<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-Q

(Mark One)

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


     For the quarterly period ended March 31, 2001
                                    --------------
                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO _____


                        Commission file number 000-31299

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

             Delaware                                 13-4048510
   (State or other jurisdiction           (IRS Employer Identification No.)
   of incorporation or organization)


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

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


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]  No [_]

The number of shares outstanding of the Registrant's Common Stock. $.0001 par
value, as of April 30, 2001 was 115,648,400 shares.
<PAGE>

                                 PEOPLEPC INC.
                                    FORM 10Q
                                     INDEX
<TABLE>
<CAPTION>
PART I.    FINANCIAL INFORMATION
Item 1.         Financial Statements
<S>        <C>                                                                                                 <C>

          Consolidated Balance Sheets as of March 31, 2001 (unaudited) and December 31,                         3
                 2000
          Consolidated Statements of Operations for the Three Months Ended March 31,
                 2000
                 and 2001 (unaudited)                                                                           4
          Consolidated Statements of Cash Flows for the Three Months Ended March 31,
                 2000
                 and 2001 (unaudited)                                                                           5
          Notes to Consolidated Financial Statements (unaudited)                                                6
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of                           10
          Operations
Item 3.   Qualitative and Quantitative Disclosure about Market Risk                                            16

PART II.   OTHER INFORMATION
Item 1.   Legal Proceedings                                                                                    31
Item 2.   Changes in Securities and Use of Proceeds                                                            31
Item 4.   Submission of Matters to a Vote of Security Holders                                                  31
Item 5.   Other information                                                                                    31
Item 6.   Exhibits and Reports on Form 8-K                                                                     31

SIGNATURES

</TABLE>

                                       2
<PAGE>

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

<TABLE>
<CAPTION>


                                                                    December 31,    March 31,
                                                                       2000            2001
                                                                    ------------    ---------
 <S>                                                                 <C>            <C>

                 ASSETS                                                            (Unaudited)
Current Assets:
 Cash and cash equivalents                                              $ 65,493     $ 32,275
 Restricted cash                                                          22,954       17,145
 Accounts receivable, net of allowance for doubtful
   accounts of $3,500 and $4,700 as of December 31, 2000
   and March 31, 2001, respectively                                       41,864       31,746
 Prepaid expenses and other current assets                                 2,177        2,889
                                                                        --------     --------
  Total current assets                                                   132,488       84,055
Accounts receivable, long-term                                            11,589        9,065
Property and equipment, net                                                7,688        8,511
Capitalized web site development costs                                       674          571
Deposits and other assets                                                    592          686
                                                                        --------     --------
  Total assets                                                          $153,031     $102,888
                                                                        ========     ========
                 LIABILITIES
Current liabilities:
 Accounts payable                                                       $ 23,745     $ 24,080
 Accrued and other liabilities                                            39,193       13,679
 Borrowing under line of credit                                            5,176        4,917
 Current portion of deferred revenues, net                                19,047       25,977
                                                                        --------     --------
  Total current liabilities                                               87,161       68,653
Other long term liabilities                                                    0        1,195
Deferred revenues, net                                                    28,121       28,081
                                                                        --------     --------
  Total liabilities                                                      115,282       97,929
                                                                        --------     --------
Commitments (Note 2)

Minority interest                                                         46,700       44,338
                                                                        --------     --------
Stockholders' deficit                                                     (8,951)     (39,379)
                                                                        --------     --------
  Total liabilities, minority interest and stockholders' deficit        $153,031     $102,888
                                                                        ========     ========

</TABLE>

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

                                       3
<PAGE>

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

<TABLE>
<CAPTION>

                                                             Three Months Ended
                                                                 March 31,
                                                            --------------------
                                                                2000       2001
                                                            --------   --------
<S>                                                         <C>        <C>

Membership revenues earned                                  $  4,551   $ 34,506
Other revenues                                                 3,334      2,827
                                                            --------   --------
      Total revenues                                           7,885     37,333
                                                            --------   --------
Cost of membership revenues earned                             7,772     36,514
Cost of other revenues                                         3,304      1,422
                                                            --------   --------
      Total cost of revenues                                  11,076     37,936
                                                            --------   --------
Gross loss                                                    (3,191)      (603)
                                                            --------   --------
Operating expenses:
   Sales and marketing (exclusive of stock-based
     compensation of $2,722 and $ 1,201 for the three
     months ended March 31, 2000 and 2001, respectively)      14,603      7,002
   General and administrative (exclusive of stock-based
     compensation of $3,975 and $4,601 for the three
     months ended March 31, 2000 and 2001, respectively)       9,909     26,781
   Amortization of deferred stock-based compensation           6,697      5,802
   Other operating expenses                                       --     (1,873)
                                                            --------   --------
      Total operating expenses                                31,209     37,712
                                                            --------   --------
Loss from operations                                         (34,400)   (38,315)
Minority share                                                     0      2,436
Net interest income and other                                    643       (309)
                                                            --------   --------
Net loss                                                    $(33,757)  $(36,188)
                                                            ========   ========

Basic and diluted net loss per share                        $  (1.03)  $  (0.33)


Shares used in computing basic and diluted net loss per
 share                                                        32,916    109,551



</TABLE>

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

                                       4
<PAGE>

                                 PEOPLEPC, INC.
                   CONDENSED CONSOLIDATED STATEMENT CASH FLOWS
                                 (In thousands)
                                  (Unaudited)



<TABLE>
<CAPTION>


                                                           Three Months Ended
                                                                 March 31,
                                                          ----------------------
                                                            2000         2001
                                                          --------    ----------
<S>                                                       <C>        <C>

Cash flows from operating activities:
Net loss................................................  $(33,757)   $(36,188)
Adjustments to reconcile net loss to net cash used in
operating activities:
 Depreciation and amortization..........................        60         773
 Amortization of deferred stock-based compensation......     6,697       5,802
 Net increase in allowance for doubtful accounts........        --       1,200
 Issuance of common stock warrants......................     1,498          --
 Minority interest, allocation of the loss..............        --      (2,436)
 Changes in assets and liabilities:
  Accounts receivable...................................    (2,631)      8,944
  Prepaid expenses and other current assets.............        59        (712)
  Deposits and other assets.............................      (753)        (94)
  Accounts receivable, long term........................        --       2,524
  Accounts payable......................................     4,353         335
  Accrued liabilities...................................    (2,627)    (25,514)
  Deferred revenues.....................................     5,232       6,890
  Other.................................................        52       1,195
                                                          --------    --------
   Net cash used in operating activities................   (21,817)    (37,281)
Cash flows from investing activities:
Restricted cash.........................................        --       5,809
Purchase of property and equipment......................      (358)     (1,222)
Capitalized web site development costs..................       (96)         --
                                                          --------    --------
   Net cash provided by (used in) investing
    activities..........................................      (454)      4,587
Cash flows from financing activities:
Proceeds from issuance of common stock, net.............       347          32
Borrowing under line of credit..........................        --        (530)
Purchase of treasury shares.............................        --         (26)
                                                          --------    --------
   Net cash provided by (used in) financing
    activities..........................................       347        (524)

Net decrease in cash and cash equivalents...............   (21,924)    (33,218)
Cash and cash equivalents at beginning of period........    36,108      65,493
                                                          --------    --------
Cash and cash equivalents at end of period..............  $ 14,184    $ 32,275
                                                          ========    ========
Supplemental noncash investing and financing activity:
 Cost associated with issuance of 500,000 warrants
  to purchase common stock..............................  $  1,498          --
 Receivable from stockholders...........................  $  1,482    $     68
 Interest paid..........................................        --    $    125

</TABLE>

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

                                       5
<PAGE>

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

1. Basis of Presentation

   The Company

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

   Liquidity and capital resources

   Since March 2, 1999 (date of inception), the Company has been successful in
completing several rounds of private equity financing, as well as an initial
public offering in August 2000. For the year ended December 31, 2000 and the
three months ended March 31, 2001, the Company incurred a net loss of $236
million and $36 million and negative cash flow from operations of $159 million
and $37 million. At December 31, 2000 and March 31, 2001, the Company had an
accumulated deficit of approximately $320 million and $357 million.

   The Company intends to pursue new enterprise and other arrangements to
increase its revenues and cash flow. The Company has also taken and intends to
take further steps to reduce expenses. Steps already taken include targeting
sales and marketing expenditures on channels with low acquisition cost per
member, consolidation of sales offices and a realignment and reduction of its
workforce. In an effort to further improve liquidity, the Company is currently
negotiating with lenders to borrow against its receivable from Delta and has
signed a binding memorandum of agreement with @viso as described in Note 5.

   In connection with the binding memorandum of agreement, the Company has
borrowed $15 million from PeoplePC N.V. under a term loan due May 23, 2001. On
April 2, 2001, @viso agreed to execute the Definitive Documents (as described in
Note 5) and to consent to PeoplePC N.V. extending further loans (up to $10
million) under similar terms as the $15 million term loan.

   The Company made two additional borrowings from PeoplePC, N.V. The first
borrowing was in the amount of $6 million, under a term loan due July 18, 2001.
The second borrowing was in the amount of $4 million, under a term loan due
July 27, 2001. The other terms of the loan are identical to the terms of the $15
million loan described above. If the Definitive Documents are not executed prior
to the due date of the term loans the Company may not be able to repay them.

   While management does not anticipate that this will be an issue, in the event
that revenues from new enterprise agreements and new products and services
combined with expense reductions are not sufficient to meet the Company's
obligations, the Company may need to seek additional financing. There can be no
assurance that such additional financing will be available or will be available
on terms acceptable to the Company, which, as a result, could have a material
adverse effect on the Company's business operating results and financial
condition.

