<PAGE>

    As filed with the Securities and Exchange Commission on August 31, 1999
                                                      Registration No. 333-
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                 -----------

                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
                                 -----------

                                eMachines, Inc.
            (Exact Name of Registrant as Specified in its Charter)
<TABLE>
 <C>                              <C>                              <S>
             Delaware                           3571                           943311182
 (State or Other Jurisdiction of    (Primary Standard Industrial           (I.R.S. Employer
  Incorporation or Organization)    Classification Code Number)         Identification Number)
</TABLE>


                         14350 Myford Road, Suite 100
                           Irvine, California 92606
                                (714) 481-2828
  (Address, including zip code, and telephone number, including area code, of
                   Registrant's principal executive offices)

                                 -----------

                               Stephen A. Dukker
                            Chief Executive Officer
                         14350 Myford Road, Suite 100
                           Irvine, California 92606
                                (714) 481-2828
(Name, address, including zip code, and telephone number, including area code,
                             of agent for service)

                                 -----------

                                  Copies to:
<TABLE>
<S>                                              <C>
               John A. Fore, Esq.                            William D. Sherman, Esq.
        Wilson Sonsini Goodrich & Rosati                    Stephen J. Schrader, Esq.
            Professional Corporation                         Justin L. Bastian, Esq.
               650 Page Mill Road                            Rochelle A. Krause, Esq.
          Palo Alto, California 94304                        Morrison & Foerster LLP
                 (650) 493-9300                                 755 Page Mill Road
                                                           Palo Alto, California 94304
                                                                  (650) 813-5600
</TABLE>

                                 -----------

   Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.


   If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
   If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
   If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
                 ---------------
   If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
                 ---------------
   If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]

                        CALCULATION OF REGISTRATION FEE
<TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<CAPTION>
                                              Proposed Maximum
           Title of Each Class of                Aggregate         Amount of
        Securities to be Registered          Offering Price (1) Registration Fee
--------------------------------------------------------------------------------
<S>                                          <C>                <C>
Common Stock, $0.0000125 par value.........     $200,000,000        $55,600
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
(1)  Estimated pursuant to Rule 457(o) solely for the purpose of computing the
     amount of the registration fee.
                                 -----------

   The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall hereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to such
Section 8(a), may determine.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted.             +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                  SUBJECT TO COMPLETION, DATED AUGUST 31, 1999

                                        Shares

                                     [LOGO]

                                eMachines, Inc.
                                  Common Stock
                                   --------

  Prior to this offering, there has been no public market for our common stock.
The initial public offering price of our common stock is expected to be between
$     and $     per share. We have applied to list our common stock on The
Nasdaq Stock Market's National Market under the symbol "EEEE."

  The underwriters have an option to purchase a maximum of     additional
shares to cover over-allotments of shares.

  Investing in our common stock involves risks. See "Risk Factors" on page 6.

<TABLE>
<CAPTION>
                                                          Underwriting
                                              Price to    Discounts and  Proceeds to
                                               Public      Commissions    eMachines
                                            ------------- ------------- -------------
<S>                                         <C>           <C>           <C>
Per Share..................................      $             $             $
Total......................................     $             $             $
</TABLE>

  Delivery of the shares of common stock will be made on or about       , 1999.

  Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

Credit Suisse First Boston

            BancBoston Robertson Stephens

                         Hambrecht & Quist

                                                           Salomon Smith Barney

                   The date of this prospectus is     , 1999.
<PAGE>

                                 ------------

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                      Page
                                      ----
<S>                                   <C>
Prospectus Summary..................    3

Risk Factors........................    6

Special Note Regarding Forward-
 Looking Statements.................   20

Use of Proceeds.....................   20

Dividend Policy.....................   20

Capitalization......................   21

Dilution............................   22

Selected Financial Data.............   23

Management's Discussion and Analysis
 of Financial Condition and Results
 of Operations......................   24

Business............................   32
</TABLE>

<TABLE>
<CAPTION>
                                     Page
                                     ----
<S>                                  <C>
Management..........................   41

Related Party Transactions..........   46

Principal Stockholders..............   51

Description of Capital Stock........   53

Shares Eligible for Future Sale.....   56

Underwriting........................   57

Notice to Canadian Residents........   59

Legal Matters.......................   60

Experts.............................   60

Additional Information..............   60

Index to Financial Statements.......  F-1
</TABLE>

                                 ------------

   You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.



                     Dealer Prospectus Delivery Obligation

   Until     , 1999 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
<PAGE>

                               PROSPECTUS SUMMARY

   This summary highlights information described more fully elsewhere in this
prospectus. This summary is not complete and does not contain all the
information you should consider before investing in our common stock. You
should read the entire prospectus, including the Financial Statements and
related Notes, before making an investment decision.

                                eMachines, Inc.

   We are a leading provider of low-price, high-quality branded personal
computers, or PCs. Since our first sale in November 1998 when we introduced our
eTower PCs, we have sold over one million PCs. According to Ziff Davis Market
Intelligence, we sold the third highest number of PCs through retailers in the
United States in June 1999. We also offer an integrated computing and Internet
access solution, currently through our relationship with America Online, Inc.,
and plan to launch e-machines.net, our private label Internet access service,
in the fourth quarter of 1999.

   The explosive growth in the popularity of the Internet has increased demand
for PCs as the PC has proven to be the predominant means of accessing the
Internet. We believe the combination of this growing demand for Internet access
and the introduction of the sub-$600 PC creates an opportunity for our low-
price, high-quality integrated computing and Internet access solution. As part
of our integrated solution, our PC buyers may receive rebates in connection
with long-term Internet access service subscriptions, or ISP rebates. We
currently offer our ISP rebates through our relationship with America Online
and, in the future, we plan to directly offer ISP rebates with our planned e-
machines.net service. Our ISP rebates enable consumers to purchase our PCs for
a net effective price of as low as $0 and to gain access to the Internet for a
monthly fee. In addition, our PC buyers who do not enter into a long-term
contract but subscribe to e-machines.net on a month-to-month basis may qualify
for our planned program that will enable subscribers to upgrade the
configuration of their eTower model PC for a low fee. We believe that our
products, services and programs will appeal to a wide variety of consumers,
especially first-time PC buyers, who are looking for an inexpensive and
powerful means of accessing the Internet.

   Our operating model allows us to cost-effectively offer our PCs and
integrated computing and Internet access solution for the following reasons:

  .  we are able to maintain low fixed costs, capital expenditures and
     manufacturing and operating costs by outsourcing most of our major
     operating and manufacturing functions;

  .  we maintain low distribution, marketing and administration costs by
     distributing and advertising our products and services through a limited
     number of large retailers, including Best Buy, Circuit City, Office
     Depot and Staples; and

  .  we achieve high inventory turnover through product management and
     outsourcing of manufacturing.

   We were incorporated in Delaware in September 1998. Our principal executive
offices are located at 14350 Myford Road, Suite 100, Irvine, California 92606
and our telephone number is (714) 481-2828. Our web site is located at
"www.e4me.com." Information contained on our web site does not constitute a
part of this prospectus.

                                  ------------

   E-MACHINES(R) is our registered United States trademark. eMachines(TM),
eTower(TM), eView(TM) and eOne(TM) are also our trademarks. This prospectus
contains other trademarks and trade names of other companies.

                                       3
<PAGE>

                                  The Offering

Common stock offered....................      shares

Common stock to be outstanding after
 this offering..........................      shares

Use of proceeds.........................  General corporate purposes, including
                                          working capital and financing our ISP
                                          rebate program with respect to our
                                          planned e-machines.net service

Proposed Nasdaq National Market
 symbol.................................  EEEE

                         Summary Financial Information
                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                                    Period From
                                                   Sept. 18, 1998  Six Months
                                                   (inception) to     Ended
                                                   Dec. 31, 1998  June 30, 1999
                                                   -------------- -------------
<S>                                                <C>            <C>
Statements of Operations Data:
  Net revenues....................................   $   58,283    $  351,313
  Cost of revenues................................       58,088       338,790
                                                     ----------    ----------
  Gross profit....................................          195        12,523
  Income (loss) from operations...................       (1,913)        1,051
  Net loss .......................................       (2,802)       (3,909)
  Basic and diluted net loss per share............   $    (0.04)   $    (0.05)
                                                     ==========    ==========
  Shares used in computing basic and diluted net
   loss per share.................................   77,600,000    77,600,000
                                                     ==========    ==========
</TABLE>

<TABLE>
<CAPTION>
                                                         June 30, 1999
                                                 -------------------------------
                                                                      Pro Forma
                                                  Actual   Pro Forma As Adjusted
                                                 --------  --------- -----------
<S>                                              <C>       <C>       <C>
Balance Sheet Data:
  Cash ......................................... $ 10,911  $157,571     $
  Working capital...............................   (6,502)  140,158
  Total assets..................................  160,313   306,973
  Long-term obligations.........................      560       560
  Redeemable convertible preferred stock........       --        --       --
  Total stockholders' equity (deficiency).......   (5,120)  141,540
</TABLE>


   The total number of outstanding shares of our common stock and the pro forma
data above are based on:

  .  77,600,000 shares of our common stock outstanding as of June 30, 1999;

  .  the sale of 24,279,369 shares of our preferred stock in August 1999
     (including 5,560,776 not outstanding as of the date of this prospectus
     that are issuable to America Online upon regulatory approval) and the
     automatic conversion of these shares of preferred stock upon completion
     of this offering into 24,279,369 additional shares of common stock; and

  .  the issuance of 419,538 additional shares of our common stock on August
     18, 1999, as consideration for the assignment of our trademark.

   See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.

                                       4
<PAGE>

   The pro forma as adjusted data above has been adjusted to reflect the sale
of        shares of common stock in this offering at an assumed initial public
offering price of $      per share (less underwriting discounts and commissions
and estimated offering expenses).

   The above information excludes:

  .  609,200 shares of common stock issuable upon exercise of options
     outstanding as of June 30, 1999, having a weighted average exercise
     price of $1.56 per share, and 2,590,800 additional shares authorized to
     be issued under our stock plan;

  .  227,897 shares of common stock issuable upon exercise of an option
     granted to our President and Chief Executive Officer, with an exercise
     price of $1.61 per share; and

  .  shares of common stock issuable to America Online upon exercise of its
     warrants. See "Related Party Transactions--Relationship with America
     Online, Inc." for a discussion of the America Online warrants.

   Unless otherwise specifically stated, information throughout this
prospectus:

  .  reflects the conversion of all outstanding shares of preferred stock,
     including the 5,560,776 shares of preferred stock not outstanding as of
     the date of this prospectus that are issuable to America Online upon
     regulatory approval, into 24,279,369 shares of common stock
     automatically upon the closing of this offering;

  .  assumes no exercise of the underwriters' over-allotment option; and

  .  reflects the eight-for-one stock split of our common stock effected on
     August 13, 1999 (all share and per share amounts of our common stock
     have been retroactively restated to reflect the stock split).

                                       5
<PAGE>

                                  RISK FACTORS

   You should carefully consider the following risks before making an
investment decision. The risks described below are intended to highlight risks
that are specific to us and are not the only ones that we face. Additional
risks and uncertainties, such as those that generally apply to our industry or
to companies undertaking initial public offerings, may also impair our business
operations. You should also refer to the other information in this prospectus,
including the discussions in "Special Note Regarding Forward-Looking
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as our Financial Statements and
the related Notes.

Because we have operated for a very limited period of time and our business is
still rapidly changing, we may have difficulty accurately predicting future
operating results and you have limited information upon which to evaluate our
business

   We were incorporated in September 1998 and sold our first PC in November
1998. To date, most of our revenues have been derived from the sale of PCs and
monitors, and from the provision of customer support and other technical
services. Our business is changing rapidly, and we expect to derive a portion
of our future net revenues from America Online, our Internet access service
provider, and our own planned Internet access services. We intend to introduce
our own branded Internet access service, e-machines.net, during the fourth
quarter of this year. Our limited operating history and our evolving business
make it very difficult for us and for investors to evaluate or predict our
future business prospects. In addition, we may change our business strategy as
a result of changing market conditions. You should consider our business and
prospects in light of the risks and difficulties typically encountered by
companies in the early stages of development, particularly those in the rapidly
changing PC and Internet access service markets. For example, we may be unable
to:

  .  obtain a sufficient supply of PCs and monitors on a timely basis;

  .  timely and effectively introduce new PCs, monitors and Internet access
     services;

  .  attract and retain our PC buyers as subscribers to Internet access
     services offered by America Online or us;

  .  raise sufficient capital to support our growth or any future ISP rebate
     programs;

  .  build significant brand name recognition;

  .  compete successfully in the highly competitive PC and Internet access
     service markets;

  .  successfully manage the outsourcing of a significant portion of our
     operations, including the manufacture and distribution of our PCs and
     monitors, customer service and support and Internet access services; and

  .  attract, retain and efficiently integrate new senior management
     personnel.

