partnersand suppliers. Other revenues were $2.8 million for the three months ended March 31, 2001, of which $2.1 million was related to the sale of upgrades and peripherals and $0.7 million was related to revenues from merchants, content partners andsuppliers. The decrease in other revenues is attributable to the decline in gross sales of Membership Packages.  *Cost ofRevenues* *Cost of Membership Revenues Earned.*    Cost of Membership revenues earned consistsprimarily of the cost of the basic system hardware and software, fulfillment and shipping costs and our cost of providing members with Internet connectivity. Cost of gross sales of Memberships decreased 91% to $6.2 million for the three months endedMarch 31, 2002 compared to $65.7 million for the three months ended March 31, 2001. Because we recognize some system hardware and software cost of revenues over the term of the Membership, $0.9 million of cost of gross Membership sales was deferredin the three months ended March 31, 2002, while $57.6 million of cost of gross Membership sales was deferred in the three months ended March 31, 2001. Cost of Membership revenues earned included the recognition of $38.2 and $28.5 million in costspreviously deferred for the three months ended March 31, 2002 and 2001, respectively. The cost of providing Internet service to our members included in cost of Membership revenues was $4.4 million and $6.6 million for the three months ended March31, 2002 and 2001, respectively. Cost of Membership revenues also includes a $1.6 million net amortization and a $1.0 million net provision of acquisition discount for the three months ended March 31, 2002 and 2001. The decrease in cost ofMembership revenues is consistent with the decrease in Membership revenues.  *Cost of OtherRevenues.*    The cost of other revenues for the three months ended March 31, 2002 decreased by 79% to $0.3 million from $1.4 million for the three months ended March 31, 2001. Cost of other revenues primarily consists of thecost of printer and monitor peripherals, the incremental cost of upgrades, and the related shipping expense. Cost of other revenues also includes incidental costs incurred such as costs related to returns. The decrease in cost of other revenues isconsistent with the decrease in other revenues.  *Operating Expenses* *Sales and Marketing.*    Sales and marketing expenses include fees paid to third-party advertising sales agents, sales support functions, travel andrelated expenses and related salaries and benefits. Sales and marketing costs are expensed in the period incurred. Sales and marketing expenses decreased 84% to $1.3 million for the three months ended March 31, 2002, of which $0.5 million wasrelated to fees paid for third-party advertising. The decrease resulted from the shift in our business model to more targeted marketing efforts and away from mass marketing of our memberships to consumers to build our brand. For the three monthsended March 31, 2001, sales and marketing expenses were $8.2 million, of which $5.2 million was related to fees paid for third-party advertising. Sales and marketing expenses include the amortization of deferred stock-based compensation of $0.1million and $1.2 million for the three months ended March 31, 2002 and 2001. In 2001, we shifted the focus of our sales and marketing program to less costly enterprise and affinity channels and targeted marketing. We do not expect sales andmarketing expenses to increase as a percentage of revenues. 15 
Table of Contents *General and Administrative.*    General and administrative expensesinclude 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 administrativeexpenses decreased 62% to $11.9 million for the three months ended March 31, 2002, including approximately $1.0 million facilities expense and $3.1 million paid to outside consultants, contractors and other professionals forservices rendered. For the three months ended March 31, 2001, general and administrative expenses were $31.4 million, including approximately $0.5 million facilities expense and $7.7 million paid to outside consultants, contractorsand other professionals for services rendered. General and administrative expenses included stock-based compensation amounting to $1.7 million for the three months ended March 31, 2002 and $4.6 million for the three months endedMarch 31, 2001. We have been aggressively reducing our general and administrative expenses. As a result, we do not anticipate a significant increase in general and administrative expenses.  *Other operating income*.    Other operating expenses is not significant for the three months ended March 31, 2002. For the three months ended March31, 2001, other operating expenses consisted of a credit adjustment to the loss reserve established in 1999 to cover any potential exposure related to non-conforming computers held on our behalf by our distributor in the amount of $3.4 million, andother operating expenses of $1.5 million.  *Net interest income (expense) and other expenses* Net interest income (expense) and other expenses consist of net interest income earned on cash balances and short-term investments, interest expenserelated to a credit facility, imputed interest on our acquisition discount reserve and other miscellaneous expenses. Interest income from cash equivalents and restricted cash decreased 80% to $0.1 million for the three months ended March 31,2002 from $0.5 million for the three months ended March 31, 2001, primarily because of lower average balances. Interest expense was $0.2 million and $0.8 million for the three months ended March 31, 2002 and 2001.  *Minority interest* Theminority interest in net loss of consolidated subsidiaries of $0.3 million for the three months ended March 31, 2002 represents 35% of the $0.9 million net loss of the consolidated subsidiaries. Most of this loss was attributable to the activitiesof People PC UK in Europe. For the three months ended March 31, 2001, the minority interest in net loss of consolidated subsidiaries of $2.4 million represents 35% of the $7.0 million net loss of the consolidated subsidiaries.  *Income Taxes* As a result of our operating losses and the uncertainties related to our ability to recognize a benefit from our deferred tax assets, we have not recorded a provision for income tax for the three months ended March 31, 2002. We haveprovided a full valuation allowance on our deferred tax assets.  *Net Loss* Net loss for the three months ended March 31, 2002 decreased 76% to $8.8 million from $36.2 million for the three months ended March 31, 2001.Significant components of net loss for the three months ended March 31, 2002 were a gross profit of $4.2 million, including the net amortization of acquisition discount of $1.6 million, operating expenses of $11.4 million, and amortization ofdeferred stock-based compensation of $1.8 million. For the three months ended March 31, 2001, $0.6 million of net loss was attributable to cost of revenues exceeding revenues, including the net provision of acquisition discounts of 1.0 million,$31.9 million was attributable to operating expenses, $5.8 million was attributable to the amortization of deferred stock-based compensation.  *Liquidity* Our consolidated financial statements have been prepared assuming that we willcontinue as a going concern. We have incurred substantial losses and negative cash flows from operations since inception. Based upon current Membership levels, our current working capital and expected cash flows to be generated from operations maynot be sufficient to fund operations for the remainder of 2002. 16 
Table of Contents On a consolidated basis as of March 31, 2002, our sources of liquidity consisted of $13.7million in cash and cash equivalents, including $2.6 million in restricted cash. Our net accounts receivable balance as of March 31, 2002 was $5.7 million. Of these amounts, $1.3 million in cash and $0.4 million in accounts receivable balance areheld by our subsidiary, PeoplePC U.K. Limited. Due to legal and other constraints, some or all of the cash assets held by PeoplePC U.K. Limited may not be available to fund our United States operations.  We have plans to acquire additional revenue-generating PeoplePC Online members through a combination of private label programs, wholesale arrangements,or acquisitions of members from other Internet service providers. There is no guarantee that we will be able to increase our Membership levels.  If we are unable to increase Membership to generate sufficient operating revenues, further capital investment or other financing will be needed to fund operations. There is no guarantee that additional financing willbe available on favorable terms, or at all. We may have to sell stock at prices lower than those paid by existing stockholders, and perhaps lower than existing market prices, resulting in dilution of existing stockholders. We may have to sell stockor bonds with rights superior to rights of holders of common stock. Also, any debt financing might involve restrictive covenants that would limit our operating flexibility. If we are not able to raise additional funds, we may be required to curtailor discontinue some or all of our operations.  We have already taken steps to improve liquidity, including obtaining additionalfinancing, targeting sales and marketing expenditures on channels with a low acquisition cost per member, consolidation of sales offices and a realignment and reduction of our workforce during the past 12 months.  These factors raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments thatmight result from the outcome of this uncertainty.  Net cash used in operating activities was $11.0 million for the three monthsended March 31, 2002. Cash provided by operating activities for this period consisted primarily of Membership fees. Cash used in operating activities for these periods consisted primarily of the cost of providing Internet access, customer support,and other Membership services, 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 used in investing activities was $0.4 million for the three months ended March 31, 2002, consisting primarily of an increase in accountscollateralizing letter of credit agreements securing the lease for our headquarter office.  Any projections of future cash needsand 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 theacquisition of businesses with negative cash flows, which may necessitate additional financing. We may seek to raise additional funds through public or private equity or debt, strategic relationships or other arrangements in order to fund ouroperations and capital expenditures; take advantage of favorable business opportunities; acquire complementary businesses or technologies; develop and upgrade our technology infrastructure; develop new product and service offerings; take advantageof favorable conditions in capital markets; or respond to competitive pressures.  Except where we contract directly withequipment 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 projectionsmade 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 continuetheir business relationship. At March 31, 2002, we had approximately $0.2 million noncancelable purchase commitments with Ingram Micro. With the movement of our business model away from Membership Packages involving the sale of computers, we expecthardware distribution arrangements to be of diminishing importance.  In the ordinary course of our business we make commitmentsto 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 requiredto maintain a deposit at Ingram Micro, adjusted weekly, equal to approximately 25% of outstanding purchase orders and unshipped inventory. On March 31, 2002, this deposit amounted to approximately $0.1 million. 17 