   Unaudited Interim Results

   The accompanying unaudited interim condensed consolidated financial
statements of PeoplePC, Inc., a Delaware corporation, for the three months ended
March 31, 2001 reflect all adjustments (consisting of normal recurring accruals)
which, in the opinion of management, are necessary for a fair presentation of
the results for the interim periods presented. These financial statements have
been prepared in accordance with generally accepted accounting principles of
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.

                                       6

<PAGE>

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

   Operating results for the three-month period ended March 31, 2001 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 2001.

   Revenue recognition

   Revenues and the related cost of revenues for the initial membership package,
which includes the personal computer, cost of shipping the personal computer
system, internet access for three years, in-home warranty and participation in a
member commerce program, are deferred and recognized over the three-year term of
the membership agreement.

   Revenues from the PeoplePC Online program are recognized monthly. PeoplePC
Online agreements are renewable each month and the monthly fees are not
refundable.

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

   The initial membership package revenues, other revenues and the related cost
of revenues are not recognized until the expiration of a 7-day right of return.
The cost of providing Internet access and email services for all members is
expensed as incurred.

   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
has offered pricing of its memberships and services that was less than its total
current and estimated future costs (primarily the cost of providing Internet
access and email services) of performing under its membership agreements,
resulting in an estimated gross margin loss over the life of the contract. As a
result, the Company is required to accrue for the estimated loss related to this
acquisition discount during the membership period. These amounts will be
amortized over the life of the membership as an offset to future expenses. The
Company has recorded a net acquisition discount of $2.5 million and $1 million
for the three months ended March 31, 2000 and March 31, 2001, respectively. The
provision and related amortization is reflected in cost of membership revenues
earned on the income statement and included with the related net deferred
revenue on the balance sheet.


   Segment information

   The Company reports segment data based on the management approach which
designates the internal reporting that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable operating segments. During all periods presented, the Company
operated in a single business segment. Long-lived assets and revenue are mainly
located or generated in the United States.

   Net loss per share

   Basic net loss per share is computed by dividing net loss available to common
stockholders by the weighted average number of vested common shares outstanding
for the period. Diluted net loss per share is computed giving effect to all
dilutive potential common stock, including options, warrants and preferred
stock. Options, warrants, non-vested common stock and preferred stock were not
included in the computation of diluted net loss per share in the periods
reported because the effect would be antidilutive.

                                       7
<PAGE>

   Antidilutive securities not included in net loss per share calculation for
the periods:

<TABLE>
<CAPTION>

                                 Three Months Ended
                                   March 31, 2000     March 31, 2001
                                 -------------------  ---------------
                                     (unaudited)        (unaudited)
<S>                              <C>                  <C>

  Non vested common stock......        8,240,030          4,401,194
  Common stock options.........        7,516,250         14,247,457
  Warrants.....................          500,000          2,857,500
  Convertible preferred stock..       53,816,514                 --
                                      ----------         ----------
                                      70,072,794         21,506,151
                                      ==========         ==========

</TABLE>


2. COMMITMENTS

   Purchase commitments

   The Company relies on Ingram Micro (the "Distributor") to provide some of its
computer products, maintain inventory, process orders, prepare merchandise for
shipment and to distribute its products to customers in a timely and accurate
manner. The Distributor purchases inventory from a computer manufacturer ("the
OEM") on behalf of the Company based on sales projections made by the Company.
The Company takes title to the equipment just prior to shipment to the customer.
The Company is obligated to purchase inventory held by the Distributor purchased
on its behalf. At December 31, 2000 and March 31, 2001, the Company had
approximately $1.5 million and $4.0 million in noncancelable purchase
commitments with the Distributor.

   In 1999, the Company recorded a provision of $15.6 million relating to the
cost of resolving any potential dispute over non-conforming computers. During
2000, the Company reached an agreement with Ingram Micro to liquidate the non-
conforming computers, following which the Company will split the losses
associated with these computers so that it bears half of the loss and Ingram
Micro bears half of the loss. As a result of this agreement, the Company has
reduced the provision by $8 million (included in other operating expenses) in
2000. In early 2001, the Company has reached a final settlement with Ingram
Micro and paid its share of the loss. As a result of that settlement, the
Company released a portion of the remaining provision related to the Distributor
(included in other operating expenses). A $1 million provision remains which the
Company believes will be sufficient to cover its share of any further claim from
the OEM.

   As of December 31, 2000 and March 31, 2001, the Company is also obligated to
purchase approximately $25.8 million and $1.0 million of products from IBM. The
Company expects to sell all products that it has committed to purchase from the
Distributor and IBM.

3. Borrowings under line of credit

   In July 2000, the Company entered into a credit agreement with a bank
providing for a $50 million revolving credit facility maturing in July 2001.
Financing under this facility is only available for the purpose of factoring
receivables owed to the Company by Ford. Amounts borrowed under the credit
agreement will bear interest at variable rates, including, as one of the rate
options, LIBOR plus 60 basis points. The Company is required to pay fees to the
lender for the loan commitment and for underwriting and structuring. The
obligations under the credit agreement will be secured by all accounts
receivable under the agreement with Ford Motor Company, Inc. The availability of
loans under the credit agreement is subject to usual and customary closing
conditions, as well as to a borrowing base based on a percentage of invoiced
receivables under the Ford agreement meeting specified eligibility requirements.
At December 31, 2000 and March 31, 2001, the eligible receivable from Ford was
approximately $10.2 million and $5.1 million. The credit agreement also includes
normal and customary covenants for transactions of this type,

                                       8
<PAGE>

including maintenance of corporate existence, properties and rights, performance
of obligations, various notice and information provisions, compliance with laws
and certain contracts, limitation on indebtedness, limitation on liens,
limitation on mergers and other fundamental changes, limitation on investments
and acquisitions, limitation on transactions with affiliates, and limitations on
restrictive agreements. As of December 31, 2000 and March 31, 2001, the Company
had a balance of $5.2 million and $4.9 million outstanding in regard to this
credit facility (net of issuance cost of $633,000 and $362,000). An amount of
$272,000 of issuance cost was amortized during the three months ended March 31,
2001. The interest rate at March 31, 2001 was 8.0%.

4. Warrant

   In February 2001, the expiration date of the warrant granted to Ford Motor
Company to purchase 2,857,500 of the Company's common stock at $10 per share was
extended for a period up to 29 months.

5. Minority Interest

   At December 31, 2000, minority shareholders hold preferred stock in PeoplePC
N.V., a Dutch company, with a par value of EUR.01 as follows:


             Series       Shares        Proceeds
           Authorized   Outstanding

      A    100,000,000   11,666,667   $35,000,000
      B     50,000,000    5,000,000    15,000,000
           -----------   ----------   -----------
                                      $50,000,000
                                      ===========


   In connection with the issuance of series B preferred stock and series A
preferred stock to @viso Limited (a UK company), PeoplePC N.V. granted Softbank
Capital Partners LP a warrant to acquire 2,380,952 shares of Series A Preferred
Stock, with an aggregate exercise price of $7,142,857. The warrant will be
exercisable and must be exercised (i) at the request of PeoplePC N.V., but no
sooner than six months after the Closing Date or (ii) immediately prior to (a)
an acquisition, sale or merger of or by PeoplePC N.V. resulting in a change in
control of PeoplePC N.V., (b) a merger of PeoplePC N.V. with and into the
Company, or acquisition of all of PeoplePC N.V. assets or shares by the Company
or (c) PeoplePC N.V.'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 N.V.
that Softbank exercise such right and (b) the occurrence of a liquidity event.

   On February 16, 2001, the Company signed a binding memorandum of agreement
with PeoplePC N.V., @viso, Softbank Capital Partners LLC and Softbank Technology
Ventures (SOFTBANK). The definitive documents implementing the agreement are
currently being drafted. When executed, the agreement will entitle @viso to sell
all or a portion of its shares of PeoplePC N.V. to the Company in exchange for
PeoplePC stock. Under this arrangement @viso is entitled to receive between
approximately 13.8 million and 29.1 million shares of PeoplePC common stock
based on a formula and the date of exchange. SOFTBANK is entitled to exercise
its warrant to purchase convertible preferred stock in PeoplePC N.V. Once the
warrant is exercised, SOFTBANK will be entitled to sell all or a portion of its
shares of PeoplePC N.V. to the Company in exchange for PeoplePC stock. Under
this arrangement SOFTBANK Capital Partners LP is entitled to receive between
approximately 1.9 million and 3.5 million shares of PeoplePC common stock based
on a formula and the date of exchange. These put options will terminate in 2006.
In addition, the memorandum provided for a 90-day term loan of $15 million to
the Company. Upon the execution of the Definitive Documents contemplated by the
memorandum, the loan will convert to a demand note and, at the same time,
management of PeoplePC N.V. will be authorized to make further loans to PeoplePC
for general corporate and working capital purposes.

6. Subsequent events

                                       9
<PAGE>

   On April 2, 2001, @viso agreed to execute the Definitive Documents by May 15,
2001 (prior to the expiration of the term loan) and consented to the extension
of additional loans (up to an additional $10 million) to the Company by PeoplePC
N.V. under similar terms as the $15 million loan. The Company subsequently drew
on this additional line of credit in the amounts of $6 million and $4 million,
under terms identical to that of the $15 million loan.