We have incurred significant losses since our inception and may continue to
incur losses in the future

   We have incurred net losses since our inception and at June 30, 1999 we had
an accumulated deficit of $6.7 million. While we experienced a period of rapid
revenue growth following our inception, we may not be able to maintain this
revenue growth and we may not become profitable. In addition, pricing pressures
in both the PC and Internet access service markets may cause us to decrease the
prices of our PCs or Internet access services, which would harm our operating
results. Also, we have maintained relatively low operating costs by outsourcing
most of our business operations. We may not be able to successfully manage
these outsourcing relationships. As a result, our ability to achieve
profitability may be significantly harmed.


                                       6
<PAGE>

A number of factors could cause our quarterly operating results to fluctuate
significantly and cause our stock price to be volatile

   We expect our operating results to fluctuate significantly in the future due
to a number of factors, many of which are outside of our control. Our PC
business currently generates low operating margins, and we expect this to
continue for the foreseeable future. Thus, slight variations in the sales
prices of our PCs, component or manufacturing costs or operating costs could
significantly affect our operating results in future periods. In addition, the
Internet access services market is highly competitive and subject to rapid
change. If our planned Internet access services are not successful, our
operating results will be harmed. If our operating results do not meet the
expectations of securities analysts and investors, our common stock price could
significantly decline. Some of the other factors that could affect our
quarterly operating results include:

  .  our ability or our suppliers' ability to effectively develop and support
     new PC models;

  .  new product or Internet access service announcements and introductions
     by us or our competitors;

  .  fluctuations in the amount of, and the number of our PC buyers claiming,
     product rebates;

  .  the number of subscribers who default on their long-term Internet access
     service contracts;

  .  reductions in the sales prices of PCs, monitors or Internet access
     services offered by us or our competitors;

  .  changes in the mix of the PCs and monitors we sell;

  .  changes in the dollar amount of ISP rebates we offer;

  .  achieving and maintaining a low-cost business model and managing third-
     party relationships necessary to do so;

  .  the cost of, and our key suppliers' ability to obtain sufficient
     supplies of, PCs and monitors and the components for them;

  .  our key suppliers' ability to manufacture sufficient quantities of PCs
     and monitors, and maintain the quality of our products;

  .  loss of subscribers due to changes in consumer demand for America
     Online's CompuServe or our own e-machines.net service;

  .  the popularity of, and seasonal or other fluctuations in demand for, our
     PCs, monitors and Internet access services; and

  .  our ability to adequately reserve for price protection credits to
     retailers, product returns, warranty claims or anticipated defaults
     relating to our Internet access services, as well as the cost of our
     "PC rEnewal" program.

   Historically, demand for PCs and PC-related services has generally been
stronger in the fourth quarter of each year. We believe this seasonal impact on
business will increase to the extent that PCs continue to become more consumer-
oriented or entertainment-driven products. As a result, we expect our net
revenues to generally be greater in the fourth quarter and generally lower in
the first quarter of each year.

Because our business depends on outsourcing a substantial portion of our
operations, if we were unable to do so in the future, our business would be
significantly harmed

   Historically, we have had relatively low manufacturing and operating costs
because we outsource most of our operating and manufacturing functions,
including system assembly, warehouse labor, distribution, research, product
design, warranty services and customer support. In addition, we have had
relatively low distribution costs because we distribute our products primarily
through a limited number of large retailers. We may not be successful in
managing our relationships with any of these third parties and if existing
third-party suppliers

                                       7
<PAGE>

cannot provide these services at commercially reasonable prices, or at all, and
we are not able to find suitable alternative suppliers, our business would be
significantly harmed. Moreover, we may not be able to monitor or control
effectively the quality of the PCs and monitors manufactured by our suppliers
and, in the case of Internet access services, the reliability of our suppliers'
network. Low-quality products, poor customer service, capacity constraints
within our suppliers' networks resulting in slow Internet connectivity or
similar inadequacies may harm our brand name, both as a PC vendor and as an
Internet service provider, which would significantly harm our business.

Because we currently depend solely on a single manufacturer for our eTower PCs,
a single manufacturer for our eOne PCs and a limited number of manufacturers
for our monitors, if supply is reduced or discontinued, our business would be
significantly harmed

   TriGem Computer currently manufactures all of our eTower PCs. Korea Data
Systems Co. manufactures our eOne PCs and, together with the Taiwanese
manufacturer Jean Company, all of our monitors. TriGem Computer's PC production
facility in Korea is currently operating at full capacity. In order to meet
anticipated demand for our products and the products of other customers, TriGem
Computer has recently entered into an outsourcing manufacturing agreement with
a facility in Xiamen, China and intends to open an additional facility in
Shenyang, China during the second half of 1999. Building and bringing a new
manufacturing facility up to full production capacity is a lengthy, costly and
difficult process. These facilities may not achieve their scheduled production
levels on a timely basis, or at all. Even if these new facilities do meet
projected production levels, the products manufactured may not meet our high-
quality standards. Additionally, TriGem Computer, Korea Data Systems Co. and
Jean Company provide other vendors with PCs and monitors. As a result, we may
not benefit from any increased production capacity. If we are unable to obtain
a sufficient supply of PCs or monitors to meet the demand for our products, our
business would be significantly harmed.

Our suppliers depend on a limited number of key suppliers for microprocessors
and other components used in our products

   Our suppliers generally use standard parts and components available from a
number of vendors. However, our suppliers are dependent on Intel Corporation
and Advanced Micro Devices, Inc. for their supply of microprocessors. If, in
the future, our suppliers are unable to obtain sufficient quantities of
microprocessors from Intel or Advanced Micro Devices, or if these companies
stop producing microprocessors that meet our needs, our suppliers could
experience increases in component costs or delays in product shipments that
would significantly harm our business. Even where multiple vendors are
available, our suppliers' strategy has been to concentrate purchases from a
single source to obtain favorable pricing. Our business would be significantly
harmed if supply shortages led to price increases or production delays for our
products.

We operate under a number of verbal agreements with our key suppliers and their
subsidiaries, the terms of which may be changed in a manner adverse to us

   We currently operate under a number of verbal agreements with our key
suppliers and their subsidiaries. TriGem Computer provides warranties to us on
PCs sold and provides repair services for returned PCs through its wholly-owned
subsidiary, TriGem America. Korea Data Systems Co. and Jean Company provide us
a warranty for monitors under a verbal agreement as well. Under a verbal
agreement with KDS USA, our inventory trade payable terms are extended out to
90 days with a cash discount on PC purchases proportional to the number of days
we pay early. We also sublease space to TriGem America under our warehouse
lease under a verbal agreement. These verbal agreements are described in more
detail under "Related Party Transactions." Since these agreements are not in
written form, we may not be able to continue to operate our business under
these terms and these terms may be subject to future change. If we are unable
to continue to operate under these verbal agreements or these verbal agreements
are changed in a manner adverse to us, our business would be significantly
harmed.

                                       8
<PAGE>

The international operations of our suppliers of PCs and monitors expose us to
currency, trade, regulatory, political and other risks

   All of our PCs and monitors are currently being manufactured in Korea, China
and Malaysia by TriGem Computer, Korea Data Systems Co. and Jean Company. These
suppliers' operations, and in turn our operating results, are subject to a
number of risks associated with international operations including:

  .  fluctuations in currency values;

  .  export duties, import controls and trade barriers;

  .  restrictions on the transfer of funds;

  .  political and economic instability; and

  .  compliance with foreign laws.

Because we have partnered with America Online, any reduction in the popularity
of its AOL or CompuServe services would significantly harm our business

   The Internet access service industry is highly competitive. To the extent
any particular Internet service provider becomes unpopular with a significant
number of subscribers, that provider's business may be materially harmed.
Pursuant to our agreement with America Online, we offer America Online's AOL
and CompuServe services in connection with our PCs. We are, therefore,
substantially dependent on America Online's ability to maintain AOL and
CompuServe's position as two of the preferred Internet access services. Our
relationship with America Online may not be as successful as we anticipate if
other PC vendors offer similar integrated computing and Internet solutions with
more favorable terms than ours.

   America Online is not prohibited from entering into similar agreements with
other PC vendors or retailers, so long as the terms are no more favorable than
ours. For example, America Online has entered into an agreement with Circuit
City, one of our largest customers, for a limited time to offer consumers a
rebate of up to $400 with the purchase of various PCs. In addition, another
retailer recently announced that it plans to offer its own branded low-price
PCs in connection with Internet access service from America Online. If
consumers use the Circuit City rebate offer in connection with the purchase of
another company's PC, or if consumers find other rebate offers more attractive,
any competitive advantage we may gain from our ISP rebate program would be
significantly harmed.

If we are unable to successfully compete with established Internet service
providers, our business will be significantly harmed

   We plan to enter a new market where we have no previous experience. The
Internet access services market is highly competitive and we expect competition
in this market to intensify in the future. This market is new and subject to
rapid change, including the impact of new technologies, declining prices and
well-funded promotional campaigns. If we begin providing our own branded
Internet access services, we will compete with many large companies that have
substantially greater market presence, and financial, technical, marketing and
other resources than we have. In addition, as consumers begin to access the
Internet through emerging Internet appliances such as the television, we may
face additional competition. Potential competitors include the following:

  .  established online services, such as America Online, Microsoft Network
     and Prodigy Communications Corp.;

  .  local, regional and national Internet service providers, including
     EarthLink Network, Inc. and MindSpring Enterprises, Inc.;

  .  nonprofit or educational institutions providing access to the Internet;

  .  national telecommunications companies, including AT&T Corp., MCI
     WorldCom, Inc. and GTE Corp.;

                                       9
<PAGE>

  .  regional Bell operating companies, including BellSouth and SBC
     Communications, Inc.;

  .  competitive local exchange carriers, including Covad Communications
     Group, Inc. and Rhythms NetConnections, Inc.;

  .  online cable services, including Excite@Home, Time Warner and Road
     Runner;

  .  alternative e-commerce Internet advertising vendors, including Free-PC
     and NetZero Inc.; and

  .  potential new entrants to the Internet access services market such as
     computer hardware vendors, including Compaq Computer Corporation, Dell
     Computer Corporation, Gateway, Inc. and Micron Electronics, Inc. or
     computer retailers, such as Best Buy Co., Inc.

   In addition to America Online, some of our current or future strategic
partners may become our competitors. Our entry into the Internet access
services market may have a negative effect on our relationship with America
Online or our relationships with other parties. Competition is likely to remain
intense as large, diversified telecommunications and media companies acquire
Internet service providers, as Internet service providers and PC vendors merge
and as Internet service providers consolidate. The consolidation of existing
competitors with or into larger entities, or entry of new entities into the
Internet access services market, would likely result in greater competition for
us.

If we do not maintain our reputation and expand our name recognition, we will
not remain competitive and our business will be significantly harmed

   Developing and maintaining awareness of our "eMachines" brand name is
critical to achieving widespread acceptance of our PCs and monitors and our
branded Internet access service. Promotion and enhancement of our brand will
depend largely on our success in providing high quality products and services,
which is uncertain. If our PC buyers do not perceive our products and services
to be of high quality, our brand name and reputation could be significantly
harmed. Furthermore, the importance of brand recognition will increase as
competition in our market increases. The substantial resources of other PC
vendors may enable them to enter the Internet access industry quickly. As a
result, we may have only a limited opportunity to enter, and maintain a
significant market share of, the Internet access services market. If we fail to
successfully promote our brand name or if we incur significant expenses
promoting and maintaining our brand name, our business could be significantly
harmed.

   Our ability to successfully promote and position our brand will depend
largely on the effectiveness of our marketing efforts, our retail customers'
marketing efforts and our ability to develop reliable and desired products at
competitive prices. Therefore, we may need to increase our financial commitment
to create and maintain brand awareness among potential PC buyers. Currently, we
depend exclusively on our retail customers to advertise our PCs. If these
retailers reduce or cease advertising our PCs, we would have to increase our
own sales and marketing expenses and our business would be significantly
harmed.