Table of Contents The following table summarizes our contractual obligations at March 31, 2002, and the effectsuch obligations are expected to have on our liquidity and cash flow in the future periods (in thousands):     **Total**    **Less Than 1 Year**  **1-3 Years**  **After 3 Years**Contractual obligations:                  Non-cancelable operating lease obligations  $4,044    $1,214  $2,830  $ Commercial commitments for Internet service   40,900     4,900   19,000   17,000Commercial commitments for computers   200     200   —   —           Total Contractual cash obligations  $45,144    $6,314  $21,830  $17,000            In June 2000, we formed a European subsidiary, PeoplePC Europe N.V. (PeoplePCEurope), a Netherlands corporation. We and PeoplePC Europe entered into financing and related agreements with @viso Limited, a partnership of SOFTBANK Corp., a Japanese company, and Vivendi Universal S.A., a French corporation. In the financing,PeoplePC Europe received $50.0 million from @viso payable over a two month period beginning on the closing date in exchange for 35% of PeoplePC Europe’s outstanding capital stock in the form of convertible preferred stock, and we retained 65%of PeoplePC Europe’s outstanding capital stock in the form of common stock.  We received our 65% interest in exchange forour 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 awarrant 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 executionof 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 ofenterprises 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 payPeoplePC 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 receivebetween 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 beentitled 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. Inparticular, 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-existingstructural and contractual restrictions, thus allowing use of PeoplePC Europe assets for the combined benefit of the two companies. PeoplePC Europe has made five loans totaling $35.0 million to fund our United States’ operations during fiscal2001. PeoplePC Europe’s remaining cash assets (which are consolidated in our financial statements for purposes of this report) may be unavailable for purposes of funding our United States’ operations and for general corporate purposes. Under our typical consumer financing arrangements with MBNA, we receive promptly a lump sum payment from MBNA that completelypays 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 thenumber 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. MBNA has given notice that it is terminating its program withPeoplePC effective May 17, 2002. 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 thedistributor. 18 
Table of Contents **Recent Accounting Pronouncements** Effective January 1, 2002, we adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses significant issues relating to theimplementation of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and develops a single accounting method under which long-lived assets that are to be disposed of by sale aremeasured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest ofthe entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. The adoption of SFAS No. 144 did not have a material impact on our financial position or our results of operations.  Effective January 1, 2002, we adopted EITF 01-09, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of theVendor’s Products, (“EITF 01-09”). The adoption of EITF 01-09 did not have a material impact on our financial position or our results of operations.  **Risk Factors** You should carefully consider the risks described below before making aninvestment decision. The risks and uncertainties described below are not the only ones facing our company. Additional risks not presently known to us or that we currently believe are immaterial may also impair our business operations. If any of thefollowing risks actually occurs, our business, financial condition or operating results could be seriously impaired. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.  ***We may need to raise additional financing to fund our operations and implement our business plan.*** We may be required to raise additional capital in order to fund our operations during 2002 and implement our business plan. Such funds may not be available on acceptable terms, ifat all. In the absence of additional revenue from operations and 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 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 equitysecurities to raise funds, the ownership percentage of our existing stockholders would be materially reduced. We may have to sell stock at prices lower than those paid by existing stockholders, and perhaps lower than existing market prices. Newinvestors 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 couldimpose restrictions on our operations.  ***Our ability to achieve cash flow positive status is affected by a number of factors.*** The timing of our reaching cash flow positive status is affected by a number of the risk factors described in this report.  A significant factor will be our ability to complete one or more acquisitions of monthly subscribers from existing Internet serviceproviders. Completing one or more such transactions may require additional cash infusions, if we are not able to use our stock as purchase consideration. There is no guarantee that funding will be available on acceptable terms, or at all. While weare conducting discussions with a number of potential targets, there is no assurance that we will be able to complete a transaction. Because of our low stock price, we may not be able to use our stock as purchase consideration. If we have to usecash as purchase consideration, we will likely require additional capital investment, which may not be available on acceptable terms or at all. Even if it is available, such investment may be severely dilutive to existing shareholders. Acquisitionsof members also raise a variety of operating difficulties that may be difficult or expensive to solve.  Another important factorwill be our ability to expand our monthly subscription Membership, and thus develop a significant recurring monthly revenue stream. 19 