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

   This report contains forward-looking statements that involve risks and
uncertainties. These statements relate to our future plans, objectives,
expectations and intentions, and the assumptions underlying or relating to any
of these statements. These statements may be identified by the use of words such
as "expect", "anticipate", "estimate", "believe", "intend" and "plan". Our
actual results may differ materially from those discussed in these statements.
These statements include, but are not limited to, our intent to pursue members
through enterprise and consumer programs to increase membership revenues; our
expectations regarding enterprise agreements providing a significant portion of
membership revenues; our expectations regarding increasing our revenues from
merchants, content partners and suppliers; our expectations regarding the costs
of our member commerce programs; our expectations to improve pricing and
eliminate acquisition discounts; our expectations regarding when the majority of
Ford and Delta members will be enrolled; our expectations regarding the amount
of future acquisition discount provisions; our intent to increase the offerings
and revenues related to our member commerce program; our intent to establish
member web site operations in foreign countries; our expectations regarding the
cost of expanding our international operations; our expectation to expend
significant resources on sales, marketing and general and administrative
expenses; our expectations regarding our ability to fund our operations for the
next twelve months; and our expectations regarding the costs of expanding our
domestic operations and sales and marketing.

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

   Overview

   We were incorporated in March 1999. We began offering our products and
services on a limited basis in September 1999 and on a commercial basis in
October 1999. Until September 1999, we had no revenues and our operating
activities consisted primarily of developing relationships with vendors,
suppliers and merchants.

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

   PeoplePC UK, our European operating subsidiary, began distributing products
to Vivendi Universal employees in France in January 2001. Planning is underway
to extend the program to Vivendi employees in seventeen further countries
including the United Kingdom, Germany and the United States. The Vivendi program
is open to all employees of Vivendi for a nominal employee co-payment, while the
remainder of the program expenses are subsidized by Vivendi. We receive payment
for the entire membership package from Vivendi when the package is sold to a
Vivendi employee.

                                       10
<PAGE>

PeoplePC hosts and maintains a web site for Vivendi employees participating in
the program.

   In February 2001, we commenced rolling out the Model E Program to up to
15,000 employees of Ford's affiliate, Hertz Corporation. We also began to offer
our program on a non-subsidized basis to employees of Ford's Certified Blue Oval
Program dealers.

   The rollout of the Ford program is substantially complete in the United
   States. Recently, Ford decided to defer expansion of the program in countries
   outside the United States until at least the fourth quarter of 2001. The
   Company believes that while this may impact gross revenues, the deferment
   will have an ultimately beneficial impact on the Company's cash position and
   margins over the balance of the year.

   In the event that Ford does not go forward with the rollout of the program
   beyond the fourth quarter of 2001, or were to go forward without PeoplePC,
   gross revenues from Ford in future years may fall short of original
   projections. PeoplePC and Ford are continuing to discuss PeoplePC's role in
   the program.

   Membership revenues consist of revenues earned from the sale of membership
bundles; the related charges for shipping the systems; and revenues earned from
the sale of PeoplePC Online memberships which include all of our Internet
related services but do not include a computer system. Although we receive
revenue from the sale of membership bundles at the time of the member's
enrollment, we defer the revenue and amortize it over the life of the membership
contract due to the three-year nature of the relationship. We intend to continue
to pursue members through enterprise agreements and our consumer programs to
increase our membership revenues. We expect that memberships obtained through
enterprise agreements will provide a significant portion of membership revenues
in the future.

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


   Results of Operations

   Three months ended March 31, 2001 and March 31, 2000

   Revenues

   Membership Revenues Earned. Membership revenues earned include membership
revenues, related shipping revenues, revenues from PeoplePC Online memberships,
and recognition of membership revenues previously deferred. Gross membership
revenues increased 110% to $71.0 million for the three months ended March 31,
2001 from $33.8 million for the three months ended March 31, 2000. Revenues
recognized from our online program included in gross membership revenues
increased by 129% to $1.8 million for the three months ended March 31, 2001 from
$785,000 for the three months ended March 31, 2000. Because we recognize
membership revenues over the 36-month term of the membership agreement, $66.7
million of membership revenues were deferred for the three months ended March
31, 2001, while $31.1 million were deferred for the three months ended March 31,
2000. Membership revenues include the recognition of $30.3 million and $1.9
million in revenues previously deferred for the three months ended March 31,
2001 and March 31, 2000, respectively.

   Other Revenues. Other revenues consist of sales of peripherals and the
incremental cost of upgrades, the related shipping revenues and revenues from
merchants, content partners and suppliers. Other revenues decreased by 15% to
$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. For the three months ended
March 31, 2000, other revenues were $3.3 million, all of which were related to
the sales of upgrades and peripherals. The decrease in other revenues is
primarily due to the fact that no peripherals or upgrades are offered under the
Vivendi program.

  Cost of Revenues

   Cost of Membership Revenues Earned. Cost of membership revenues earned
consists primarily of the cost of the basic system hardware and software,
fulfillment and shipping costs and our cost of providing members with Internet
connectivity. Cost of gross membership revenue increased by 92% to $65.7 million
for the three months ended March 31, 2001 from $34.3 million for the three
months ended March 31, 2000. Because we recognize system hardware and software
cost of

                                       11
<PAGE>

revenues over the 36-month term of the membership agreement, $57.6 million of
cost of membership revenues was deferred, while $28.2 million of cost of
revenues was deferred for the three months ended March 31, 2000. Cost of
membership revenues earned included the recognition of $28.5 million and $1.7
million in costs previously deferred for the three months ended March 31, 2001
and March 31, 2000, respectively. The amount of Internet service provider
expense in cost of membership revenue is $6.6 million and $1.9 million for the
three months ended March 31, 2001 and March 31, 2000, respectively. Cost of
revenues for the three months ended March 31, 2001 also includes a net provision
of $1 million for the amount by which our estimated membership revenue exceeds
the related current and future cost of membership, a decrease of 60% from $2.5
million for the three months ended March 31, 2000.

   Cost of Other Revenues. The cost of other revenues for the three months ended
March 31, 2001 decreased by 58% to $1.4 million from $3.3 million for the three
months ended March 31, 2000. Cost of other revenues primarily consists of the
cost of printer and monitor peripherals, the incremental cost of upgrades, and
the related shipping expense. Cost of other revenues also includes incidental
costs incurred such as restocking fees. These costs are not significant for the
periods reported. The decrease in cost of other revenues is primarily due to the
fact that no peripherals or upgrades are offered under the Vivendi program.

  Operating Expenses

   Sales and Marketing. Sales and marketing expenses include fees paid to
third-party advertising sales agents, sales support functions, travel and
related expenses and related salaries and benefits. Sales and marketing costs
are expensed in the period incurred. Sales and marketing expenses decreased by
52% to $7 million for the three months ended March 31, 2001, $5.2 million of
which was related to fees paid for third-party advertising. For the three months
ended March 31, 2000, sales and marketing expenses were $14.6 million, all of
which were related to fees paid for third-party advertising. Sales and marketing
expenses exclude the amortization of deferred stock-based compensation of $1.2
million and $2.7 million for the three months ended March 31, 2001 and March 31,
2000, respectively. We have shifted the focus of our sales and marketing program
to more efficient enterprise and affinity channels and more effective targeted
marketing. As a result, we expect sales and marketing expenses to decrease in
absolute dollars and as a percentage of revenues.

   General and Administrative. General and administrative expenses include
payroll and related expenses for management and administrative personnel,
expenses related to maintaining member relations, facilities costs, professional
service fees, travel and other general corporate expenses. General and
administrative expenses increased by 170% to $26.8 million for the three months
ended March 31, 2001 and included approximately $496,000 of facilities expense
and $7.7 million paid to outside consultants, contractors and other
professionals for services rendered. For the three months ended March 31, 2000,
general and administrative expenses were $9.9 million including approximately
$523,000 of facilities expense and $5.6 million paid to outside consultants,
contractors and other professionals for services rendered. General and
administrative expenses excluded stock-based compensation amounting to $4.6
million and $4.0 million for the three months ended March 31, 2001 and March 31,
2000, respectively. We do not anticipate a significant increase in general and
administrative expenses, and we expect general and administrative expenses as a
percentage of revenues to decrease.

   Other operating expenses. For the period ended March 31, 2001, other
operating expenses consists of a credit adjustment to a loss reserve established
in 1999 to cover any potential exposure related to non-conforming computers held
on our behalf by our distributor in the amount of $3.4 million and other
operating expenses of $1.5 million.

   Net interest income and other expenses

   Net interest income and other mainly consists of interest income and interest
expense. Interest income from cash equivalents and restricted cash were $490,000
for the three months ended March 31, 2001. Interest expenses related to Chase
Manhattan Bank's line of credit were $799,000 for the three months ended


                                       12
<PAGE>

March 31, 2001. Net interest income and other expenses for the three months
ended March 31, 2000 consisted of $643,000 of interest income.

   Minority Interest

   The minority interest represents the amount of consolidated net loss
attributable to the minority shareholders in PeoplePC Europe N.V.

   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, 2001.
We have provided a full valuation allowance on our deferred tax assets.

   Net Loss

   Net loss for the three months ended March 31, 2001 increased 7% to $36.2
million from $33.8 million for the three months ended March 31, 2000. For the
three months ended March 31, 2001, $603,000 of net loss was attributable to cost
of revenues exceeding revenues, $5.8 million was attributable to the
amortization of deferred stock-based compensation, and $1.0 million was
attributable to a provision for acquisition discounts. For the three months
ended March 31, 2000, $3.2 million of net loss was attributable to cost of
revenues exceeding revenues, $6.7 million was attributable to the amortization
of deferred stock-based compensation, and $2.5 million was attributable to a
provision for acquisition discounts.


   Liquidity and Capital Resources

   As of March 31, 2001, our sources of liquidity consisted of $49.4 million in
cash and cash equivalents, including $17.1 million in restricted cash. Our net
accounts receivable balance as of March 31, 2001 was $40.8 million.

   Net cash used in operating activities was $37.3 million for the three months
ended March 31, 2001. Cash provided by operating activities for this period
consisted primarily of membership fees. Cash used in operating activities for
these periods consisted primarily of advertising expenses, costs of our computer
systems and peripherals, payroll and other employee-related expenses, and a
decrease in accrued liabilities.