We are involved in litigation that may be costly and time-consuming

   In July 1999, Compaq Computer Corporation filed a complaint against us,
TriGem Computer, TriGem America and Korea Data Systems Co. as defendants in the
U.S. District Court for the Southern District of Texas based on the defendants'
alleged infringement of 13 patents held by Compaq related to improved system
processing speed, enhanced video graphics, peripheral compatibility and overall
system architecture. The complaint seeks an accounting, treble damages, a
preliminary and permanent injunction from further alleged infringement,
attorneys' fees and other unspecified damages. We are currently in the process
of assessing the complaint. As a result, we are currently unable to estimate
the total expenses, possible loss or range of loss that may be ultimately
connected with these allegations. We cannot assure you that Compaq will not
succeed in obtaining monetary damages or an injunction against the production
of our PC products. Our defense of the claims could result in significant
expenses and diversion of management's attention and other resources. In
addition, we cannot assure you that the results of this litigation would not
result in our business being significantly harmed.

                                       10
<PAGE>

   In August 1999, Apple Computer, Inc. filed a complaint against us as a
defendant in the U.S. District Court for the Northern District of California
based on our alleged unfair and unauthorized use of the design and trade dress
of the iMac computer. The complaint seeks a constructive trust of profits from
sales of our eOne PC, treble damages, a preliminary and permanent injunction
from further distribution of our eOne PC, attorneys' fees and punitive damages.
We are currently in the process of assessing the complaint. As a result, we are
currently unable to estimate the total expenses, possible loss or range of loss
that may be ultimately connected with these allegations. We cannot assure you
that Apple will not succeed in obtaining monetary damages or an injunction
against the production of our eOne PCs. Our defense of the claims could result
in significant expenses and diversion of management's attention and other
resources. In addition, we cannot assure you that the results of this
litigation would not result in our business being significantly harmed.

   Various other lawsuits, claims and proceedings have been or may be asserted
against us, including those related to product liability, intellectual
property, environmental, 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, the outcome of
litigation cannot be predicted with certainty. Some lawsuits, claims or
proceedings may be disposed of unfavorably to us.

Our business as a high technology company may subject us to claims that our
trademarks or other intellectual property, or intellectual property used in our
products, infringes the rights of third parties which could cause us to incur
significant costs

   It is common in the PC industry to receive communications from time to time
from other parties asserting that they possess patent rights, copyrights,
trademark rights or other intellectual property rights which cover our
products. We receive notices from time to time that our technology allegedly
infringes on intellectual property rights held by others. Any assertions of
this nature may make us subject to legal proceedings and claims in the ordinary
course of our business. For example, in July 1999, Compaq filed a lawsuit
against us alleging that our products infringe a number of its patents. In
addition, in August 1999, Apple filed a lawsuit against us alleging that our
eOne product infringed against the design and trade dress of the iMac computer.
For a discussion of these lawsuits, see the immediately preceding risk factor.
If the final judgment of any legal action is decided against us, our business
could be significantly harmed. Intellectual property litigation is expensive
and time consuming regardless of the merits of the claim, and could divert our
management's attention from our business. Any potential intellectual property
litigation could also force us to do one or more of the following:

  .  stop using the challenged intellectual property or selling our products
     or services that incorporate it;

  .  obtain, if possible, a license to use the challenged intellectual
     property or to sell products or services that incorporate it, although a
     license may not be available on reasonable terms, or at all; or

  .  redesign those products or services that are based on or incorporate the
     challenged intellectual property.

   If we are forced to take any of the foregoing actions, we may be unable to
sell our products or services and our business would be significantly harmed.

Misappropriation by others of our trademarks and other proprietary rights could
harm our reputation, affect our competitive position and cause us to incur
significant costs to defend our rights

   We believe our trademarks and other proprietary rights are critical to our
success and competitive position. If we are unable to protect our trademarks
and other proprietary rights against unauthorized use by others, our reputation
and brand name would be damaged and our competitive position would be
significantly harmed. One of our trademarks is registered in the United States.
We seek to limit access to our proprietary information and our third-party
licensors' proprietary information. Nonetheless, we may not be able to deter
misappropriation of our proprietary information and material in light of the
following risks:

  .  nonrecognition or inadequate protection of our proprietary rights in
     certain foreign countries;

                                       11
<PAGE>

  .  undetected misappropriation of our proprietary information or materials;
     and

  .  unenforceability of confidentiality agreements entered into by our
     employees.

Because we depend on licenses of intellectual property from third parties to
produce our products, the loss of any of these licenses would significantly
harm our business

   We are required to obtain licenses from software providers in order to
market and sell our products and services. In particular, we currently pre-
install Windows 98 and Microsoft Works on our PCs pursuant to a license.
However, if we are unable to maintain these licenses, or obtain the necessary
licenses in the future, we may be forced to market products without these
technological features or software. We may also be forced to discontinue sales
of our products which incorporate allegedly protected technology for which we
have no license or defend legal actions taken against us relating to our use of
the allegedly protected technology. Our inability to obtain licenses on
competitive terms necessary to sell our PCs at a profit would significantly
harm our business.

We have no prior experience in providing Internet access services and if we are
unsuccessful, our business will be significantly harmed

   Our future success is partially dependent on the success of our e-
machines.net Internet access service. We intend to begin offering this service
to our PC buyers in the fourth quarter of 1999. However, we may decide to
postpone the introduction of our e-machines.net Internet service or decide to
pursue alternative Internet strategies as a result of changing market
conditions. If introduced, this service will compete directly with America
Online's CompuServe service as well as other Internet access services. We may
not successfully introduce e-machines.net or attract subscribers to this
service. The success of e-machines.net depends on a variety of other factors,
including:

  .  the quality and reliability of our service;

  .  our ability to develop new products and services;

  .  our pricing policies and the pricing policies of our competitors;

  .  our ability to introduce new services before our competitors; and

  .  general economic trends.

If we do not maintain and strengthen our relationships with our retail and
strategic partners, our ability to generate revenues will suffer and our
business will be significantly harmed

   We are substantially dependent on retailers to sell our PCs and monitors.
Since inception, we have derived a significant portion of our gross revenues
from sales to a limited number of large retailers. For the six months ended
June 30, 1999, approximately 70% of our gross revenues were from sales to our
four largest retail customers. We expect to continue to derive a large
percentage of our gross revenues from sales to a limited number of leading
retailers. However, our retail customers are not contractually committed to
future purchases of our products and could discontinue carrying our products at
any time. In addition, we compete with an increasing number of companies for
access to limited shelf space with these retailers. Generally, these retailers
limit the number of PC brands they carry and may stop carrying our PCs at any
time. Any significant disruption of our relationship with any of our major
retailers, or any significant reduction in purchases by them, could
significantly harm our business.

If we are unable to sell Internet access services to our PC buyers, our
business would be significantly harmed

   Our future success depends in part on our ability to sell Internet access
services to our PC buyers. The PC industry and the Internet industry are
currently evolving and converging. We believe that this convergence will

                                       12
<PAGE>

result in the PC becoming the Internet appliance that attracts consumers to
enter into long-term Internet access service contracts. Our business would be
harmed if a significant number of buyers do not also purchase Internet access
service from either America Online or us. In addition, if Internet access
services fees decline significantly or become free, our ISP rebate program will
be unattractive to consumers and our business would be significantly harmed.

If we are unable to monitor and manage our product rebate programs, our
business could be significantly harmed

   We currently offer product rebates to buyers of our PCs. We have limited
historical data to assist us in determining what percentage of consumers will
claim these product rebates. At the same time, we must approximate future
product rebate redemptions in order to price our products effectively. Our
business would be significantly harmed if an unexpectedly large number of our
PC buyers redeemed the product rebates to which they were entitled, thereby
reducing the effective average selling price of our products below the level we
anticipated.

Our business would be significantly harmed if our PC buyers who elect to
receive an ISP rebate and enter into long-term contracts for Internet access
services fail to honor their commitments

   We intend to directly offer an ISP rebate to our PC buyers who subscribe to
our planned e-machines.net for a three year period. In addition, with each new
subscriber, we may pre-pay UUNET, an MCI WorldCom company that provides
Internet infrastructure services, a nonrefundable fee for the Internet services
that we will outsource to UUNET. As prices for Internet access services
decline, subscribers may default and subscribe to a lower-priced service. If
significant numbers of our PC buyers who elect to enter into long-term
contracts for Internet access services fail to honor their contractual
subscription obligations after receiving an ISP rebate, we will lose the amount
of the ISP rebate that we paid and the amount of any prepayment to UUNET that
has not been recovered through monthly subscription fees, and our business
would be significantly harmed. Further, although we intend to establish
reserves in anticipation of a certain number of defaults, we have limited
experience in determining the appropriate amount of these reserves. If our
reserves are inadequate, we may incur unexpected losses.

   In addition, if recurring monthly net revenues are discontinued due to the
default by buyers of our PCs who subscribe to America Online's CompuServe
Internet access service, our business could be significantly harmed. Because we
operate our business on narrow margins, any change in our expected net revenues
from Internet access service monthly payments or e-commerce could adversely
affect our business.

If we extend credit to retailers that do not repay us, or that pay late, we may
have unexpected losses, which would significantly harm our business

   We extend credit to our retail customers, which exposes us to credit risk.
Most of our outstanding accounts receivable are from a limited number of large
retailers. As of June 30, 1999, the five highest outstanding accounts
receivable balances totaled $102.4 million, representing 83% of our gross
accounts receivable, with one customer accounting for $34.8 million,
representing 28% of our gross accounts receivable. In the event that we fail to
monitor and manage effectively the resulting credit risk and a material portion
of our accounts receivable is not paid in a timely manner or becomes
uncollectible, our business would be significantly harmed and we could incur a
significant loss associated with any outstanding accounts receivable.

Technology in the PC industry changes rapidly, therefore, we must continually
introduce new products and services to remain competitive or our business will
be significantly harmed

   We must introduce new PCs with features that address the needs and
preferences of consumers to remain competitive. The PC industry is
characterized by short product life cycles resulting from rapid changes in
technology and consumer preferences and declining product prices. We must
regularly introduce new PCs and services, including new computer configurations
and offerings, to maintain retailer and consumer interest in our

                                       13
<PAGE>

products. These new PCs or services may not be successful. Further, the
successful introduction of new products or services by us or our competitors
may significantly harm the sale of, or gross margins on, our existing products.
We may not be able to adapt to future changes in the PC industry because we do
not maintain a research and development group. Currently, we work closely with
TriGem Computer to evaluate the latest developments in PC-related technology.
In the future, we may not have access to new technology, successfully
incorporate new technology into our products or be able to deliver commercial
quantities of new products or features in a timely and cost-effective manner.
If any of these events occur, our business would suffer.

Products that contain, or are rumored to contain, design defects could result
in significant costs to us or otherwise significantly harm our business

   The design and production of PC components is highly complex and, since we
do not design or produce our own products, we rely on our suppliers and
component manufacturers to provide us with high-quality products. If any of our
products contain defective components, we could experience delays in shipment
of our products and increased costs. If defects are discovered after we have
shipped our affected products in volume, we could be harmed in the following
ways:

  .  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
     significant damage to our brand; and

  .  our PC buyers could file suits against us alleging damages caused by
     defective products.

Because average selling prices of PCs decline rapidly, if we fail to properly
manage our inventory our business could be significantly harmed

   The average selling prices of PCs are subject to rapid declines. To address
the problems created by excess inventory in the face of rapid price decreases,
PC vendors must carefully manage their inventory. Additionally, due to our
narrow margins, we must manage our inventory more efficiently than traditional
PC vendors. From time to time in the past, our inventory has been limited by
the capacity of our manufacturers and may be limited in the future. We may be
unsuccessful in managing the supply of our PCs and monitors to meet demand in
the future. Our business is dependent on our ability to quickly sell our PC
products through the retail channel. We must carefully monitor market demand
for, and supply of, our products in an effort to match supply to consumer
demand. If we overestimate the supply needed to meet consumer demand, our
business could be significantly harmed. If we underestimate needed supply or
otherwise maintain too little inventory, we may not be able to react quickly to
sudden increases in market demand for a given product, which may significantly
harm our business.

   In connection with the introduction of new products, we may be required to
discount prices of existing products or to give other sales incentives to
retailers. As a result, we may experience price protection adjustments to a
significant degree in the future. For example, in the second quarter of 1999,
we offered a significant price protection to certain retailers in connection
with the introduction of our next generation of products. In addition,
retailers generally have the right to return a portion of excess inventory
purchased in the prior quarter within a limited period of time. Increased
inventory levels in our distribution channels, whether due to a decrease in
consumer demand for our products, lower-than-anticipated demand for PCs in
general, problems in managing product transitions or component pricing
movements could significantly harm our profitability. Production delays at the
beginning of a new PC product cycle could affect our sales of newer products
and how we manage the sale of older PC product inventory held by retailers. If
we are unable to sell our aging products at anticipated prices, our business
could suffer. In managing our supply chain, we must accurately forecast
consumer demand for our products. The amount we establish as reserves for price
adjustments in the event we must credit a retail customer for a price decrease
may be insufficient and any future returns or price protection charges may
significantly harm our business.