Table of Contents ***We may acquire fewer members if we are unable to offer consumer financing for our bundle programs.*** Our consumer credit vendor, MBNA, has given notice that it is terminating its program with PeoplePC effective May 17,2002. ****We are currently in discussions with MBNA and other credit providers regarding replacement of the MBNA program. There is no assurance that we will be able to convince MBNA to reconsider its decision. If we cannot replace MBNA, we willlikely continue to offer our bundle products without a financing option. Customers would be required to pay the entire purchase price of the bundle by credit card. This could affect our ability to sell bundle products through our consumer andchannel programs. The financing option is not typically offered in a subsidize enterprise employee connectivity program. 75% of consumer purchasers of our bundle products use the financing option in 2001. However, with our shift in emphasis awayfrom Membership Packages, we do not believe that any such negative effect would have a significant impact on our future results.  ***Our financialcondition may make it difficult to complete transactions with large companies.*** The success of our business depends inpart on our ability to enter into contracts with large companies and organizations for the continuing provision of Internet connectivity services. Some of these companies and organizations may be reluctant to enter into long-term contracts with usdue to concerns over our financial condition.  ***We have moved our listing from the Nasdaq National Market to the Nasdaq SmallCap Market. We may notbe able to retain our listing.*** We are currently out of compliance with the standards for listing on the Nasdaq SmallCapMarket. We believe that we probably will have until the early 2003 to come into compliance with these listing standards. There is no assurance that we will be able to meet the continuing standards for listing on the Nasdaq SmallCap Market. ***We may implement a reverse stock split. The effect of a reverse split on the trading price of our common stock is unpredictable.*** Although we have secured approval from our stockholders to conduct a reverse stock split in the range of 1-to-15 to1-to-20, our board of directors has decided not to implement the reverse stock split at this time. However, the board of directors could decide at any time to implement the reverse stock split. Although the theoretical effect of a reverse stocksplit should be to increase the per share price of common stock, the actual price effect of a reverse stock split is difficult to predict. It is possible that the post-split trading price of our stock could be below the level one would expect basedon the proportional effect of the split alone.  ***We have a limited operating history.*** Our business prospects are difficult to predict because of our limited operating history, unproven business model and rapidly evolving business strategies and markets. Weincorporated in March 1999 and began doing business in October 1999.  ***Connectivity programs with large companies are important to our success; ourability to close and execute on such programs is not assured.*** We expect that a significant portion of our futurerevenues 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 businessconditions affecting the company. The slowdown in the U.S. economy may cause companies to defer decisions to undertake connectivity programs. Connectivity program deals are complex and the sales cycle is long. In addition, companies may be reluctantto 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 tosubsidize an employee purchase, purchase prices and terms, vendor relationships, financing arrangements, levels of service to be provided, taxation of employee benefits, logistical arrangements and other factors. The execution of a connectivityprogram 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 isno 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 employeeson 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 toapplicable 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 insome 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 instructuring 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. 20 
Table of Contents ***Our business would be harmed if we are unable to generate anticipated revenues from our private label andco-branded ISP business.*** We expect that an important source of future revenues will be offerings of private label orco-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 orco-branded ISP deals with large companies. The speed with which such programs could be implemented is also uncertain. If we are unable to conclude such deals, or the implementation of the programs is delayed, our revenues and operating results willsuffer.  ***We rely on Ingram Micro for distribution services for sales of computer/service bundles; our business would be harmed if Ingram Microstopped 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 andfulfill our computer products could reduce our revenues and harm our business. Our agreements with Ingram Micro expired on February 28, 2001. The term of the agreement has not been extended. However, the parties currently continue their businessrelationship, although either party could terminate the relationship at any time. We work actively with Ingram Micro and third party computer suppliers to identify the types of computers, the specifications and prices of the computers that will beoffered to our members. Ingram Micro’s failure to deliver computers could cause significant delays in our ability to fulfill our customers’ orders, and we may not be able to locate another distributor that can provide comparablefulfillment, processing and shipping services in a timely manner or on acceptable commercial terms.  ***We rely on computer suppliers to supply anddeliver computers; our business would be harmed if they failed to perform.*** From time to time, we may enter intoagreements with computer suppliers providing for the supplier to direct ship to our members. If the supplier is unable or unwilling to supply sufficient numbers of computers to meet our requirements, or fails to ship our orders on a timely basis,our reputation and our revenues may be harmed. In the past, this type of failure on the part of computer suppliers has caused us to experience problems with shipment of computers and customers have cancelled their memberships and requested refunds. ***Our ISP network is built on multiple contractual relationships with wholesale suppliers of ISP service; our success depends on our ability tosuccessfully manage these relationships.*** We rely on multiple wholesale suppliers of ISP service to provide Internetaccess service to our members in the United States. Our business would be harmed if any of these suppliers fails to provide our members with reliable Internet access, or terminates service in particular geographical localities not served by otherproviders. Our business will also be harmed if we are unable to manage these contractual relationships successfully. Finally, wholesale ISP costs comprise an important part of our cost structure. Our business could be harmed if prices in thewholesale ISP market increase.  ***We rely on multiple third parties to provide customer service and technical support as well as a hardware warrantycovering parts and labor and in-home technical service. If these parties do not provide reliable, high-quality service, and we are unable to satisfactorily replace these services in a reasonable time, our reputation and our business will be harmed.*** We depend on third-party vendors to render certain services to members. If existing vendors cannot or will not providethese services at commercially reasonable prices and reasonable payment terms and we are not able to find suitable alternative vendors, our business would be harmed. Low-quality service could harm our reputation and brand name, and demand for ourproducts would decline. In addition, we may need to spend money and expend other resources to remedy these problems. 21 
Table of Contents ***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 arecomparable 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, suchas 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 knowledgeof 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 oraddress 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 couldsignificantly 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- andlong-term effects on our stock price and could affect the long-term viability of our enterprise. Some of the factors that could affect our quarterly and long-term operating results include:  ****·****  our ability to achieve and maintain a low-cost business model and manage the third-party relationships necessary to do so;****·****  our ability to generate additional revenues from commerce opportunities with our member base;****·****  the popularity of the computer systems we sell;****·****  our key suppliers’ ability to manufacture sufficient quantities of the computer systems we offer; and****·****  general economic conditions, as well as those specific to the Internet, technology and related industries. The foregoing factors are only partially within our control and, in the case ofexternal 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 operationsaccordingly.  ***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 toconduct 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 numerouscompetitors and decrease the value of our offering to consumers.  22 
Table of Contents ***Fluctuations in our workforce and management structure could have an adverse effect on our business.*** The fluctuations in our workforce and management structure have placed, and will continue to place, a significantstrain 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 toincrease revenues or control costs unless we continue to improve our operational, financial and managerial controls and reporting systems and procedures, train and manage our work force and manage multiple relationships with third parties. We haverecently 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 inforce 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 our Chief Executive Officer, Nick Grouf, and our ChiefOperating 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 SanFrancisco 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 implementour business strategy. We grant stock options as a method of attracting and retaining employees, to motivate performance and to align the interests of management with those of our stockholders.  ***We need to refresh our products and services as technology changes to remain competitive.*** The personal computer and Internet access markets are both characterized by rapid ongoing technological change, changes in user requirements and preferences and frequent new service introductions involving newprocesses 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 enhancedInternet services, to maintain consumer interest in our products and services. The market may not accept the new computer products or services that we introduce. In addition, the introduction of new products or services by us or our competitors mayadversely 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 orfeatures in a timely and cost-effective manner, which could adversely affect demand for our products and services.  ***Our business may be harmed ifthe security of our systems is compromised.*** The secure transmission of confidential information over the Internet isessential 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 membercommerce 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 encryptionand 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 againstand remedy security breaches and their consequences, but we may not be able to prevent such security breaches. Our insurance policies may not be adequate to reimburse us for losses caused by security breaches.  ***Our business may be harmed if our servers are damaged by natural disasters and similar catastrophic events.*** We depend on the efficient and uninterrupted operations of our Web servers and other hardware systems. Most of our Web servers and other hardware systems are not redundant and arelocated 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 theseevents 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 incursubstantial costs in repairing any damage. 23 
Table of Contents ***Our business may be harmed if we are unable to protect our intellectual property.*** We rely on a combination of trademark, trade secret and copyright law and contractual restrictions to establish and protect our intellectual property.These afford only limited protection. We have filed for U.S. trademark registrations for “PeoplePC” and other trademarks. It is also possible that our competitors or others will adopt service names similar to ours, thereby impeding ourability to build brand identity and possibly leading to customer confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variationsof 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 theproprietary 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 wehave 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 mayassert 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 coulddivert 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 designand 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 couldexperience 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 failto 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 ofgrant of options to purchase 125.6 million shares of common stock issued to employees through March 31, 2002. In connection with the grant of such options, we have recorded net deferred stock-based compensation of $6.1 million for the three monthsended March 31, 2002 and $21.7 million and $63.5 million for the years ended December 31, 2000 and 1999. Stock-based compensation expense will decrease our earnings over the period of amortization. Deferred stock-based compensation will be amortizedover the vesting period, which is generally 36 or 48 months from the date of grant. Stock-based compensation for the three months ended March 31, 2002 was $1.8 million and for the years ended December 31, 2001 and 2000 was $4.0 million and $43.1million. We recorded reductions in deferred stock-based compensation relating to terminated employees of $1.0 million for the three months ended March 31, 2002 and $30.1 million for the year ended December 31, 2001. As of March 31, 2002, the Companyhad an aggregate of $8.2 million of deferred stock-based compensation remaining to be amortized.  The balance is expected to beamortized as follows:   **Period**  **Deferred Stock-Based Compensation**2002  $5.0 million2003  $2.7 million2004 and thereafter  $0.5 million Warrants issued to Ford to purchase 2.9 million shares of common stock at $10.00per share are outstanding as of March 31, 2002. These warrants expire in equal installments on January 16, 2003 and July 16, 2003. 24 
Table of Contents***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 arecurrently 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 theapplication 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. Inaddition, 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 inviolation 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 ouroperating results and financial condition.  ***We cannot guarantee that an active market will develop for our stock.*** We cannot predict the extent to which an active market for our common stock will develop or how liquid that market will eventually become. Since theinitial public offering of our common stock, the volume of our common stock traded on the Nasdaq National Market has decreased to very low levels. Low trading volumes may cause the price of our common stock to fall. We cannot predict how the tradingmarket for our common stock will be affected by our proposed move to the Nasdaq SmallCap market.  ***Our stock price has declined and may continue tobe depressed and volatile in the future.*** The stock markets in general, and the Nasdaq SmallCap Market and technologycompanies 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 $0.13per share on March 31, 2002. In addition, if we are delisted from the Nasdaq SmallCap Market, it may seriously impact the market price and volatility of our common stock in the future, regardless of our actual operating performance. We may also besued in a securities class action lawsuit, which could be costly, divert our resources and seriously harm our business.  ***Our principal stockholderscan exercise a controlling influence over our business and affairs.*** As of March 31, 2002, our directors, executiveofficers and 5% or greater principal stockholders together controlled approximately 89.1% of our common stock, assuming the exercise of any options that these stockholders have the right to exercise within 60 days of March 31, 2002. If thesestockholders 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 corporatetransactions. This concentration of ownership may delay or prevent a change in control of our company, even when a change may be in the best interests of our stockholders. In addition, the interests of these stockholders may not always coincide withour interests as a company or the interests of other stockholders. Accordingly, these stockholders could cause us to take action or omit to take action, even if doing otherwise would benefit our stockholders as a whole.  ***Substantial future sales of our common stock in the public market may depress our stock price.*** Our stockholders hold a substantial number of shares of our common stock that they will be able to sell in the public market in the future. An additional 509,586,575 shares becameeligible for sale in the public market upon the effective date of our registration statement on form S-3, which was filed on January 16, 2002 and was declared effective on April 2, 2002. Sales of a substantial number of shares of our common stockcould 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 sowould be of benefit to our stockholders. 25 