   Net cash provided by investing activities was $4.6 million for the three
months ended March 31, 2001. Net cash provided by investing activities for this
period consisted primarily of a decrease of $5.8 million in accounts
collateralizing letter of credit agreements (primarily securing future inventory
purchases) and an increase of $1.2 million for the purchase of property and
equipment.

   Net cash used in financing activities was $524,000 for the three months ended
March 31, 2001, and consisted primarily of the decrease of borrowing under line
of credit.

   We currently rely on MBNA America Bank, N.A. to provide a line of credit with
36 monthly payments to qualified members who wish to finance their membership
package. The agreement is structured as an unsecured line of credit directly
between MBNA and the member. We receive the present value of the membership
package. The lines of credit extended by MBNA are non-recourse to PeoplePC. We
are not involved in the approval, funding or collection of current or past due
payments on the loan. Members may also finance upgraded monitors, printers and
shipping charges or they may use a credit card, which is charged directly by
us. Members who finance the purchase price of their membership packages make
their monthly payments directly to MBNA. MBNA allows members to prepay their
loan in part or in whole at any time without penalty.

   In our enterprise programs, membership fees are generally paid by both the
enterprises and the employees in the form of a co-payment. An employee may make
their co-payment by credit card, loan agreement through a financial institution
or

                                       13
<PAGE>

electronic debit, and in some cases by payroll deduction over the membership
period. If the employee co-payment is made by payroll deduction the enterprise
will generally pay the total membership fee at the time of enrollment and
receive the benefit of the payroll deductions over the membership period.

   Except where we contract directly with equipment manufacturers, we rely on
Ingram Micro to distribute computer systems and peripherals from our suppliers
to our customers. Our computer suppliers ship their products directly to Ingram
Micro's distribution centers around the country. When a customer application is
approved, products are picked from inventory, packed and shipped to our
customers from the distribution center closest to the shipping address. Ingram
Micro purchases inventory on our behalf based on sales projections made by us.
We are obligated to purchase inventory held by Ingram Micro purchased on our
behalf. Our agreement with Ingram Micro expired on December 31, 2000, and was
renewed for a one-year term by mutual written consent of the parties. At March
31, 2001, we had approximately $4.0 million in noncancelable purchase
commitments with Ingram Micro.

   During 1999, Ingram Micro purchased on our behalf approximately 29,000
computers from Toshiba, which proved to be non-conforming. We recorded a
provision of $15.6 million relating to the cost of resolving any potential
dispute over such non-conforming computers. During 2000, we reached an agreement
with Ingram Micro to liquidate the non-conforming computers and to split the
parties' combined losses equally. As a result of this agreement, we have reduced
the provision by $8 million. In early 2001, we reached a final settlement with
Ingram Micro and paid our share of the loss. As a result of that settlement, we
have reduced the remaining provision (included in other operating expenses) to
$1 million. We believe the $1 million will be sufficient to cover our share of a
potential claim from the OEM.

   In June 2000, we formed a European subsidiary, PeoplePC Europe N.V., a
Netherlands corporation. We and PPC 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, PPC
Europe received $50.0 million from @viso payable over a two month period
beginning on the closing date in exchange for 35% of PPC Europe's outstanding
capital stock in the form of convertible preferred stock, and we retained 65% of
PPC Europe's outstanding capital stock in the form of common stock. We received
our 65% interest in exchange for our grant of an exclusive license to use and
exploit our technology and brand in Europe. We have retained the rights to our
technology and brand in the rest of the world. The financing closed in July
2000. In addition, PPC Europe issued a warrant to acquire convertible preferred
stock to SOFTBANK Capital Partners LP representing 5% of PPC Europe's shares
outstanding as of the closing of the financing. PPC Europe has the exclusive
right and obligation to fulfill, market and sell PeoplePC products to and
receive buyer's club revenues from European members including the European
employees of enterprises such as Ford and Delta. We have comparable rights
worldwide, including with respect to any enterprise agreement entered into by
PPC Europe with a European multinational operation. PPC Europe will pay us, and
we will pay PPC Europe $100 for each member acquired in our respective
territories as a result of the other party entering into an enterprise
agreement. @viso has the right to designate two board members for PeoplePC
Europe and we have the right to designate the chief executive officer and the
remaining five board members (including the chief executive officer who serves
on the board). One of the @viso designated board members must vote to approve
transactions outside the ordinary course of business.

   Under a binding memorandum of agreement signed on February 16, 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 arrangement, @viso is entitled to
receive between 13,750,000 and 29,146,132 shares of PeoplePC common stock based
on a formula and the date of exchange. SOFTBANK Capital Partners LP is entitled
to exercise its warrant to purchase convertible preferred stock in PeoplePC
Europe. Once the warrant is exercised, SOFTBANK Capital Partners LP will be
entitled to sell all or a portion of its shares of PeoplePC Europe to us in
exchange for PeoplePC stock. Under this arrangement, SOFTBANK Capital Partners
LP will be entitled to receive between 1,850,000 and 3,481,928 shares of
PeoplePC capital stock based on

                                      14
<PAGE>

a formula and the date of exchange.

   The memorandum agreement contemplates that definitive documents will be
negotiated and executed, implementing the agreements in the memorandum of
agreement. At such time as the definitive documents are executed, PeoplePC will
acquire additional control over PeoplePC Europe, free of certain restrictions
contained in the PeoplePC Europe Articles of Association and a related
shareholder agreement.

   Pursuant to the memorandum of agreement, we borrowed $15 million from
PeoplePC Europe in February 2001. This note will automatically come due on May
23, 2001, unless the definitive documents have been executed by this date. If
the definitive documents are executed by this date, the note will remain a
demand note. Because PeoplePC will control the board of directors of PeoplePC
Europe, PeoplePC will be able to control the date of maturity of the note.
PeoplePC Europe will also have the power to make further loans to PeoplePC, free
of structural or contractual restrictions, thus allowing use of PeoplePC Europe
assets for the combined benefit of the two companies. On April 2, 2001, @viso
agreed to execute the definitive documents by May 15, 2001 and to consent to the
extension of further loans by PeoplePC Europe up to a maximum of an additional
$10 million under similar terms as the loan mentioned above.

   PeoplePc N.V. has made two additional loans to PeoplePC. The first, in the
amount of $6 million, comes due on July 18, 2001; the second, in the amount of
$4 million, comes due on July 27, 2001. Both loans will become demand notes if
the definitive documents are executed before the maturity date. The other terms
of such loans are identical to the terms of the $15 million loan described
above.

   In July 2000, we entered into a credit agreement with The Chase Manhattan
Bank providing for a $50 million revolving credit facility maturing in July
2001. The facility may only be used in connection with the financing of
receivables owed to the Company by Ford. Amounts borrowed under the credit
agreement will bear interest at variable rates, including as one of the rate
options LIBOR plus 60 basis points. We are required to pay fees to the lender
for the loan commitment and for underwriting and structuring. Our obligations
under the credit agreement will be secured by all accounts receivable under our
agreement with Ford. The availability of loans under the credit agreement is
subject to usual and customary closing conditions, as well as to a borrowing
base based on a percentage of invoiced receivables under the Ford agreement
meeting specified eligibility requirements. As of March 31, 2001, the eligible
receivable from Ford was approximately $5.1 million. The credit agreement also
includes normal and customary covenants for transactions of this type, including
maintenance of corporate existence, properties and rights; performance of
obligations; various notice and information provisions; compliance with laws and
certain contracts; limitation on indebtedness; limitation on liens; limitation
on mergers and other fundamental changes; limitation on investments and
acquisitions; limitation on transactions with affiliates; and limitations on
restrictive agreements. As of March 31, 2001, there was a net balance of $ 4.9
million outstanding in regard to this credit facility.

   In addition to the proceeds from our initial public offering, we may need to
raise additional capital to fund our future operations because we expect to
incur operating and net losses until at least 2003. We currently anticipate that
the combination of our available funds as of March 31, 2001, our credit
facility, the collection or financing of short term accounts receivable and
other available sources of borrowed funds will be sufficient to meet our
anticipated needs through the end of the year.

   If we need to raise additional funds through public or private financing, we
cannot be certain that additional financing will be available or that, if
available, it will be available on terms acceptable to us. Additional financing
may result in substantial and immediate dilution to existing stockholders. If
adequate funds are not available to satisfy either short- or long-term capital
requirements, we may be required to curtail our operations significantly or to
seek funds through arrangements with third parties that may require us to
relinquish material rights to certain of our services, technologies or potential
markets.

   The non-cancelable purchase commitments at March 31, 2001 included
approximately $4.0 million to Ingram Micro and approximately $1.0 million to IBM
pursuant to a direct shipment program entered into with IBM. In the ordinary

                                       15
<PAGE>

course of our business we make commitments to purchase computers in order to
make timely deliveries to new members as they sign up for our membership
package. However, we normally pay for the computers no sooner than two days
after the time of shipment to the member, although we are required to maintain a
deposit at Ingram Micro, adjusted weekly, equal to approximately 25% of
outstanding purchase orders and unshipped inventory. On March 31, 2001, this
deposit amounted to approximately $1.1 million.

   Under our typical consumer financing arrangements with MBNA, we receive
promptly a lump sum payment from MBNA that completely offsets the cost of the
computer and other equipment being purchased. We generally receive this payment
from MBNA before we are obligated to pay our computer system suppliers.
Therefore, these arrangements enable us to use a relatively small amount of
capital because the number of computers purchased and not paid for or financed
at any given time will be only a fraction of the total purchase commitment which
will typically extend over several months. The Ford and Delta programs depart
from our typical practice as described above. In the Ford program we collect the
majority of the amount for which the employee is responsible similarly to the
process described above. Ford remits the portion for which it pays semi-monthly.
The Delta program involves monthly payments to us rather than a lump sum
payment. We are presently negotiating with lenders to arrange financing for the
Delta program.