                                       14
<PAGE>

Increased popularity of non-PC Internet access devices could result in lower
sales of our PCs

   Our future business depends on PCs remaining the predominant Internet access
device. Internet services are currently accessed primarily by PCs. However,
television set-top boxes, hand held products and other non-PC devices may
increasingly be used to access the Internet. Television set-top boxes equipped
with modems and cable modems allow users to transmit data at substantially
faster speeds than the analog modems currently incorporated in our PCs. If
consumers prefer this or any other alternative devices to PCs to access the
Internet, sales of our PCs may slow, we may be unable to attract subscribers to
our Internet access service and our business would be significantly harmed.

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

   We believe a significant number of our PC buyers are purchasing our products
and services as a means of connecting to the Internet. As a result, our future
success is substantially dependent upon continued growth in Internet use. The
adoption of the Internet for commerce and communications generally requires the
understanding and acceptance of a new way of purchasing goods and exchanging
information. The use and acceptance of the Internet may not increase for a
number of other reasons, including the following:

  .  actual or perceived lack of security of information, such as credit card
     numbers;

  .  high cost or lack of availability of access;

  .  congestion of traffic or other usage delays on the Internet;

  .  inconsistent quality of service;

  .  possible outages due to year 2000 difficulties or other damage to the
     Internet;

  .  uncertainty regarding intellectual property ownership; and

  .  government regulation of the Internet.

   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 if the Internet does not become a viable and widespread
commercial and communication medium, our business could be significantly
harmed.

If demand for PCs does not continue to grow, our business will be significantly
harmed

   Our future success is significantly dependent on the continued strong demand
for PCs generally and for low-price PCs in particular. The PC market is
characterized by rapid new product and technology introductions and generally
declining prices for existing products. Demand for PCs might be significantly
reduced if consumers perceive little technological advantage in new PCs or
believe that the price of a new PC is not worth the perceived technical
advantage. Further, if consumers view anticipated changes as significant, such
as the introduction of a new operating system or microprocessor architecture,
overall market demand for PCs may decline because potential consumers may
postpone their purchases until release of the new PCs or in anticipation of
lower prices on existing PCs following the introduction of new models. Reduced
demand could result in excessive inventories that could take several quarters
to correct. If any of these events occur, our business would be significantly
harmed.

Our business would be significantly harmed if we are unable to compete
successfully in the PC industry

   The PC industry is highly competitive and we expect this competition to
increase significantly, particularly in the low-price PC market. We have been
able to gain market share by selling high-quality PCs at prices significantly
lower than those offered by established PC vendors. We expect pricing pressures
in the PC market to continue, particularly as more vendors combine Internet
access with the purchase of a PC. PC vendors may

                                       15
<PAGE>

continue to reduce their prices to compete with us at our low price points.
Large PC vendors such as Compaq, Gateway, Hewlett-Packard and IBM have
significantly greater financial, marketing and technical resources than we do
and may decide to accept lower margins or losses on a sustained basis on their
low-price PC sales to regain market share. The introduction of low-price PCs
combined with brand strength, extensive distribution channels and financial
resources of the larger PC vendors may cause us to lose market share.

   Most major PC vendors have begun to offer Internet access services. Some PC
vendors are trying to increase their sales of higher-price PCs by offering
additional services, such as free Internet access for a limited period of time.
In addition, other PC vendors are adopting programs similar to ours that rebate
a portion of the purchase price of PCs in exchange for entering into long-term
Internet services contracts. There are relatively few barriers preventing
competitors from entering this market. As a result, new market entrants pose a
threat to our business. We do not own any patented technology that precludes or
inhibits competitors from entering the low-price PC market. 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.
For example, a retailer recently announced that it plans to offer its own
branded low-price PCs in connection with Internet access service from America
Online. Our PC and monitor suppliers are not contractually bound to meet our
demand for products and can divert some or all of their output to others,
including our competitors, or sell directly to the retail channel. If any of
these events were to occur, our business would be significantly harmed unless
we were able to successfully compete with these parties and source other low-
cost manufacturers of high-quality PCs and monitors.

If we, our key suppliers or our retailers fail to be ready for the year 2000
calendar change, our business may be disrupted and be significantly harmed

   The year 2000 issue refers to the potential for disruption to business
activities caused by system failures or miscalculations that are triggered by
advancement of date records past the year 1999. Many existing computer programs
use only two digits to identify a year. These programs were designed and
developed without addressing the impact of the upcoming change in the century.
If not corrected, many computer software applications could fail or create
erroneous results by, at or beyond the year 2000. We use software, computer
technology and other services provided by third-party vendors that may fail due
to the year 2000 calendar change. A failure due to year 2000 issues involves
numerous risks including:

  .  potential product warranty or other claims from our consumers;

  .  negative impact on market demand for PCs in general until preparations
     for the calendar change by existing and potential consumers is complete;
     and

  .  manufacturing, information, facility and development systems problems,
     both those that are unique to us and those that affect geographical
     areas, such as Korea, where our business, employees or suppliers reside
     or operate.

   Our PCs may operate in complex network environments, including the Internet,
and may directly or indirectly interact with a number of other hardware
systems, any of which may not be ready for the year 2000 calendar change.
Further, consumers may install software on our PCs that is not ready for the
year 2000 calendar change. We may discover that our PCs contain errors or
defects associated with the year 2000 date functions. We are unable to predict
to what extent our business may be affected if our PCs, the systems that they
operate in conjunction with, including the Internet, or consumers' software
experience material year 2000 problems. Known or unknown errors or defects in
our PCs or that affect our PCs, whether or not originating with our PCs, could
result in delays or losses of net revenues, interruptions of Internet service,
cancellations of subscriptions by our consumers, diversions of our resources,
damage to our brand name or reputation, increased service and warranty costs or
litigation costs. Any of these costs could adversely affect our business. Our
suppliers are currently in the process of assessing their year 2000 readiness.
In the event we or our suppliers are not year 2000 ready, we could experience
product delays. Further, regardless of whether we experience year 2000
problems, consumers may reduce their spending on PCs during the latter part of
1999 in anticipation of

                                       16
<PAGE>

the potential effects of the year 2000, waiting until the beginning of 2000 to
buy a new PC so that they know a particular PC did not suffer problems
associated with the year 2000 calendar change. Any reduction in consumer demand
for our PCs due to year 2000 worries could have a material adverse effect on
our business.

The loss of key personnel or our inability to attract and retain additional
personnel when needed could significantly harm our business

   Our future success will depend, in part, on our ability to attract and
retain key management and personnel. Competition in the PC and Internet access
services industries is high. If we are unable to retain existing personnel and
attract and retain additional personnel, our business could be significantly
harmed. Our success also depends on the skills, experience and performance of
our senior management and other key personnel, many of whom have worked
together for only a short period of time. For example, Steven H. Miller, our
Chief Financial Officer, joined us in June 1999. We will also need to hire
additional personnel with expertise in the Internet access services market. If
we do not quickly and efficiently integrate these and other new executives, our
business could suffer. Our operations are substantially dependent on the
continued services of certain members of senior management, especially our
President and Chief Executive Officer, Stephen A. Dukker. Other than Mr.
Dukker, all of our senior management and other key personnel are at-will
employees. Further, we do not maintain "key man" life insurance with respect to
any of our employees. Loss of any key employees could significantly harm our
business.

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

   Immediately after the offering, our three principal stockholders, TriGem
Corporation, Korea Data Systems America and Stephen A. Dukker, will own
approximately  % of our common stock ( % if the underwriters' over-allotment
option is exercised in full). If these stockholders acted or voted together,
they would have the power to elect our directors and to exercise a controlling
influence over our business and affairs, including:

  .  any determinations over whether to change the source of our supply of
     PCs and monitors;

  .  the appointment of new management;

  .  any determinations with respect to mergers, acquisitions or other
     business combinations;

  .  future issuances of debt and equity securities; and

  .  the approval of any action requiring the consent of the stockholders,
     including amendments to our certificate of incorporation.

   In addition, this concentration of ownership could prevent a change in
control that might otherwise be beneficial to stockholders.

We may have potential conflicts of interest with our principal stockholders
which could be resolved in a manner that is inconsistent with other
stockholders' interests

   Conflicts of interest may arise between us and our principal stockholders in
a number of areas relating to our present and ongoing relationships, which
could be resolved in a manner which is inconsistent with stockholders'
interests. Conflicts of interests which may arise include:

  .  the ongoing indirect supply relationships between us and our principal
     corporate stockholders that may result in terms that may not be as
     favorable to us as arrangements we could negotiate at arm's length
     between unrelated parties;

  .  potential competitive business activities;

  .  potential acquisitions or financing transactions;

  .  sales or other dispositions by these principal stockholders of shares of
     our common stock, including through the exercise of their registration
     rights; and

  .  tax and intellectual property matters.

                                       17
<PAGE>

If we are not able to manage our growth successfully, our business could be
significantly harmed

   Our ability to successfully offer products and services and implement our
business plan in a rapidly changing market requires an effective planning and
management process. Our net revenues increased from $58.3 million for the
period from our inception to December 31, 1998, to $351.3 million for the six
months ended June 30, 1999. We are increasing the scope of our operations, and
we have recently hired a significant number of additional employees. As of June
30, 1999, our total number of employees was 49, of which 26 joined us during
the second quarter of 1999. This growth has placed, and will continue to place,
a significant strain on our management systems, infrastructure and resources.
We will need to continue improving our product distribution systems, financial
and managerial controls, and reporting systems and procedures. We will also
need to continue to expand, train and manage our workforce. We also expect to
manage an increasing number of relationships with various retail customers and
other third parties. If we fail to successfully execute in these areas, our
business could be significantly harmed.

   We operate with a minimal number of employees to maintain a cost effective
business model. As a result, we do not have the ability to assume various
operations in the event that one of our third party suppliers is no longer
available to perform those functions. Further, our executive management team
does not have prior experience in the management and administration of a public
company. If our senior management team does not efficiently and effectively
integrate and gain experience in these duties, our business may be
significantly harmed.

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

   Our current 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. Sales
of a substantial number of shares of our common stock after this offering could
cause our stock price to fall. In addition, the sale of these shares could
impair our ability to raise capital through the sale of additional stock. You
should read "Shares Eligible for Future Sale" for a full discussion of shares
that may be sold in the public market in the future.

Our management has broad discretion over the use of the proceeds from this
offering

   Our management has broad discretion over the use of the proceeds of this
offering. Accordingly, it is possible that our management may allocate the
proceeds differently than investors in this offering would have preferred, or
that we will fail to maximize our return on the proceeds. See "Use of Proceeds"
for a more complete description of our current intention regarding the net
proceeds of this offering.

As a new investor you will experience immediate and substantial dilution

   If you purchase common stock in this offering, you will pay more for your
shares than the amount paid by existing stockholders which acquired shares
before this offering. As a result, the value of your investment based on the
value of our net tangible assets, as recorded on our books, will be less than
the amount you pay for shares of common stock in this offering. In addition,
the total amount of our capital will be less than what it would have been had
all the existing stockholders and optionees paid the same amount per share of
common stock as you will pay in this offering. See "Dilution" for a more
complete description of the dilution of your investment in our common stock
upon the completion of this offering.

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

   Our certificate of incorporation and bylaws are designed to make it
difficult for a third party to acquire control of us, even if a change in
control would be beneficial to stockholders. For example, our amended and
restated certificate of incorporation to be filed upon completion of this
offering, authorizes our board of directors to issue up to 25,000,000 shares of
preferred stock without previously designated rights and privileges. Without
stockholder approval, the board of directors has the authority to attach
special rights, including voting and dividend rights, to this preferred stock.
With these rights, preferred stockholders could make it more difficult for a
third party to acquire our company, including takeover attempts that might
result in a premium over the market price for shares of our common stock.

                                       18
<PAGE>

   Our charter documents will, subject to appropriate corporate action, create
a classified board of directors, eliminate the right of stockholders to call a
special meeting of stockholders, and eliminate the ability of stockholders to
take action by written consent. As a Delaware corporation, we are also subject
to the Delaware anti-takeover statute contained in Section 203 of the Delaware
General Corporation Law. See "Description of Capital Stock--Delaware Anti-
Takeover Law and Certain Charter and Bylaw Provisions" for a more complete
description of Section 203 of the Delaware General Corporation Law. These
provisions could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders.