Table of Contents **ITEM 3.    Quantitative and Qualitative Disclosures About Market Risk** **Quantitative and QualitativeDisclosures About Market Risk** We are exposed to fluctuations in interest rates and market values of our investments. Ourexposure 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 derivativefinancial 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 anyone 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 ushas 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 toshort-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 whileat 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 ratesmay 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 ourinvestment 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 andnon-government debt securities.  Based on our average outstanding credit balance and the fact that we hold no derivativeinstruments and do not earn significant foreign sourced income, changes in interest rates or currency exchange rates do not generally have a direct effect on our financial position. In addition, we have primarily operated in the United States andsubstantially all purchases and sales to date have been made in U.S. dollars. Foreign currency exchange rates, however, may affect the cost of our personal computers, printers and monitors purchased from our foreign suppliers, thereby indirectlyaffecting 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. 26 
Table of Contents **PART II—OTHER INFORMATION** **ITEM 1.    LEGAL PROCEEDINGS** On April 22, 2002, SupportSoft, Inc.(“SupportSoft”) filed a complaint against the Company in the Superior Court of the County of Santa Clara, California, alleging that the Company is in breach of its obligations under a Master License Agreement dated September 29, 2000between SupportSoft and the Company (the “Master License Agreement”). The Master License Agreement relates to customer service software that the Company is no longer using. The complaint alleges that the Company has not paid approximately$200,000 that it was obligated to pay with respect to license, support, maintenance, and service fees relating to the first annual period under the Master License Agreement. Further, the complaint alleges that the Company is obligated to pay toSupportSoft $1,250,000 relating to the second year of the Master License Agreement, and $2,500,000 relating to the third year of the Master License Agreement.  The Company has not yet filed an answer to the complaint, but intends to contest vigorously the allegations made in the lawsuit. Among other relief, the Company will seek rescission of the Master License Agreement anda refund of approximately $950,000 paid to SupportSoft during 2000 and 2001. In addition, the Company will seek a declaration that it is not obligated under the Master License Agreement to pay any further amounts to SupportSoft.  **ITEM 4.    Submission of Matters to a Vote of Security Holders** A Special Meetingof the Stockholders was held on February 19, 2002. The following proposals were presented to, and approved by, the stockholders at the Special Meeting. **Proposal**  **For**  **Against**  **Abstain**    **Broker Non-Votes**Approval of the issuance of 437,500,000 shares of PeoplePC common stock upon the conversion of 4,375,000 shares of PeoplePC Series BPreferred Stock issued in a private placement in December 2001.  77,599,767  232,362  13,000    0Approval of amendments to the PeoplePC 2000 Stock Plan (1) to increase the number of shares reserved for issuance thereunder by126,404,098 shares, for an aggregate of 138,156,898 shares reserved for issuance thereunder and (2) to increase the Internal Revenue Code Section 162(m) limits on the number of shares underlying options and stock purchase rights granted to anindividual in any fiscal year or in connection with an individual’s initial employment from 2,000,000 shares to 40,000,000 shares.  72,870,056  4,961,823  12,100    0Approval of an amendment to the PeoplePC Amended and Restated Certificate of Incorporation to allow for a reverse stock split of notless than 1 for 15 and not more than 1 for 20 and to authorize the Board of Directors to determine which, if any, of the reverse stock splits to effect.  77,467,777  365,252  12,100    0Approval of an amendment to the PeoplePC Amended and Restated Certificate of Incorporation to increase the number of authorizedshares of common stock from 500,000,000 shares to 750,000,000 shares.  77,592,567  240,362  12,200    0 **ITEM 6.    Exhibits and Reports on Form 8-K** None.  **Items 2, 3, and 5 are not applicable and have been omitted.**27 
Table of Contents **SIGNATURES** Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has dulycaused this report to be signed on its behalf by the undersigned, hereunto duly authorized.       PEOPLEPC INC.   By: /s/    NICK GROUF                                                 Nick Grouf     Chief Executive Officer   By: /s/    MICHAEL GLOGOWSKY     Michael Glogowsky     Chief Financial Officer       Dated:    May 15, 2002      28