   Effects of Recent Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company, to date, has
not engaged in derivative and hedging activities. The Company is currently
evaluating the impact of this pronouncement and will adopt SFAS No. 133 in 2001.

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements."
SAB 101 summarizes the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company is in
compliance with this pronouncement.

   In March 2000, the FASB issued Interpretation No. 44 "Accounting for certain
transactions involving stock compensation, an interpretation of APB Opinion No.
25" ("FIN 44"). FIN 44 establishes guidance for the accounting for stock option
grants or modifications to existing stock option awards and is effective for
option grants made after June 30, 2000. FIN 44 also establishes guidance for the
repricing of stock options and determining whether a grantee is an employee, for
which the guidance is effective after December 15, 1998 and modifying a fixed
option to add a reload feature, for which the guidance is effective after
January 12, 2000. The adoption of certain of the provisions of FIN 44 prior to
March 31, 2000 did not have a material effect on the financial statements. The
Company currently follows the guidance in this EITF.

   In May 2000, the EITF reached a final consensus for Issue 00-14 "Accounting
for Certain Sales Incentives." Issue 00-14 provides guidance on applying
generally accepted accounting principles in recognizing certain sales
incentives, such as price reductions or sales incentives offered without charge
to customers. The Company currently follows the guidance in this consensus.



Item 3.   Qualitative and Quantitative Disclosure about Market Risk

   We are exposed to fluctuations in interest rates and market values of our
investments. Our exposure to fluctuations in interest rates and market values of
our investments relates primarily to our short-term investment portfolio, which
is included in cash and cash equivalents and short-term investments. We have not
used derivative financial instruments in our investment portfolio. We invest our
excess

                                       16
<PAGE>

cash in highly liquid commercial paper and U.S. Government debt securities with
maturities of less than one year, and, by policy, we limit the amount of credit
exposure to any one issuer. Due to the short-term nature of our investments, the
impact of interest rate changes would not generally be expected to have a
significant impact on the value of these investments. The effect of interest
rate and investment risk on us has not been significant.

   Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.

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

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

Risk Factors That May Affect Future Results

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

Risks Related to Our Business

Our limited operating history, our unproven business model and our rapidly
evolving business make it difficult to evaluate or predict our future business
prospects.

   We were incorporated in March 1999 and began selling our products and
services on a commercial basis in October 1999. We have a limited operating
history and, therefore, limited historical data or operating history upon which
to base our forecasts. As a result, it is difficult to evaluate or predict our
future business prospects. As of March 31, 2001, we had approximately 430,000
members who have purchased our products and services. However, our business
model requires us to increase our membership rapidly. In addition, our business
depends on deriving future revenues from payments made to us by merchants who
have entered into agreements to participate in our member commerce program. To
date, we have not generated significant revenues from our member commerce
program and we may not generate such revenues in the future.

                                       17
<PAGE>

Our business model depends on our ability to enter into and perform agreements
with large enterprises.

   As part of our strategy to expand our membership base, we have entered and
seek to enter into agreements with large enterprises to provide our products and
services to employees, customers and affiliated parties of these enterprises. We
anticipate that a significant portion of our future revenues will be derived
from our agreements with these enterprises. In order to execute our enterprise
strategy, we will need to enter into and perform agreements with other large
enterprises in the future on favorable terms. We may face difficulties entering
into agreements with large enterprises in the future when these enterprises do
not want to provide additional benefits to their employees, affiliates and
customers. If we are unable to enter into and perform these agreements, our
revenues and reputation would be harmed.

If our members are unable to obtain financing for the purchase of our products
and services, our business would be harmed.

   MBNA America Bank, N.A. is currently the sole provider of consumer financing
for the purchase of our products and services by individual consumers in the
United States. If we experience difficulties in our relationship with MBNA, or
if MBNA changes its requirements making it more difficult for consumers to
qualify for financing and we are unable to find alternative financing
arrangements, we may lose our ability to attract new customers through
direct-to-consumer marketing.

   We have established an agreement with MBNA America Bank, N.A. to provide a
line of credit with up to 48 monthly payments to qualified members who wish to
finance their membership fees. Our agreement may be terminated by MBNA upon 90
days notice or by us upon 90 days notice after we have submitted a predetermined
number of credit applications to MBNA. Either party may terminate our agreement
for a material breach following a 45-day cure period. Prior to our relationship
with MBNA, we relied on another financial institution to provide credit to our
members. We experienced significant difficulties with this institution in
administering and implementing our member financing program, which caused delays
in providing financing to our members for the purchase of our products and
services. While we were not materially affected by these delays because our
business was then in its preliminary stage of development, if our members
experience delays in the future in purchasing our products and services because
they are unable to obtain financing in a timely manner from MBNA, our growth
would be slowed.

Ingram Micro's failure to supply and fulfill our computer products could reduce
our revenues and harm our business.

   We rely on Ingram Micro to provide some of our computer products, maintain
inventory, process orders, prepare merchandise for shipment and distribute our
products to individual customers in a timely and accurate manner. We work
actively with Ingram Micro and third party computer suppliers to identify the
types of computers, the specifications and prices of the computers that will be
offered to our members. If Ingram Micro were to terminate or refuse to renew our
distribution arrangement or refuse to enter into agreements with identified
third party suppliers, we would have to arrange to sell these computer products
through other distributors. Ingram Micro's termination of or failure to renew or
otherwise deliver computers under our contract could cause significant delays in
our ability to fulfill our customers' orders, and we may not be able to locate
another distributor that can provide comparable fulfillment, processing and
shipping services in a timely manner, on acceptable commercial terms, if at all.
Our agreements with Ingram Micro terminated on February 28, 2001. The terms of
the agreements have not been extended. However, the parties currently continue
their business relationship.

If a manufacturer making direct shipments fails to fulfill orders for computer
products, our business would be harmed.

From time to time, we may enter into agreements with computer suppliers
providing for the supplier to direct ship to our members. If the supplier is
unable or unwilling to supply sufficient numbers of

                                       18
<PAGE>

laptop computers or desktop 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, we have experienced problems with shipment of computers and people
have cancelled their memberships.

If our members do not receive reliable Internet access, our business would be
harmed.

   We rely on UUNET Technologies, Inc., an MCI WorldCom company, Genuity
Solutions, Inc. and others to provide Internet access to our members in the
United States. If UUNET, Genuity or any other Internet access provider in the
future does not provide our members with reliable Internet access, our business
would be harmed. Our agreement with UUNET expires in April 2002, but will be
renewed for an additional year unless either party provides notice of its intent
not to renew 60 days prior to the end of the term. Either party may terminate
the agreement at any time for material breach, provided that the other party is
provided a 60-day cure period. Our agreement with Genuity expires in July 2003.
Either Genuity or we may terminate the agreement at any time for material
breach, provided that the other party is provided a 30-day cure period. Both
UUNET and Genuity may suspend performance if their user policies are violated.

We rely on third parties to provide our members with customer service and
technical support as well as a hardware warranty covering parts and labor and
in-home technical service. If these third parties do not provide our members
with reliable, high-quality service, our business would be harmed.

   We rely on multiple third parties to provide customer service and technical
support as well as a hardware warranty covering parts and labor and in-home
technical service. These third-party providers generally represent us without
identifying themselves as independent parties. If these parties do not provide
reliable, high-quality service, and we are unable to satisfactorily replace
these services in a reasonable time, our reputation and our business will be
harmed.

We depend on third-party computer suppliers. If these suppliers are unwilling or
unable to provide us with their products in the future, our business would be
seriously harmed.

   We rely on third parties, including Compaq and Hewlett-Packard, to supply
computer systems to Ingram Micro for distribution to our customers. We work
actively with Ingram Micro and third party computer suppliers to identify the
types of computers, the specifications and prices of the computers that will be
offered to our members. In addition, we currently rely on HP to supply computer
systems directly to our customers. These computer systems comprise an important
part of our membership package. In the future, we may rely on these and other
suppliers to provide our systems either directly to us or to Ingram Micro for
distribution to our customers. If existing suppliers cannot or will not provide
the products we require either directly to us or to Ingram Micro at commercially
reasonable prices and reasonable payment terms and we are not able to find
suitable alternative suppliers, our business would be harmed. Moreover, we may
not be able to monitor or control effectively the quality of the computers
manufactured by our suppliers or the speed and accuracy of their distribution.
Low-quality products, slow distribution or similar inadequacies may harm our
reputation and brand name, and demand for our products would decline. In
addition, we may need to spend money and expend other resources to remedy these
problems. For example, in 1999 Ingram Micro received a shipment of computers
from one of our suppliers for distribution to our members that did not conform
to product specifications. In early 2001, we reached a final settlement with
Ingram Micro and paid our share of the loss. As a result of that settlement, we
released a portion of the remaining provision related to the Distributor
(included in other operating expenses). A $1 million provision remains which we
believe will be sufficient to cover our share of any further claim from the OEM.
If we experience similar difficulties with Ingram Micro or other computer
suppliers in the future, we could incur losses and be required to expend
significant amounts of management's time in handling the resulting disputes.

                                       19
<PAGE>

Our relationships with our enterprise partners are complex. If we are not
successful in managing these relationships, our business will be harmed.

   The breadth and complexity of our obligations in employee connectivity and
other enterprise deals will require a great deal of effort and coordination to
achieve successful execution. In particular, distribution of our products
internationally is very complex and difficult to execute. We cannot be certain
that we will be able to deliver our products and services under these
arrangements on a timely basis. In the event that our relationships with Ford or
our other relationships are not successful, we will have spent a great deal of
time and resources that may otherwise have been directed to more profitable
activities. In addition, customer perceptions, our ability to secure additional
enterprise customers and our business will be adversely impacted if we do not
meet the expectations of our enterprise partners, Ford, Delta, Vivendi and the
National Trades Union Congress.