Our stock price may be volatile

   There has not previously been a public market for our common stock. We
cannot predict the extent to which investor interest in eMachines will lead to
the development of a trading market or how liquid that market might become. The
initial public offering price for our shares will be determined by negotiations
between us and the representatives of the underwriters and may not be
indicative of prices that will prevail in the trading market.

   In addition, the stock markets in general, and The Nasdaq National Stock
Market and technology companies in particular, have experienced extreme price
and volume fluctuations that have often been unrelated or disproportionate to
the operating performance of such companies. The trading prices of many
comparable technology companies' stocks are at or near historical highs. These
trading prices are substantially above historic levels and may not be
sustained. These broad market and industry factors may seriously impact the
market price of our common stock, regardless of our actual operating
performance.

                                       19
<PAGE>

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

   This prospectus contains forward-looking statements that relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"intend," "potential" or "continue" or the negative of such terms or other
comparable terminology. These forward-looking statements include, but are not
limited to, statements about our plans, objectives, expectations and intentions
and other statements contained in the prospectus that are not historical facts.
These statements are only predictions. We cannot guarantee future results,
levels of activity, performance or achievements. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including the risk outlined under "Risk Factors" and
elsewhere in this prospectus.

                                USE OF PROCEEDS

   We estimate that the net proceeds to us from the sale of the     shares of
common stock offered will be approximately $     million (approximately $
million if the underwriters' over-allotment option is exercised in full), at an
assumed initial public offering price of $  per share (less underwriting
discounts and commissions and estimated offering expenses).

   We intend to use the net proceeds from this offering for general corporate
purposes, including working capital and financing our ISP rebate program with
respect to our planned e-machines.net service. In addition, we may use a
portion of the net proceeds to acquire complementary products, technologies or
businesses. We currently have no commitments or agreements and are not involved
in any negotiations with respect to any such transactions. Pending use of the
net proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment-grade securities.

                                DIVIDEND POLICY

   We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future.

                                       20
<PAGE>

                                 CAPITALIZATION

   The following table sets forth our unaudited capitalization as of June 30,
1999 on the following three bases:

  .  on an actual basis;

  .  on a pro forma basis to reflect the sale of 24,279,369 shares of our
     preferred stock in August 1999 (including 5,560,776 not outstanding as
     of the date of this prospectus that are issuable to America Online upon
     regulatory approval) and the automatic conversion of these shares of
     preferred stock upon completion of this offering into 24,279,369 shares
     of common stock and the issuance of 419,538 shares of our common stock
     on August 18, 1999, as consideration for the assignment of our
     trademark; and

  .  on a pro forma as adjusted basis to reflect the sale of        shares of
     common stock in this offering at an assumed initial public offering
     price of $      per share (less underwriting discounts and commissions
     and estimated offering expenses).

   The table excludes the following:

  .  609,200 shares of common stock issuable upon exercise of options
     outstanding as of June 30, 1999 and 2,590,800 additional shares of our
     common stock authorized to be issued under our 1998 stock plan;

  .  227,897 shares of common stock issuable pursuant to an option granted to
     our President and Chief Executive Officer, with an exercise price of
     $1.61 per share; and

  .  shares of common stock issuable to America Online upon exercise of its
     warrants. For information with respect to the America Online warrants,
     see "Related Party Transactions--Relationship With America Online, Inc."

<TABLE>
<CAPTION>
                                                         June 30, 1999
                                                 -------------------------------
                                                                      Pro Forma
                                                 Actual   Pro Forma  As Adjusted
                                                 -------  ---------  -----------
                                                  (in thousands, except share
                                                             data)
<S>                                              <C>      <C>        <C>
Long-term obligations........................... $   560  $    560      $
Redeemable convertible preferred stock, $0.01
 par value: no shares authorized, issued and
 outstanding (actual); 25,000,000 shares
 authorized, no shares issued and outstanding
 (pro forma); no shares authorized, issued and
 outstanding (pro forma as adjusted) ...........     --        --        --

Stockholders' equity:
  Preferred stock, $0.01 par value: 50,000,000
   shares authorized, no shares issued and
   outstanding (actual); 25,000,000 authorized,
   no shares issued or outstanding (pro forma
   and pro forma as adjusted)...................     --        --        --
  Common stock, $0.0000125 par value:
   250,000,000 authorized, 77,600,000 issued and
   outstanding (actual); 102,298,907 issued and
   outstanding (pro forma);     shares issued
   and outstanding (pro forma as adjusted)......       1         1
Additional paid-in capital......................   3,765   150,425
Unearned stock compensation.....................  (1,675)   (1,675)      (  )
Notes receivable from stockholders..............    (500)     (500)      (  )
Accumulated deficit.............................  (6,711)   (6,711)      (  )
                                                 -------  --------      ----
  Total stockholders' equity (deficiency).......  (5,120)  141,540
                                                 -------  --------      ----
    Total capitalization........................ $(4,560) $142,100      $
                                                 =======  ========      ====
</TABLE>

                                       21
<PAGE>

                                    DILUTION

   If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
common stock after this offering. Pro forma net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the pro forma number of shares of common stock outstanding. Dilution
in pro forma net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of common stock in
the offering made hereby and the net tangible book value per share of common
stock immediately after the completion of this offering.

   Our pro forma net tangible book value as of June 30, 1999 was $141,540 or
$1.38 per share of common stock. Pro forma net tangible book value per share
represents the amount of our stockholders' equity divided by 102,298,907 shares
of our common stock (on a pro forma basis to reflect issuance and conversion of
all preferred stock outstanding or issuable upon regulatory approval and
issuance of the 419,538 shares issued as consideration for the assignment of
our trademark). After giving effect to the sale of the     shares of common
stock offered hereby at an assumed public offering price of $    per share
(less underwriting discounts and commissions and estimated offering expenses),
our pro forma as adjusted net tangible book value as of June 30, 1999 would
have been $    or $    per share. This represents an immediate increase in net
tangible book value of $    per share to existing stockholders and an immediate
dilution in net tangible book value of $    per share to new investors of
common stock in this offering, as illustrated in the following table:

<TABLE>
<S>                                                                 <C>   <C>
Assumed initial public offering price per share....................       $
 Pro forma net tangible book value per share as of June 30, 1999... $1.38
 Increase per share attributable to new investors.................. $
                                                                    -----
Pro forma as adjusted net tangible book value per share after this
 offering..........................................................       $
                                                                          ----
Dilution per share to new investors................................       $
                                                                          ====
</TABLE>

   The following table sets forth, as of June 30, 1999, the differences between
the number of shares of common stock purchased from us, the total consideration
paid and the average price per share paid by existing holders of common stock
(on a pro forma basis to reflect issuance and conversion of all preferred stock
outstanding or issuable upon regulatory approval) and by new investors, before
deducting the underwriting discounts and commissions and estimated offering
expenses at an assumed public offering price of $      per share.

<TABLE>
<CAPTION>
                             Shares Purchased   Total Consideration
                            ------------------- ---------------------- Average Price
                              Number    Percent   Amount     Percent     Per Share
                            ----------- ------- ----------- ---------- -------------
                               (in thousands, except share data)
   <S>                      <C>         <C>     <C>         <C>        <C>
   Existing stockholders... 102,298,907       % $   148,600          %     $1.45
   New investors...........                                                $
                            -----------  -----  -----------  --------
     Total.................              100.0% $               100.0%
                            ===========  =====  ===========  ========
</TABLE>

   The foregoing discussion and table assume no exercise of the underwriters'
over-allotment option and any stock options outstanding as of June 30, 1999. As
of June 30, 1999, there were options outstanding to purchase 609,200 shares of
common stock at a weighted average exercise price of $1.56 per share, an option
outstanding to purchase 227,897 shares of common stock granted to our President
and Chief Executive Officer with an exercise price of $1.61 per share and
shares of common stock issuable to America Online upon exercise of its
warrants. For information with respect to the America Online warrants, see
"Related Party Transactions--Relationship with America Online, Inc." To the
extent any of these options or warrants are exercised, there will be further
dilution to investors. See "Capitalization," "Management--Stock Plans,"
"Description of Capital Stock" and Note 5 to Notes to Financial Statements.

                                       22
<PAGE>

                            SELECTED FINANCIAL DATA

   You should read the selected financial data set forth below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our Financial Statements and related Notes included
elsewhere in this prospectus. The financial data and other operating
information as of and for the period from inception to December 31, 1998 are
derived from audited financial statements included elsewhere in this
prospectus. The financial data and other operating information as of and for
the six months ended June 30, 1999 are derived from the unaudited financial
statements included elsewhere in this prospectus. We believe the unaudited
financial statements and other operating information contain all adjustments
necessary to present fairly the information included in those statements, and
that the adjustments consist of only normal recurring adjustments. Historical
results are not necessarily indicative of results that may be expected for any
future period.

<TABLE>
<CAPTION>
                                                   Sept. 18, 1998  Six Months
                                                   (inception) to     Ended
                                                   Dec. 31, 1998  June 30, 1999
                                                   -------------- -------------
                                                                   (unaudited)
                                                   (in thousands, except share
                                                              data)
<S>                                                <C>            <C>
Statements of Operations Data:
 Net revenues.....................................   $   58,283    $  351,313
 Cost of revenues.................................       58,088       338,790
                                                     ----------    ----------
    Gross profit..................................          195        12,523
 Operating expenses:
  Sales and marketing.............................          840         5,517
  Customer service and technical support..........          269         2,522
  General and administrative......................          988         3,293
  Stock-based compensation........................           11           140
                                                     ----------    ----------
    Total operating expenses......................        2,108        11,472
                                                     ----------    ----------
 Income (loss) from operations....................       (1,913)        1,051
 Financing charges and interest expense, net......         (889)       (4,960)
                                                     ----------    ----------
 Net loss.........................................   $   (2,802)   $   (3,909)
                                                     ==========    ==========
 Basic and diluted net loss per share.............   $    (0.04)   $    (0.05)
                                                     ==========    ==========
 Shares used in computing basic and diluted net
  loss per share..................................   77,600,000    77,600,000
                                                     ==========    ==========
<CAPTION>
                                                   Dec. 31, 1998  June 30, 1999
Balance Sheet Data:                                -------------- -------------
<S>                                                <C>            <C>
 Cash.............................................   $    3,791    $   10,911
 Working capital deficiency.......................       (1,311)       (6,502)
 Total assets.....................................       60,011       160,313
 Long-term obligations............................          560           560
 Total stockholders' deficiency...................       (1,351)       (5,120)
</TABLE>

   See Note 1 of Notes to Financial Statements for an explanation of the
determination of the weighted average common and common equivalent shares used
to compute net loss per share.

                                       23
<PAGE>

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   This prospectus contains forward-looking statements the accuracy of which
involves risks and uncertainties. We use words such as "anticipates,"
"believes," "plans," "expects," "future" and "intends" and similar expressions
to identify forward-looking statements. Prospective investors should not place
undue reliance on these forward-looking statements, which apply only as of the
date of this prospectus. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including the
risks we face described in "Risk Factors" and elsewhere in this prospectus.

Overview

   We were incorporated in September 1998 and sold our first PC in November
1998. Our founding stockholders were Stephen A. Dukker, our Chief Executive
Officer, President and a member of our board of directors, and two wholly-owned
U.S. subsidiaries of Korean PC and monitor manufacturers--TriGem Corporation
and Korea Data Systems America. TriGem Computer, the parent corporation of
TriGem Corporation, manufactures all of our eTower PCs. Korea Data Systems Co.
Ltd., the parent corporation of Korea Data Systems America, manufactures our
eOne PCs and, together with the Taiwanese manufacturer Jean Company, all of our
monitors. We source all the PCs and monitors we sell from KDS USA, a company
wholly-owned by Lap Shun Hui, which in turn purchases them from these
manufacturers. Mr. Hui is a member of our board of directors and one of our
stockholders. Initially, we sourced our PCs through KDS USA primarily because
we could not establish our creditworthiness due to our limited operating
history. We may in the future establish direct relationships with TriGem
Computer or other PC or monitor manufacturers.

   We currently derive a significant portion of our gross revenues from sales
to a limited number of large retailers. In the six months ended June 30, 1999,
approximately 70% of our gross revenues were from sales to our four largest
retail customers. We expect to continue to derive a large percentage of our
gross revenues from sales to a limited number of leading retailers.

   We have operated to date only in the United States and Canada and all of our
sales to date have been made in U.S. dollars. In addition, substantially all of
our purchases from our suppliers to date have been made in U.S. dollars. As a
result, changes in currency exchange rates do not generally have a direct
effect on our financial position. However, we do face foreign business,
political and economic risks because our supply of PCs and monitors are
manufactured outside of the United States. In addition, changes in currency
exchange rates may indirectly affect the cost of our PCs and monitors purchased
from our foreign suppliers, thereby indirectly affecting consumer demand for
our products and our net revenues.