We may not be successful in accelerating our international expansion to meet our
obligations under our Ford, Delta, Vivendi and the National Trades Union
Congress agreements.

   We do not currently offer our products and services in all of the countries
in which we are contractually required to offer our products and services. Our
agreements with Ford and Delta require us to provide our products and services
to their employees on a worldwide basis and our National Trades Union Congress
agreement requires us to provide products and services in Singapore. While
international expansion is a key part of our business strategy, the global
nature of these agreements requires us to expand our operations for our
enterprise customers into international markets on an accelerated time frame. We
may encounter difficulties with our international expansion, such as the sale of
memberships or the establishment of other member commerce opportunities,
including high costs, unreliable Internet access, complex international
operations and differing regulatory and tax requirements.

   In the event that Ford does not go forward with the rollout of the program
beyond the fourth quarter of 2001, or were to go forward without PeoplePC, gross
revenues from Ford in future years may fall short of original projections.
PeoplePC and Ford are continuing to discuss PeoplePC's role in the program.

We may not be successful in entering into or fulfilling our obligations under
agreements with large enterprises in the future.

   In addition to our relationships with Ford, Delta, Vivendi, the National
Trades Union Congress and other enterprises, we intend to enter into agreements
with other large enterprises to acquire new customers and to promote our brand.
We may face difficulties entering into agreements with large enterprises in the
future, especially in poor economic conditions in which these enterprises are
not inclined to provide additional benefits to their employees, affiliates and
customers. All of our agreements with large enterprises will involve risks,
including risks which will be unique to the specific enterprises, and will
require us to incur additional capital commitments and expand our domestic and
international operations rapidly to support the large incremental increases in
PeoplePC members associated with these agreements. If we are unable to enter
into agreements with large enterprises in the future or if we are unable to
expand our operations to maintain these relationships successfully, our business
would be harmed. Additional enterprise agreements may also hinder our ability to
perform under our agreements with Ford, Delta, Vivendi and the National Trades
Union Congress.

Uncertain tax consequences of enterprise programs for both enterprises and their
employees may slow the growth of our enterprise programs.

   The tax treatment of a program under which enterprises provide computers to
their employees on a subsidized basis is uncertain with regard to both the
enterprise and its employees and depends on a number of factors, including the
status of the employee with the company, the employee's country of residence,
the size, if any, of the employee's co-payment and the particular structure of
the program. Depending on the applicable tax rules, in order to qualify for
tax-free treatment, a subsidized enterprise employee program might have to be
structured in a manner that qualifies under the applicable rules for tax-free
fringe benefits. To the extent a program is not tax-free, the entire amount of
the subsidy could be considered taxable wages, subject to applicable withholding
rules. Our inability to structure an enterprise program that is both tax-free in
a particular country and desirable to an enterprise could hinder our ability to
enter into new enterprise agreements, particularly in some countries outside the
United States where we are unfamiliar with, and have not operated under, the
local tax laws. To successfully structure an enterprise program in a particular
country, we are required to analyze the local

<PAGE>

tax law, determine whether there are any adverse tax consequences of an
enterprise program, and if so, identify a structure for a program that
sufficiently minimizes these taxes. This process is difficult and time consuming
and we cannot guarantee that we will find an acceptable structure in every
country. We have completed this process in most of the countries in which we
will be rolling out, but there is no guarantee we will be able to do so in a
satisfactory manner in the remaining countries. In countries where the tax cost
of an employee program is too high, local enterprises may be unwilling to enter
into agreements with us. As a result, we may encounter difficulties in entering
agreements with enterprises located outside the United States and we may
experience unexpected delays in structuring and implementing our programs with
Ford and Delta in foreign jurisdictions.

We have incurred significant losses and expect to incur additional losses in the
future.

   We have incurred a net loss of $66.3 million in the fiscal year ending
December 31, 2000 and a net loss of $36.2 million in the three months ending
March 31, 2001. We expect to continue to incur operating and net losses until at
least 2003, and we may not be able to generate sufficient revenue to achieve
profitability. We anticipate that our operating expenses will increase as we:


 .  expand our product and service offerings;
 .  increase our general and administrative functions to support our growing
   operations;
 .  expand our operations outside of the United States; and
 .  develop enhanced technologies and features to improve our Web site.

   As a result, we will need to generate significant revenues to achieve and
maintain profitability. If we fail to generate such revenues, we may never
attain profitability.

We have recorded loss provisions because our business model prices selected
memberships and services below our total current and estimated future costs of
providing products and performing under these membership agreements.

   Our business model allows us to subsidize the cost of selected memberships
with merchant and other revenues. We offer aggressive pricing in order to
establish customer relationships that we believe will provide the means for
longer term profitability. The revenues received from our $24.95 per month
offering and our offerings to Ford and Delta employees are less than our current
and estimated future cost of providing products and performing under these
agreements, without regard to member commerce revenues. Accordingly, we have
recorded a loss provision net of amortization of $27.5 million for the fiscal
year ending December 31, 2000. For the three months ending March 31, 2001, we
recognized a net $1.0 million in amortization of provisions previously taken.
This loss provision represents the amount by which our total expected costs
exceed our membership revenues determined without regard to member commerce
program revenue. We may also be required to recognize additional loss provisions
due to the performance of additional enterprise agreements. Unless we are able
to build our membership base, brand awareness and member loyalty, we may not be
able to improve pricing or eliminate subsidizations to individual members or
under enterprise agreements. The recordation of loss provisions in future
periods will have a negative impact on operating results and stockholders'
equity.

Our gross margins can be significantly affected by the mix of products and
services we sell.

   Our gross margins can be significantly affected by the mix of products and
services we sell. Although we have not generated significant member commerce
program revenues to date, we expect to earn high gross margins, of up to 100% on
the revenues related to our member commerce program. Gross margins on sales of
memberships, including the bundled hardware and services, are significantly
lower and may be negative, because of:


 .  costs related to customer acquisition;
 .  costs of purchasing hardware; and
 .  costs of services provided by our suppliers.

                                       21
<PAGE>

   Therefore, to control our gross margin, we must not only seek to manage our
mix of business, we must also seek to manage our pricing and our costs of
acquiring customers, costs of purchasing hardware from manufacturers, and costs
of services provided by our suppliers. To the extent our mix of business or
these costs are not successfully managed, our operating results may be
negatively impacted.

Our future capital needs are uncertain and we may not be able to satisfy them.

   We do not expect to generate positive cash flow from operations until at
least the second half of 2001. In the future, we may need to raise additional
funds, which may not be available on acceptable terms, if at all. We may also
require additional capital to acquire or invest in complementary businesses. If
we are unable to raise additional funds as needed or the expected sources of
additional borrowed funds are not available, our ability to operate our business
will be materially harmed. We expect that, including the $45 million funding
remaining from our European joint venture and with our credit facility and other
available sources of borrowed funds, our available funds should be sufficient to
meet our working capital and capital expenditure needs for the next twelve
months. However, in the event that our available funds are not sufficient to
meet our working capital and capital expenditure needs, there can be no
assurance that additional financing will be available or will be available on
terms acceptable to us, which, as a result, could have a material adverse effect
on our business operating results and financial condition, and our business
would be harmed.

   If we issue additional equity securities to raise funds, the ownership
percentage of our existing stockholders would be reduced. Our stock price may
fluctuate in the future and may decline not only in the short term but for an
extended period of time. To the extent we are unable to attract additional stock
investors, or to provide incentives through options or similar rights, both of
which will be negatively affected by any decline in our stock price, our ability
to continue funding operations or expansion will be jeopardized. New investors
may demand rights, preferences or privileges senior to those of existing holders
of our common stock. Debt incurred by us would be senior to equity in the
ability of debtholders to make claims on our assets. The terms of any debt
issued could impose restrictions on our operations. If we cannot raise needed
funds on acceptable terms, we may not be able to develop or enhance our
business, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements.

Our capital commitments will increase as we obtain additional members under
enterprise programs.

   Ingram Micro purchases and HP separately manufactures inventory on our behalf
based on sales projections made by us. We are obligated to purchase inventory
held by Ingram Micro or manufactured by HP on our behalf. At March 31, 2001, we
had approximately $5.0 million in noncancelable purchase commitments with Ingram
Micro and HP. Our capital commitments may increase as we obtain additional
members under enterprise programs. To the extent we are not able to obtain such
financing or payment terms, our capital requirements may increase substantially
and our business would be harmed.

We have not generated significant revenues from merchants that offer products
and services through the member commerce program on our Web Site, and we may not
be able to do so in the future.

   In the future, we will need to generate revenues from merchants that
participate in our merchant commerce program, but to date we have not generated
significant revenues from these merchants. These revenues are best generated by
developing active long term relationships with our members during which we offer
them various products and services throughout their membership. We may be unable
to generate significant revenues from these merchants and our failure to do so
would materially harm our ability to achieve profitability. Members may purchase
products and services from participating merchants by clicking on links that
connect the members to a merchant's Web site. Members enter into transactions
directly with participating merchants. We typically receive a percentage of
sales revenues generated by our members' purchases from our merchants or a fixed
fee when a member opens an account or executes his or her first transaction with
a merchant. In some cases, we receive both a customer acquisition fee and a
portion of the sales revenue.

                                       22
<PAGE>

We may not be able to develop and support our members on our Web site, which
could adversely affect demand for our products and services.

   Our Web site is designed to create and support a community of PeoplePC
members who access the Internet through our Web site. Any dissatisfaction of our
members with our Web site will negatively affect our ability to attract new
members and retain existing members. We intend to develop additional community
features in the future for our Web site, including online chat and special
interest directories. If we are unable to develop these community features to
the satisfaction of our members, our ability to maintain and attract new members
may be harmed and we may not be able to expand our business.

We rely on merchants on our Web site to provide high-quality products and
services to our members on favorable terms. If they do not do so, our reputation
and our revenues will be harmed.

   In October 1999 we began entering into agreements with merchants to offer
products and services to our members through the member commerce program on our
Web site. As of March 31, 2001, we had entered into agreements with
approximately 104 merchants. Products offered include financial services,
entertainment services, travel services, consumer goods and health-related
products. We depend on these merchants to provide our members with high- quality
products and services as well as a high-quality customer experience. In
addition, we strive to enter into agreements with merchants in which merchant
products and services are offered to our members at terms more favorable than
the terms typically offered. All of our merchant relationships are in their
early stages and we cannot be certain that our merchants will provide
high-quality products and services on favorable terms. If we are unable to add
merchants and renew agreements with existing merchants, or if our merchants do
not provide satisfactory products, services and customer experiences for our
members on favorable terms, our reputation and our revenues would be harmed.

Our business would be harmed if we are unable to compete effectively.

   The markets for personal computers, Internet access and other online services
are highly competitive and we expect competition to intensify in the future.
Existing or future competitors may develop or offer products or services that
are comparable or superior to ours at a lower price, which could significantly
harm our business. While we compete across a variety of markets, all of the
markets in which we participate are characterized by an increasing number of
entrants. We compete for customers with the following types of companies:


 .  vendors that offer product and services bundle that includes a computer,
   Internet access and customer service in a single offering and provide a
   multi- year payment plan, such as Gateway;
 .  vendors of personal computers that integrate Internet access and service
   with their products, such as Apple, Compaq, Dell and Gateway; and
   combinations of computer vendors and Internet service and content
 .  providers, such as AT&T, Yahoo, Microsoft, Compaq, Hewlett-Packard, IBM
   and Toshiba.

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

The integrated solutions of computer vendors and Internet service providers may
pose a threat to our business.

   Several computer vendors and Internet service providers offer an integrated
solution for large enterprises or individuals in which they bundle their own
products and services with the products and services of other providers. Since
these competitors do not sell their bundled offering through a

                                       23
<PAGE>

"middleman" and would not necessarily incur costs beyond the costs they
currently undertake to promote their brands, they may be able to offer lower
prices to their customers than we are able to offer. In addition, these computer
vendors and Internet service providers may elect to offer their products and
services through their own enterprise programs or consumer offerings in order to
promote their own brands. As a result, new integrated computing and Internet
service offerings pose a threat to our business.

The unpredictability of our quarterly results may adversely affect the trading
price of our common stock.

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


 .  our ability to achieve and maintain a low-cost business model and manage
   the third-party relationships necessary to do so;
 .  our ability to generate additional revenues from commerce opportunities
   with our member base;
 .  the popularity of the computer systems we sell;
 .  our key suppliers' ability to manufacture sufficient quantities of the
   computer systems we offer; and
 .  general economic conditions, as well as those specific to the Internet,
   technology and related industries.

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

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

The telecommunications infrastructure of countries in which we wish to conduct
business may make it difficult to provide our bundled offering.

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

Fluctuations in currency exchange rates could adversely affect our revenues and
operating margins.

   If we are compensated for our services overseas in U.S. dollars, we may need
to convert these funds into the local currency in order to pay our employees and
certain foreign taxes. Alternatively, if we are compensated for our services in
the applicable local currency, we may need to convert that currency into U.S.
dollars in order to pay costs that we incur in U.S. dollars and U.S. taxes. In
either

                                       24
<PAGE>

event, fluctuations in currency exchange rates could adversely affect our
revenues and operating margins.

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

   The legal and regulatory requirements of countries in which we may conduct
business in the future may differ from those in the United States, particularly
in the areas of communications, data-protection privacy, lending, tax and labor
laws. As a result, we may incur additional legal expenses to comply with these
laws and regulations. In addition, laws relating to the protection and
enforcement of intellectual property rights in many countries are not as
advanced and offer significantly less protection than those in the United
States.

Political and economic instability in countries in which we may conduct business
may harm our international operations.

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

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

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

We have grown rapidly, and if we fail to manage expansion effectively, our
business could be seriously harmed.

   Our growth has placed, and will continue to place, a significant strain on
our management systems, infrastructure, resources and planning and management
processes. We will not be able to implement our business strategy without an
effective planning and management process. In addition, we will not be able to
increase revenues or control costs unless we continue to improve our
operational, financial and managerial controls and reporting systems and
procedures, expand, train and manage our work force and manage multiple
relationships with third parties. Some of our senior management have no prior
management experience at public companies, and we cannot be sure that we will be
able to manage our expansion effectively.

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

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

   We recently reduced our workforce as part of an effort to make our business
operations more efficient and accelerate the advent of positive cash flows.
Nevertheless, our capacity to grow is dependent on our ability to recruit,
integrate and motivate highly skilled employees in various areas of our
business. Competition for these people is intense, and we may not be able to
recruit, train or retain

                                       25
<PAGE>

enough qualified personnel, particularly at our current stock price. The loss of
the services of any of our key employees, the inability to attract or retain
qualified personnel in the future or delays in hiring required personnel could
constrain the expansion of our business operations.

Technology changes rapidly and we must continually introduce new products and
services to remain competitive or our business will be significantly harmed.

   The personal computer and Internet access markets are both characterized by
rapid ongoing technological change, changes in user requirements and preferences
and frequent new service introductions involving new processes and technologies
and evolving industry standards that could render our existing products and
services obsolete. As a result, we must regularly introduce new products and
services, including new personal computer configurations and enhanced Internet
services, to maintain consumer interest in our products and services. There can
be no assurance that any new computer products or services that we introduce
will be accepted by the market. In addition, the introduction of new products or
services by us or our competitors may adversely affect the sale of, or revenue
from, our existing products or services. If we do not have access to new
technology in the future, we may not be able to effectively incorporate new
technology into our products or deliver new products or features in a timely and
cost-effective manner, which could adversely affect demand for our products and
services.

Online security breaches could result in a loss of consumer confidence, which
could hurt our ability to implement our business strategy.

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

Our servers are vulnerable to natural disasters and other events that could
cause interruptions of our services.

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

If we are not able to protect our intellectual property, we may not be able to
compete effectively.

   We rely on a combination of trademark, trade secret and copyright law and
contractual restrictions to establish and protect our intellectual property.
These afford only limited protection. We have filed for U.S. trademark
registrations for "PeoplePC" and 12 other trademarks. We also have applied to
register marks in 27 countries. We may be unable to secure these registrations.
It is also possible that our competitors or others will adopt service names
similar to ours, thereby impeding our ability to build brand identity and
possibly leading to customer confusion. In addition, there could be potential
trade name or trademark infringement claims brought by owners of other
registered trademarks or trademarks

                                       26
<PAGE>

that incorporate variations of the term PeoplePC or our other trademark
applications. Enforcement of trademark rights against unauthorized use,
particularly over the Internet and in other countries, may be impractical or
impossible.

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

   Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to obtain and use information that we regard as proprietary, such as
technology used to operate our Web site, our content, our trademarks and our
domain names. Litigation may be necessary to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. Further, our operations providers and the
merchants participating on our Web site may be engaged in litigation in the
future that would require our involvement.

Third parties may assert intellectual property and other lawsuits or claims
against us that may be costly and time-consuming.

   We may become subject to claims by third parties that we have infringed their
intellectual property rights. We could be involved in these claims even in
instances where our connection with the intellectual property in dispute arises
only as a licensee from other companies. In addition, third parties may assert
lawsuits or claims against us, including those related to product liability,
Internet content, privacy, safety and health and employment matters. Litigation
is expensive and time consuming regardless of the merits of the claim and could
divert management's attention from our business. Moreover, we cannot predict the
outcome of any litigation. Lawsuits, claims or proceedings may result in
liability to us.

Products that contain, or are rumored to contain, defects could result in
significant costs to us, decreased sales of our products, damage to our brand
and lawsuits.

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

 .  upgrades, replacements or recalls could impose substantial costs on us;
 .  rumors, false or otherwise, could be circulated by the press and other
   media, which could cause a decrease in sales of our products and services
   and significant damage to our brand; and
 .  our members could file suits against us alleging damages caused by
   defective products and services.

We expect to amortize significant stock-based compensation that will increase
our losses in the future.

   For financial reporting purposes, we have determined that the estimated value
of common stock was in excess of the exercise price, which exercise price was
considered to be the fair market value as of the date of grant for 21,590,700
options issued to employees through March 31, 2001. In connection with the grant
of such options, we have recorded net deferred compensation of $21.7 million
during 1999 and $63.5 million during the fiscal year ended December 31, 2000.
This stock-based compensation expense will decrease our earnings over the period
of amortization. Deferred stock-based compensation will be amortized over the
vesting period which is generally 48 months from the date of grant. $3.0 million
was expensed in the period ended December 31, 1999 and $43.1 million was
expensed in the fiscal year ended December 31, 2000. The balance is expected to
be amortized as follows:

                                       27
<PAGE>

                                           Deferred Stock-Based
Period                                     Compensation
------------------                         --------------------
Fiscal Year ending
December 31, 2001                          $17.9 million
2002                                       $ 8.1 million
2003                                       $ 2.8 million
2004 and thereafter                        $ 0.1 million


We incurred a sales and marketing expense of $26.0 million and a dividend of
$22.0 million in the fiscal year ended December 31, 2000.