   Our gross margins are affected by fluctuations in demand for our products,
the mix of products sold, the timing of new product implementations, new
product introductions by us and our competitors, changes in our pricing
policies and those of our competitors and component costs.

   Substantially all of our product sales and supplier purchases are done on a
purchase order basis, not pursuant to long-term contracts.

   We outsource technical support, warehouse staffing, inspection/repair and
repackaging of returned PCs and administration of our rebate program to third-
parties. Similarly, we plan to outsource the infrastructure, administration and
technical support of our e-machines.net Internet access service. As a result of
this outsourcing, we have a relatively small internal organization that
consisted of 49 employees as of June 30, 1999. This outsourcing strategy
enables us to minimize capital investment, maintain a low-cost structure and
respond quickly to market changes.

PC and Monitor Revenue

   To date, we have derived substantially all of our net revenues from sales of
PCs and monitors. We sell a limited number of PC configurations to our retail
customers. When appropriate, we intend to introduce

                                       24
<PAGE>

enhanced configurations of our eTower PCs and new PC models. Generally, our
lowest-price PC model carries significantly lower gross margins than our other
PC models. We also sell monitors to our retail customers. We do not require
retail customers to buy PCs and monitors as a bundled package. To date, we have
sold substantially more PCs than monitors.

   We recognize revenues from PC and monitor sales at the time products are
shipped to our retail customers. Revenues are recorded net of outbound shipping
costs, returns, price protection and estimated costs for sales incentive
programs. Sales incentive programs consist primarily of cash rebates offered by
us to our PC buyers. In general, we offer a product rebate during a redemption
period which extends for up to thirty days after the PC is purchased. We rely
on historical data to forecast the percentage of our PC buyers who will redeem
their product rebates. If in a given period these redemptions exceed our
expectations, our gross margin and operating results will be adversely
impacted. In addition, we intend to modify from time to time our product rebate
programs in response to changing market conditions. These modifications may
affect the mix of PCs sold, our gross margin and the percentage of rebates
redeemed.

   We also derive limited revenues from the sale of extended service contracts
and technical support provided on an as-needed basis. We offer these services
through Sykes Enterprises, Inc., a third-party customer service provider. Our
PC buyers receive free technical support for 15 days following their initial
support call under our technical support program. After this period, our PC
buyers who require additional support can choose to enter into an extended
service contract or pay on a per incident basis until the problem is resolved.
We recognize revenues from extended service contracts ratably over the contract
period and from technical support calls outside the initial 15 day period of
free support as the services are performed.

Internet Service Revenues

   We have begun to earn and will report Internet service revenues in the third
quarter of 1999. Until we deploy our private label Internet service, which we
anticipate launching in the fourth quarter of 1999, Internet service revenues
will consist of revenues earned under our agreement with America Online. We
will recognize these revenues when reported to us by America Online.

   In June 1999, we entered into a marketing agreement with America Online
under which it will provide rebates to our PC buyers to significantly reduce
the net effective price of our PCs. To obtain an ISP rebate, our PC buyers must
enter into an agreement with America Online to subscribe to America Online's
CompuServe Internet access service over a predetermined period of time at a
stated monthly fee. In addition to the rebate provisions, the marketing
agreement also provides that we will include America Online's software on our
PCs. America Online will pay us recurring revenue or a one-time fee depending
on which service or plan a PC buyer elects.

   In addition, the agreement calls for us to work together with America Online
to design an e-commerce package that will consist of a specially designed
keyboard, desktop icons and America Online services links. Any revenue
generated by the marketing and sale of this package will be shared by America
Online and us. Finally, the agreement provides for the joint development of a
portal on a custom Netscape Netcenter homepage. The Netcenter portal will
include a dedicated area for placement of advertising and links that we can
sell to third parties and an area allowing access to third party content areas
by subscribers to e-machines.net.

                                       25
<PAGE>

Results of Operations

   Because of our limited operating history and the rapidly evolving nature of
our business, year-to-year period comparisons are not available and we believe
that quarter-to-quarter period comparisons are not meaningful and should not be
relied upon as an indication of future performance. The following table
presents our operating results for the period from September 18, 1998
(inception) to December 31, 1998, each of the quarters ended March 31, 1999 and
June 30, 1999 and the six-month period ended June 30, 1999.

<TABLE>
<CAPTION>
                           Period from
                          Sept. 18, 1998    Quarter       Quarter     Six Months
                          (inception) to     Ended         Ended         Ended
                          Dec. 31, 1998  Mar. 31, 1999 June 30, 1999 June 30, 1999
                          -------------- ------------- ------------- -------------
                           (in thousands, except as a percentage of net revenues)
<S>                       <C>            <C>           <C>           <C>
Statements of Operations
 Data:
  Net revenues..........     $58,283       $137,434      $213,879      $351,313
  Cost of revenues......      58,088        131,101       207,689       338,790
                             -------       --------      --------      --------
   Gross profit.........         195          6,333         6,190        12,523
  Operating expenses:
   Sales and marketing..         840          2,719         2,798         5,517
   Customer service and
    technical support...         269            949         1,573         2,522
   General and
    administrative......         988          1,106         2,187         3,293
   Stock-based
    compensation........          11             41            99           140
                             -------       --------      --------      --------
    Total operating
     expenses...........       2,108          4,815         6,657        11,472
                             -------       --------      --------      --------
   Income (loss) from
    operations..........      (1,913)         1,518          (467)        1,051
   Financing charges and
    interest expense,
    net.................        (889)        (2,390)       (2,570)       (4,960)
                             -------       --------      --------      --------
    Net loss............     $(2,802)      $   (872)     $ (3,037)     $ (3,909)
                             =======       ========      ========      ========
As a Percentage of Net
 Revenues:
  Net revenues..........       100.0%         100.0%        100.0%        100.0%
  Cost of revenues......        99.7           95.4          97.1          96.4
                             -------       --------      --------      --------
   Gross profit.........         0.3            4.6           2.9           3.6
  Operating expenses:
   Sales and marketing..         1.4            2.0           1.3           1.6
   Customer service and
    technical support...         0.5            0.7           0.8           0.8
   General and
    administrative......         1.7            0.8           1.0           0.9
   Stock-based
    compensation........         0.0            0.0           0.0           0.0
                             -------       --------      --------      --------
    Total operating
     expenses...........         3.6            3.5           3.1           3.3
                             -------       --------      --------      --------
   Income (loss) from
    operations..........        (3.3)           1.1          (0.2)          0.3
   Financing charges and
    interest expense,
    net.................        (1.5)          (1.7)         (1.2)         (1.4)
                             -------       --------      --------      --------
    Net loss............        (4.8)%         (0.6)%        (1.4)%        (1.1)%
                             =======       ========      ========      ========
</TABLE>

Net Revenues

   Our net revenues increased from $58.2 million for the period from inception
to December 31, 1998 to $137.4 million in the quarter ended March 31, 1999 and
to $213.9 million in the quarter ended June 30, 1999, representing an increase
of 55.6% from the first to second quarters of 1999. These increases were
primarily due to increases in unit shipments at each of the $399, $499 and $599
price points. Net revenue from extended service contracts and technical support
calls during these periods was minimal. In addition, we recognized only

                                       26
<PAGE>

immaterial Internet service revenues from America Online and, therefore, we did
not report Internet service revenues separately. We expect to report Internet
service revenues separately in the future.

Cost of Revenues

   Cost of revenues consists of the cost of PCs and monitors, inbound shipping
costs and inventory valuation reserves. Cost of revenues increased from $58.1
million for the period from inception to December 31, 1998 to $131.1 million,
in the quarter ended March 31, 1999, to $207.7 million, in the quarter ended
June 30, 1999. These increases were primarily due to increases in unit
shipments. The increase in gross margin from 0.3% in the period ended December
31, 1998 to 4.6% in the quarter ended March 31, 1999 was primarily due to
reduced component costs in the first quarter. Gross margin decreased to 2.9% in
the quarter ended June 30, 1999 primarily as a result of price protection given
to certain retail customers and higher redemption rates associated with the
offer of a $75 product rebate during the period versus a $50 product rebate in
the prior quarter. Our historical gross margins may not be indicative of our
future results of operations. For example, we are currently launching a number
of new sales incentives in conjunction with our agreement with America Online,
and in the fourth quarter of 1999 we expect to launch e-machines.net and our
associated ISP rebate and "PC rEnewal" programs. We do not expect to incur
significant costs from the services offered through America Online. However, we
will incur significant costs associated with e-machines.net and our associated
ISP rebate programs. These new programs are expected to affect the level of
demand for different product models, the mix of PCs we sell and the gross
margins that we earn.

Operating Expenses

 Sales and Marketing

   Sales and marketing expenses consist primarily of cooperative advertising
incentives paid to retail customers, net of cooperative advertising credits
earned by us from component suppliers. Sales and marketing expenses also
include payroll expenses for sales and marketing personnel. Sales and marketing
expenses have increased from approximately $840,000 for the period from
inception to December 31, 1998 to $2.7 million in the quarter ended March 31,
1999 and $2.8 million in the quarter ended June 30, 1999. These increases were
primarily due to increased commission expenses and cooperative advertising
costs associated with increased sales volumes. As a percentage of net revenues,
sales and marketing costs decreased from 2.0% in the quarter ended March 31,
1999 to 1.3% in the quarter ended June 30, 1999. This decrease is a result of a
one-time increase in cooperative advertising credits earned from component
suppliers which reduced our cooperative advertising costs. We are able to
maintain a small sales and marketing staff by selling product primarily to a
limited number of large retailers. Marketing and advertising programs
undertaken by these retailers also help establish the "eMachines" brand
nationwide without requiring us to spend significant amounts on radio,
television and print advertisements. Our sales and marketing expenses in
absolute dollars will increase as sales increase and to the extent we increase
the number of our sales representatives, a possibility we are currently
evaluating.

 Customer Service and Technical Support

   Customer service and technical support expenses consist primarily of the
cost of technical support provided for us by Sykes. In addition, we anticipate
that when we launch e-machines.net, Sykes will provide technical support to our
subscribers. For either of these services, Sykes charges on a per minute basis
for each support call they receive. We expect customer service and technical
support expenses to increase to the extent our sales volumes increase or we
successfully introduce e-machines.net. Customer service and technical support
expenses were approximately $949,000 in the quarter ended March 31, 1999 and
$1.6 million in the quarter ended June 30, 1999.

 General and Administrative

   General and administrative expenses consist primarily of payroll and related
expenses for management and administrative personnel, outsourced warehousing
activities, facilities expenses, professional service fees, travel

                                       27
<PAGE>

and other general corporate expenses. General and administrative expenses were
approximately $988,000 or 1.7% of net revenues for the period from inception to
December 31, 1998, $1.1 million, or 0.8% of net revenues, in the quarter ended
March 31, 1999 and $2.2 million, or 1.0% of net revenues, in the quarter ended
June 30, 1999. We anticipate that general and administrative expenses will
increase in absolute dollars primarily due to increased expenses associated
with the addition of personnel and additional professional fees, including
costs associated with being a public company. We anticipate that general and
administrative expenses may increase in future periods as a result of
litigation costs associated with the recent lawsuits filed against us by Compaq
and Apple. For a discussion of these lawsuits, see "Business--Legal
Proceedings."

 Stock-based Compensation

   Stock based compensation arises when an option to purchase stock, with an
exercise price less than the fair value of the underlying stock, is granted to
an employee. The amount of compensation is measured as the spread between the
exercise price and the fair value of the underlying stock. Stock-based
compensation is considered earned, and we recognize the related expense, as the
options vest. From inception to June 30, 1999, we recognized approximately
$151,000 of stock-based compensation. As of June 30, 1999, $1.7 million was
unearned and will be amortized according to the vesting schedules of the
relevant options.

Financing Charges and Interest Expense, Net

   Financing charges and interest expense, net consists primarily of interest
on trade payables. Finance charges and interest expense, net were approximately
$889,000 or 1.5% of net revenues for the period from inception to December 31,
1998, $2.4 million, or 1.7% of net revenues, in the quarter ended March 31,
1999 and $2.6 million, or 1.2% of net revenues, in the quarter ended June 30,
1999. These increases in absolute dollars were primarily due to increases in
trade payable financing associated with inventory purchases, resulting from
higher sales volumes in each succeeding period, partially offset by a decrease
in the effective annual interest rate from 12% to 10% as of March 31, 1999.