   In April 2000, we raised $49.7 million in gross proceeds from the sale of
9,468,252 shares of series C preferred stock. Ford Motor Company purchased
4,765,650 shares of series C preferred stock in connection with this financing
and other investors purchased 4,702,602 shares. Ford also received the right to
purchase 1,905,000 shares of common stock in a private placement effected at the
closing of our initial public offering at the same price per share as our
initial public offering. Ford exercised this right in full. Because Ford
exercised this right, Ford also received a warrant to purchase 2,857,500 shares
of common stock, exercisable at the same price per share as our initial public
offering of $10.000, at any time for a period of 200 days following the date of
our initial public offering, August 21, 2000. In February 2001, the expiration
date was extended for a period of up to 29 months. In relation to Ford, the
value of the right, the warrant and the excess of the value of the common stock
into which the series C preferred stock is exercisable over the price paid for
the series C preferred stock is $24.5 million, and has been charged to sales and
marketing expense in the second quarter of 2000. These rights and equity have
been granted to Ford in order to gain access to Ford's employees as potential
members and to entice Ford to purchase membership packages. As Ford has no
future performance requirements and no minimum purchase commitments with respect
to the membership packages, the charge has been expensed when incurred. The
series C preferred stock converted into common stock on a 1-to-1 basis upon the
closing of our initial public offering on August 21, 2000. In the fiscal year
ended December 31, 2000, we incurred a dividend of $22.0 million as a result of
a beneficial conversion feature of preferred stock issued to the other
investors. This dividend has been calculated as the difference between the price
paid by the investors and our initial public offering price per share of $10.00.

Risks Related to Our Industry

Our business will be significantly harmed if growth in the use of the Internet
does not continue.

   We believe a significant number of our members are purchasing our products
and services as a means of connecting to the Internet. Because we expect to
derive a large portion of our revenues from transactions with our members either
directly or indirectly, and our merchants, our ability to achieve needed
revenues is substantially dependent upon continued growth in Internet use,
particularly as a means to buy and sell goods.

   Capacity constraints caused by growth in the use of the Internet may impede
further development of the Internet to the extent that users experience delays,
transmission errors and other difficulties. If the necessary infrastructure,
products, services or facilities are not developed to mitigate the effects of
these factors, or Internet usage does not continue to increase as expected, we
may not be able to implement our business model.

If demand for personal computers does not continue to grow, demand for our
products and services would be adversely affected.

   Our business model depends on the continued strong demand for personal
computers. The personal computer market is characterized by rapid new product
and technology introductions and generally declining prices for existing
products. Demand for personal computers may be significantly reduced if
consumers perceive little technological advantage in new products or believe
that the price of

                                       28
<PAGE>

a new product is not worth the perceived technical advantage. Alternatively, if
individuals view anticipated changes as significant, such as the introduction of
a new operating system or microprocessor architecture, overall market demand for
personal computers may decline because potential members may postpone their
purchases until release of the new product or in anticipation of lower prices on
existing products following the introduction of new models. Reduced demand could
result in excessive inventories and it could take several quarters to sell this
inventory, which could delay the introduction of new products.

   We could be exposed to liability or increased costs if new case law is
decided, or new government regulation regarding the Internet is enacted.

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


Risks Related to Market Volatility

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

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

Our common stock could be delisted from the Nasdaq National Market.

   Our common stock trades on the Nasdaq National Market, which specifies
certain requirements for continued listing of common stock. One of the
requirements is that the minimum closing bid price per share of our common stock
not be less than $1.00 for a period of 30 consecutive business days. At April 2,
2001, the minimum closing bid price for our common stock had been less than
$1.00 for 30 consecutive business days. We have received notice from Nasdaq that
our common stock will be delisted from the Nasdaq National Market unless by July
2, 2001, we meet certain listing criteria. We anticipate that we will appeal any
determination to delist our common stock from the Nasdaq National Market and
will take actions as we deem necessary to attempt to increase our stock price to
over $1.00. The result of delisting from the Nasdaq National Market could be a
reduction in the liquidity of any investment in our common stock and may have an
adverse effect on the trading price of our common stock. Delisting could also
reduce the ability of holders of our common stock to purchase or sell shares as
quickly and as inexpensively as they have done historically. This lack of
liquidity would make it more difficult for us to raise capital in the future.
Delisting could also adversely affect our relationships with vendors and
customers.

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

   The stock markets in general, and the Nasdaq National Market and technology
companies in particular, have experienced extreme price and volume fluctuations.
Since the initial public offering of our common stock, our stock price has
declined from its initial public offering price of $10.00 per share in August
2000 to $0.43 per share on May 11, 2001. These factors may seriously impact the
market

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<PAGE>

price and volatility of our common stock in the future, regardless of our actual
operating performance. We may also be sued in a securities class action law
suit, which could be costly, divert our resources and seriously harm our
business.

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

   As of March 30, 2001, our directors, executive officers and 10% or greater
principal stockholders together controlled approximately 60.5% of our common
stock. In addition, on February 16, 2001, we entered into a memorandum of
agreement with certain of our principal stockholders providing them with an
option to put shares of PeoplePC Europe N.V. held by them to PeoplePC in
exchange for PeoplePC stock. If these options were fully exercised, our
directors, executive officers and principal stockholders could control as much
as 69.2% of our common stock. If these stockholders acted or voted together,
they would have the power to elect our directors and to exercise a controlling
influence over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. This
concentration of ownership may delay or prevent a change in control of our
company, even when a change may be in the best interests of our stockholders. In
addition, the interests of these stockholders may not always coincide with our
interests as a company or the interests of other stockholders. Accordingly,
these stockholders could cause us to take action or omit to take action, even if
doing otherwise would benefit our stockholders as a whole.

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

   Our stockholders hold a substantial number of shares of our common stock that
they will be able to sell in the public market in the future. As of March 30,
2001, 96,891,356 shares were eligible or will be eligible in the future for sale
in the public market, in some cases subject only to the volume, manner of sale
and notice requirements of Rule 144 of the Securities Act of 1933. In addition,
holders of put options pursuant to a memorandum of agreement dated February 16,
2001 may acquire up to 32,628,060 shares of PeoplePC common stock in exchange
for shares of PeoplePC N.V. After August 15, 2001, these holders may require
PeoplePC to register the shares so they can be sold in the public market. Sales
of a substantial number of shares of our common stock could cause our stock
price to fall, especially if the trading volume of our stock remains low. In
addition, the sale of these shares in the public market could impair our ability
to raise capital through the sale of additional stock.

Our management has broad discretion over the use of the proceeds

   Our management has broad discretion over the use of the proceeds from our
initial public offering and of the use of our available funds, generally.
Accordingly, it is possible that our management may allocate the proceeds
differently than investors in PeoplePC would approve, or that we will fail to
maximize our return on the proceeds.

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

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

                                       30
<PAGE>

                                    PART II

Item 1.  Legal Proceedings

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

Item 2.  Changes in Securities


         Recent Sales of Unregistered Securities

         Under a binding memorandum of agreement signed on February 16, 2001,
         @viso Limited is entitled to sell all or a portion of its shares of
         PeoplePC Europe N.V. to us in exchange for PeoplePC stock. Under this
         arrangement, @viso is entitled to receive between 13,750,000 and
         29,146,132 shares of PeoplePC capital stock based on a formula and the
         date of exchange. SOFTBANK Capital Partners LP is entitled to exercise
         its warrant to purchase convertible preferred stock in PeoplePC
         Europe. Once the warrant is exercised, SOFTBANK Capital Partners LP
         will be entitled to sell all or a portion of its shares of PeoplePC
         Europe to us in exchange for PeoplePC stock. Under this arrangement,
         SOFTBANK Capital Partners LP will be entitled to receive between
         1,850,000 and 3,481,928 shares of PeoplePC capital stock based on a
         formula and the date of exchange. These put options will terminate in
         April 2006. These securities were exempt from registration under Rule
         506 of the Securities Act since the sale was to an accredited
         investors, as defined in Rule 501 of the Securities Act.

Item 3.  Default Upon Senior Securities
         None

Item 4.  Submission of Matters to a Vote of Security Holders
         None

Item 5.  Other Information
         None

Item 6.  Exhibits

                                 EXHIBIT INDEX

--------------------------------------------------------------------------------
  Exhibit                           Description
  Number
--------------------------------------------------------------------------------
   3.1*  Certificate of Designation of Rights, Preferences and Privileges of
         series A preferred stock of PeoplePC
--------------------------------------------------------------------------------
  10.1+  Memorandum of Agreement by and among PeoplePC, PeoplePC Europe N.V.,
         SOFTBANK Technology Venture IV LP, SOFTBANK Technology Advisors Fund
         LP, @viso Limited, SOFTBANK Capital Partners LP, SOFTBANK Capital
         Advisors Fund LP and Nick Grouf
--------------------------------------------------------------------------------
  10.2   Promissory Note from PeoplePC Inc. to PeoplePC Europe N.V. dated
         February 22, 2001
--------------------------------------------------------------------------------

*  Incorporated by reference to previously filed exhibit to the Annual Report on
Form 10-K (File No. 000-31299) of PeoplePC Inc. on April 2, 2001
+  Incorporated by reference to previously filed Annex A to the Schedule 14A
Information Proxy Statement (File No. 000-31299) of PeoplePC Inc on April 30,
2001.
--------------------------------------------------------------------------------

         Reports on Form 8-K
         None

                                       31

<PAGE>

                                   SIGNATURE


Pursuant to the requirements of the Securities Act of 1934, this report has been
signed and thereunto duly authorized, in the City of San Francisco, State of
California, on May 15, 2001.

                                    PEOPLEPC, INC

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

                                    By:  /s/      MICHAEL GLOGOWSKI
                                       ----------------------------------------
                                                  Michael Glogowski
                                                  Acting Chief Financial
                                                  Officer

                                       32