Liquidity and Capital Resources

   Since inception we have financed operations by extended payment terms on
trade payables, issuance of common stock and issuance of subordinated notes
payable to stockholders. As of June 30, 1999, we had $10.9 million in cash.
Trade payable terms with respect to inventory purchases are extended out to 90
days with a discount on PC purchases proportional to the number of days that we
pay early. The effective annual interest rate as of June 30, 1999 was 10%. As
of June 30, 1999 these trade payables were $134.4 million. Issuance of common
stock through June 30, 1999, yielded net cash proceeds of $1.4 million. On
December 18, 1998, we received cash proceeds of $560,000 pursuant to long-term
subordinated notes payable to stockholders, which bear interest at 5.79% and
mature on June 7, 2004.

   The private placement of 18,718,593 shares of our Series A preferred stock
on August 18, 1999 provided us with proceeds of approximately $119.5 million. A
portion of the proceeds from the issuance of our Series A preferred stock was
used to reduce trade payables. Upon regulatory approval, we will issue an
additional 5,560,776 shares of Series A preferred stock to America Online,
which will provide us with additional proceeds of approximately $35.5 million.

   Net cash provided by operating activities was $2.3 million in the period
from inception to December 31, 1998, $1.3 million in the quarter ended March
31, 1999 and $7.3 million in the quarter ended June 30, 1999. Cash provided by
operating activities for these periods consisted primarily of increases in
trade payables. Cash used in operating activities for these periods consisted
primarily of increases in accounts receivable and inventories.

   Net cash used in investing activities was approximately $550,000 in the
period from inception to December 31, 1998, approximately $662,000 in the
quarter ended March 31, 1999 and approximately $863,000

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in the quarter ended June 30, 1999. Net cash used in investing activities for
these periods consisted primarily of purchases of property and equipment.

   Net cash provided by financing activities was $2.0 million in the period
from inception to December 31, 1998. Net cash provided by financing activities
consisted of proceeds from the issuance of common stock and subordinated notes
payable to stockholders.

   We currently anticipate that the net proceeds of this offering, together
with our available funds as of June 30, 1999, and the proceeds from the
issuance of Series A preferred stock, will be sufficient to meet our
anticipated needs for at least the next 12 months. If additional funds are
required, financing may not be available on acceptable terms, if at all, and
may be dilutive to our stockholders.

Year 2000 Issues

   Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We sell PCs that rely on date information and use software, computer
technology and other services provided by third-party vendors that may fail due
to the year 2000 calendar change.

 Risks

   The failure of any of our third-party suppliers, including TriGem Computer,
Korea Data Systems Co., KDS USA and Jean Company, to be year 2000 compliant
could materially adversely affect our business. The failure of our own PCs to
be year 2000 compliant could damage our brand name and result in warranty
claims, costly litigation or unexpected costs incurred in connection with
correcting errors or defects in our PCs. A failure of the Internet
infrastructure to be year 2000 ready may adversely affect our Internet related
businesses, including our planned e-machines.net service and the service
provided to our consumers by America Online.

 State of Readiness

   We recognize the importance of year 2000 readiness for our PCs. We are
following the guidelines of National Software Testing Laboratories', or NSTL,
Year 2000 Hardware Compliance Program, an open industry standard to verify
proper date handling by PCs during the year 2000 calendar change. We have used
the software provided by NSTL to self-test our currently offered eTower and
eOne models, and have determined that they are year 2000 compliant. Pursuant to
these guidelines, several of our earlier models, including our eTower 333id and
366i models, have been certified year 2000 compliant by NSTL.

   We are currently assessing the year 2000 readiness of our third-party
supplied software and other services, which includes software bundled with our
PCs as well as for use in our accounting, database and other internal systems.
Much of this third-party supplied software and other services, including
Microsoft Windows98, Microsoft Works, AOL, CompuServe, and the services
supplied by Sykes, are certified year 2000 compliant by the companies that make
them. We have not assessed the year 2000 readiness of the internal information
technology systems of any of our manufacturers or suppliers.

   Our ability to assess the reliability of the Internet infrastructure is
limited and we are relying solely on generally available news reports, surveys
and comparable industry data.

 Costs of Compliance

   To date, the amount spent on year 2000 preparations has been immaterial. We
do not expect to make any material expenditures related to year 2000 compliance
issues in the future.

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 Contingency Plan

   We do not currently have a contingency plan to address any unanticipated
occurrence of year 2000 errors in our products or problems with our internal
information technology systems, a failure of our third-party suppliers products
or information systems to be year 2000 compliant or a serious disruption in the
general infrastructure of the Internet, and have no current plan to make one.

Quantitative and Qualitative Discussion of Market Risk

   We currently have no floating rate indebtedness, hold no derivative
instruments and do not earn significant foreign sourced income. Accordingly,
changes in interest rates or currency exchange rates do not generally have a
direct effect on our financial position. In addition, we have operated only in
the United States and Canada and all purchases and sales to date have been made
in U.S. dollars. As a result, we have not had any material exposure to foreign
currency rate fluctuations. Changes in currency exchange rates, however, may
affect the cost of our PCs 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.

   We intend to implement an investment policy, the primary objective of which
would be to preserve principal while at the same time maximizing the 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. In general, money market funds are not subject to
market risk because the interest paid on such funds fluctuates with the
prevailing interest rate. As of June 30, 1999, all of our cash was on deposit
with our bank.

Quarterly Fluctuations

   We have a limited operating history upon which you can base an evaluation of
our business and prospects. Our prospects must be considered in light of the
risks, expenses, and difficulties encountered by companies in their early stage
of development. It is likely that in some future quarter our operating results
may fall below the expectations of securities analysts and investors. In this
event, the trading price of our common stock may fall significantly. See "Risk
Factors" for a more complete description of the risks we face. We believe that
the factors influencing quarterly variability include the following:

  .  the overall growth in the computer industry;

  .  shifts in short-term demand for our products resulting, in part, from
     the introduction of new products or updates of existing products;

  .  the intensity of price competition among us and our competitors as
     influenced by various factors;

  .  the fact that virtually all sales in a given quarter result from orders
     booked in that quarter; and

  .  the popularity of, and seasonal or other fluctuations in demand for,
     Internet services generally and e-machines.net in particular.

   Traditionally, computer sales in the fourth quarter are historically higher
than in the previous three quarters. We believe that this pattern of higher
fourth quarter sales is partially due to customer buying patterns relating to
calendar year-end business and holiday purchases. This pattern could be
adversely affected in 1999 due to consumer concern of the year 2000 issues
shifting demand for PCs into the following year.

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<PAGE>

Effects of Recent Accounting Pronouncements

   In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which requires an enterprise to report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources, and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. We had no
comprehensive income items to report for the period from September 18, 1998
(inception) to December 31, 1998 and the six months ended June 30, 1999. We
currently operate one reportable segment under SFAS No. 131. Adoption of these
statements at our inception did not impact our financial position, results of
operations or cash flows.

   In June 1998, SFAS No 133 "Accounting for Derivative Instruments and Hedging
Activities" was released. The statement requires the recognition of all
derivatives as either assets or liabilities in the balance sheet and the
measurement of those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the planned use of the derivative and
the resulting designation. We are required to implement the statement in the
first quarter of fiscal 2001. We have not used derivative instruments and
believe the impact of adoption of this statement will not have a significant
effect on the financial statements.

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                                    BUSINESS

Overview

   We are a leading provider of low-price, high-quality branded personal
computers, or PCs. Since our first shipment in November 1998, we have sold over
one million PCs. We sold the third highest number of PCs through retailers in
the United States in June 1999 according to Ziff Davis Market Intelligence. We
also offer an integrated computing and Internet access solution, currently
through our relationship with America Online, and we plan to launch
e-machines.net, our private label Internet access service, in the fourth
quarter of 1999.

   A growing number of consumers are seeking to gain access to the Internet for
the first time. As a result, many of these first-time Internet users are also
purchasing their first PC. In addition, consumers across a range of income
levels are seeking to upgrade their existing PC or add a second or third PC to
their homes. We support these trends by consistently providing high-quality PCs
and monitors at low prices through nationally-recognized retailers including
Best Buy, Circuit City, Costco, Fry's Electronics, MicroCenter, Office Depot,
QVC, Sears and Staples. Our integrated computing and Internet access solution
enables these consumers to purchase a PC with a net effective price of as low
as $0 and gain access to the Internet.

Industry Background

   The explosion in popularity of the Internet has transformed the home PC from
a stand-alone system used to process discrete tasks into the predominant means
of accessing the Internet. International Data Corporation, or IDC, estimates
that there were approximately 159 million worldwide users of the Internet at
the end of 1998 and that the number of users will grow to approximately 510
million by the end of 2003. According to IDC, PCs accounted for approximately
94% of the access devices connected to the Internet in the United States for
1998. We believe that this is because the PC is ideally suited for the
Internet. PCs offer a media-rich Internet experience on an architecture
sufficiently flexible to run most applications and accommodate frequently
changing Internet technologies, such as streaming video, MP3 audio files and
browser technologies. After their initial manufacture, dedicated Internet
appliances cannot easily be adapted to accommodate the evolving technologies
utilized by the Internet. In addition, many of the most popular PC software
applications, such as those used for personal finance, games and education, are
enhanced when combined with access to the Internet. Over the past two decades,
continuous technological advancements in, and improved manufacturing
efficiencies of, key PC components, such as microprocessors and storage
devices, have significantly improved PC functionality while dramatically
lowering PC prices. This in turn has expanded the market for potential PC
buyers and Internet subscribers.

   In recent years, however, the growth rate of PC household penetration had
slowed. According to the U.S. Bureau of the Census, household PC penetration in
1990 was approximately 15%. While the PC penetration level grew to 37% by 1996,
this level only grew to 43% by April 1998, according to a January 1999 report
by Inteco Corporation. In addition, since July 1997 first-time buyers still
spent an average of $1,880, while replacement buyers spent a slightly lower
average of $1,830, according to a May 1998 Inteco Corporation report. We
believe this price point inhibited penetration of households with annual
incomes below $50,000. Based on IDC's U.S. Household Survey, approximately
84.3% of U.S. households that did not own a PC had annual incomes below
$50,000.

   We believe that the introduction of the sub-$600 PC started a change in PC
buyers' behavior. According to Ziff Davis Market Intelligence, sales of sub-
$600 PCs increased as a percentage of the total retail market from 0.7% in
September 1998 to 28.2% in June 1999. At the sub-$600 price point, we believe
that consumers increasingly view the PC as a household appliance, like a VCR or
television set, which is renewing growth in household PC penetration. Moreover,
we believe the introduction of the sub-$600 PC has attracted consumers seeking
to add a second or third PC in their home. According to IDC, the number of U.S.
households with more than one PC will increase from approximately 15.6 million
in 1998 to approximately 22.9 million in 2002. We believe that computer buying
decisions are increasingly based on price, brand identity and ease of use and
that this will continue to increase the market share of sub-$600 PCs.

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<PAGE>

   Despite the slowing growth rate of household PC penetration, the demand for
Internet access continues to increase. According to IDC, net revenues generated
by providing consumer Internet access in the United States will grow from $4.7
billion in 1998 to $7.6 billion in 2000. However, Internet users increasingly
view Internet access as a commodity product, resulting in frequent changes in
providers. According to IDC, the industry average churn rate experienced by
consumer Internet service providers in the United States is approximately 4%
per month. In response to these trends, Internet service providers have
invested significantly in advertising and marketing programs to differentiate
their services and establish brand loyalty which has led to higher operating
costs.

   To address these trends, both traditional PC vendors and Internet service
providers are exploring new solutions. Some vendors of high-price PCs have
started to offer free Internet access for limited periods to increase the
volume of PCs they sell. Internet service providers have recently initiated
programs that combine Internet access services with the purchase of a PC, which
allow PC buyers to minimize the effective purchase price of a PC.

   Traditional PC vendors and Internet service providers seeking to provide
these new solutions face significant challenges. We believe that traditional PC
vendors may have limited revenue opportunities from bundling Internet access
services with their PCs. Typically, these high-price PCs are sold to
experienced consumers with existing Internet relationships. We believe these
consumers are less likely to make purchasing decisions based on the bundling of
Internet access services. In addition, traditional PC vendors are limited by
high fixed costs, high distribution and marketing costs and shrinking gross
margins resulting from rapidly declining prices and obsolete inventory.
Moreover, a change in their traditional sales model to very low-price PCs would
reduce sales of their existing product lines and further accelerate the decline
in average selling prices. In addition, traditional Internet access service
providers are not able to offer independently a combined computing and Internet
access solution. Therefore, they are dependent upon the PC manufacturers for
the supply of PCs and the growth in PC sales. Further, Internet service
providers cannot partner with retailers to tailor content and pre-install
features on PCs.

The eMachines Solution

   We provide an integrated computing and Internet access solution that enables
consumers to cost effectively purchase a PC and gain access to the Internet. We
sell low-price, high-quality PCs through leading retailers and currently offer
Internet access through our strategic relationship with America Online. To
expand our integrated solution, we intend to launch e-machines.net, our private
label Internet access service, in the fourth quarter of 1999.

   Our widely-available, integrated computing and Internet access solution is
designed to attract first-time PC buyers that do not have an existing
relationship with an Internet service provider. Our solution is also designed
to appeal to buyers seeking to upgrade their existing PC or add an additional
PC to their household. As a result of our ISP rebate programs, we believe that
many first-time buyers may be willing to enter into a long-term Internet access
service contract in order to purchase a PC at a net effective price as low as
$0. We intend to launch two associated programs concurrently with our planned
e-machines.net service. Our PC buyers may elect to receive an ISP rebate from
us at the time of the purchase of their PC if they enter into a long-term
Internet access service contract. Alternatively, our PC buyers may elect to
subscribe to our e-machines.net service on a month-to-month basis. Month-to-
month subscribers to e-machines.net who remain enrolled for 24 consecutive
months will qualify for our planned "PC rEnewal" program. This program will be
designed to enable these subscribers to upgrade the configuration of their
eTower PC for a low fee.

   We believe the following elements of our operating model allow us to cost
effectively offer our PCs and integrated computing and Internet access
solution:

  . Low PC Manufacturing and Operating Costs. We maintain fixed costs,
    capital expenditures and manufacturing and operating costs significantly
    below the industry average by outsourcing most of our major operating and
    manufacturing functions. This includes outsourcing system assembly,
    warehouse labor, distribution, research and development, product design,
    warranty and customer support to leading suppliers such as TriGem
    Computer, Korea Data Systems Co. and Sykes.

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<PAGE>

  . Low Distribution, Marketing and Administration Costs. We also maintain
    low distribution, marketing and administration costs by distributing and
    advertising our products and services primarily through a limited number
    of large retailers. For the six months ended June 30, 1999, approximately
    70% of our gross revenues were from sales to our four largest retail
    customers. This enables us to significantly lower sales, marketing and
    administration expenses, and eliminate costs associated with the
    logistical support of a large customer base. Our retail strategy also
    allows us to increase awareness of the "eMachines" brand by leveraging
    our retail customers' marketing programs. In addition, we plan to offer
    our e-machines.net service to our PC buyers, thereby providing a cost-
    effective means of promoting our Internet access service.

  . High Inventory Turns. We believe that we have been successful in
    achieving higher inventory turnover than the industry average through
    product management and outsourcing manufacturing. Higher inventory
    turnover helps mitigate the risk of having to reduce product prices
    because of product obsolescence and generally lowers inventory costs and
    associated working capital needs.

The eMachines Strategy

   We intend to continue to increase PC sales while developing significant
Internet related recurring revenue streams by leveraging our strong position in
the consumer market and key retail relationships. Our strategy includes the
following core elements:

 Increase Penetration of the Consumer Market by Providing a Low-Price, High-
 Quality Integrated Computing and Internet Access Solution

   We intend to increase our market share and our penetration into non-PC
households by continuing to offer a low-price, high-quality integrated
computing and Internet access solution. Our ISP rebate programs are designed to
reduce the net effective price of our PCs to the consumer to as low as $0 when
a PC buyer subscribes to a long-term Internet service contract. Currently, we
offer this ISP rebate through our relationship with America Online, and, in the
future, we plan to directly offer our own ISP rebate in combination with our
e-machines.net Internet access service. Through our "PC rEnewal" program we
will offer subscribers to e-machines.net who did not receive an ISP rebate the
opportunity to upgrade the configuration of their eTower for a low fee after 24
continuous months of e-machines.net service. We believe that these programs
will increase consumer purchases of our PCs, increase Internet-related
recurring revenue opportunities through our relationship with America Online,
expand our e-machines.net subscriber base and improve the retention of both e-
machines.net and America Online's CompuServe subscribers.

 Establish Brand Recognition by Leveraging the Retail Channel

   We believe that by distributing our products through retailers, we can
rapidly increase awareness of our brand, thereby cost-effectively reaching
millions of potential PC buyers and Internet access subscribers. We will
continue to sell our products through leading retailers to benefit from their
marketing campaigns that feature our products nationwide in television, radio,
newspaper, magazine and catalog advertisements. The retail channel also enables
us to effectively target first-time PC buyers that do not typically have
established relationships with Internet service providers.

 Strengthen Strategic Relationships with Leading Retailers

   We intend to continue to strengthen our strategic relationships with leading
retailers, including Best Buy, Circuit City, Office Depot and Staples, to
capture and retain prime shelf space. We believe we are an attractive partner
to leading retailers because our low-price, high-quality PCs and integrated
computing and Internet access solution drive high sales volumes which provide
significant profit opportunities to retailers. We believe our relationships
with these retailers enable us to quickly introduce updated systems
configurations, new products and merchandising programs on a national basis.
For example, we were one of the first to establish a widely-available rebate-
based pricing format for an integrated sale of PCs and Internet access services
through the retail channel. In addition, we believe our low-price, high-quality
PCs and integrated computing and Internet access solution draws large numbers
of potential consumers of software, PC peripherals and other products into
retail stores.

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<PAGE>

 Leverage Outsourced, Low-Cost Business Model

   We intend to utilize our low-cost infrastructure to profitably sell
increasingly powerful PC models at low prices, thus meeting the needs of the
evolving PC market. We maintain low manufacturing and operating costs by
outsourcing most of our major operating and manufacturing functions including
system assembly, warehouse labor, distribution, research and development,
product design, warranty and customer support to established industry
providers. We intend to leverage the experience of established third parties,
such as UUNET for the provision of Internet access and Sykes for customer
service and technical support. By outsourcing directly to these third parties,
we reduce the cost of providing these services. Further, we intend to maintain
low distribution, sales, marketing and administrative costs by continuing to
distribute and advertise our products and services primarily through a limited
number of large retailers.

 Enhance Internet-Related Recurring Revenue Generating Opportunities

   We intend to aggressively pursue recurring revenue generating opportunities,
including Internet service payments, e-commerce, web-based advertising and
other related revenues. For example, as part of our marketing agreement with
America Online, we have structured a number of revenue sharing arrangements.
America Online will pay us recurring revenue or a one-time fee depending on
which service or plan a PC buyer elects. In addition, the agreement calls for
us to work together with America Online to design an e-commerce package that
will consist of a specially designed keyboard, desktop icons and America Online
services links. Any revenue generated by the marketing and sale of this package
will be shared by America Online and us. Also under this marketing agreement,
Netscape's Netcenter web page will be the default home page for subscribers to
e-machines.net. In return for the deployment of the Netcenter home page to our
e-machines.net subscriber base, America Online has agreed to share a portion of
e-commerce and advertising revenues derived from traffic driven to the
Netcenter portal by subscribers to e-machines.net.

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PC and Monitor Products

   Our retail customers offer our eTower PCs at static prices of $399, $499 and
$599 to consumers, which prices reflect redemption by the consumer of our
regularly offered product rebate. Each PC comes with software including Windows
98, Microsoft Works, Netscape Navigator and other utilities, and is Internet
ready. We update our configurations of eTower models when appropriate to
accommodate the introduction of new components and sub-systems that we believe
our PC buyers will find attractive. In August 1999, we introduced the eOne PC,
an integrated single piece PC and monitor based on Windows-Intel architecture.
We also offer monitors ranging in size from 14 to 17 inches. The following
table sets forth our most recently released product configurations and the
manufacturers' suggested retail prices after product and ISP rebates.









                              [CHART APPEARS HERE]

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Internet Access Services

 America Online

   In June 1999, we entered into a marketing agreement with America Online
under which it will provide rebates to our PC buyers to significantly reduce
the net effective price of our PCs. To obtain an ISP rebate, our PC buyers must
enter into an agreement with America Online to subscribe to America Online's
CompuServe Internet access service over a predetermined period of time at a
stated monthly fee. In addition to the rebate provisions, the marketing
agreement also provides that we will include America Online's software on our
PCs. America Online will pay us recurring revenue or a one-time fee depending
on which service or plan a PC buyer elects.

   In addition, the agreement calls for us to work together with America Online
to design an e-commerce package that will consist of a specially designed
keyboard, desktop icons and America Online services links. Any revenue
generated by the marketing and sale of this package will be shared by America
Online and us. Finally, the agreement provides for the joint development of a
portal on a custom Netscape Netcenter homepage. The Netcenter portal will
include a dedicated area for placement of advertising and links that we can
sell to third parties and an area allowing access to third party content areas
by subscribers to e-machines.net.

 e-machines.net

   We intend to become a leading Internet access provider by offering e-
machines.net, our planned private label Internet access service, to our PC
buyers. We believe that we will be able to successfully market our services to
first-time buyers, because they are less likely to have established
relationships with an Internet service provider. In addition, we believe our
ISP rebate on PC purchases and our "PC rEnewal" programs will be attractive to
consumers. These programs will significantly reduce the cost of PC ownership
and PC replacement while providing our PC buyers with Internet access.

   We have also entered into an Internet service provider agreement with UUNET
to cost effectively provide our program on a nationwide basis. UUNET has built
a network infrastructure that we believe will accommodate our e-machines.net
subscribers. Outsourcing this service with UUNET eliminates our need to make
significant up-front capital expenditures to build an independent network.
Under the UUNET agreement, we will offer a basic service package with an option
to upgrade to a premium service package. UUNET will bill subscribers monthly a
predetermined price set by us based on the level of service. UUNET will then
pay us the difference between our cost and the price charged subscribers for
the service.

   We have, as part of our planned e-machines.net service, developed a set of
on-screen instructions to provide our PC buyers with a user-friendly and
intuitive guide to facilitate the process of subscribing to e-machines.net.
These instructions will appear in the first screen to be displayed to our PC
buyers when they first turn the PC on, even before the Windows operating system
has completed its initial boot-up process. We believe that the appearance of
these instructions early in the registration process will help us attract a
significant number of subscribers to our e-machines.net service.

   For those buyers who do become e-machines.net subscribers, our planned
Netscape Netcenter portal will become the primary point of access to the
Internet. This will allow us to not only provide an easy point of subscriber
access to third-party content providers, but also to direct subscribers to
advertising displayed on dedicated advertising space on the portal. We expect
to benefit from e-commerce and advertising net revenues associated with this
program.

 Customer Service and Technical Support

   In order to maintain low costs, we outsource all technical support related
to our PCs and our Internet service to Sykes, a leading supplier of technical
support outsourcing services. We offer technical support services free for 15
days after the first call from our PC buyer seeking assistance. We believe that
buyers of our PCs require the most assistance during the first two weeks after
they begin using their PC. Following that period, PC buyers who require
additional support can choose to enter into an extended service contract or pay
for technical support on a per incident basis until the problem is resolved.

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Manufacturing

   We currently outsource manufacturing of all of our PCs and monitors. TriGem
Computer manufactures all of our eTower PCs. Korea Data Systems Co.
manufactures our eOne PCs and, together with the Taiwanese manufacturer Jean
Company, all of our monitors. TriGem Computer and Korea Data Systems Co. are
ISO 9001 certified and Jean Company is ISO 9002 certified. We have no
obligation to order, take minimum delivery or purchase at a pre-negotiated
price from TriGem Computer, Korea Data Systems Co. or Jean Company.
Additionally, TriGem Computer, Korea Data Systems Co. and Jean Company have no
contractual obligation to supply us with PCs and monitors. TriGem Computer has
supplied PCs to Epson, Hewlett-Packard Company, Nokia Corp., Olivetti S.p.A.
and Sharp. Korea Data Systems Co. has supplied monitors to original equipment
manufacturers, distributors and retailers including Best Buy, Compaq, CompUSA,
IBM, Ingram Micro Inc. and Tech Data Corporation.

   TriGem Computer recently entered into an outsourcing manufacturing agreement
with a facility in Xiamen, China and intends to open an additional facility in
Shenyang, China during the second half of 1999. The Xiamen facility is expected
to produce 100,000 PC units per month initially, increasing to 200,000 PC units
per month in the fourth quarter of 1999. The Shenyang facility is a final-
assembly plant expected to complete production of 200,000 PC units each month.
This facility may not commence operations when planned, and we may not benefit
from the increased capacity from either of these facilities.

   TriGem America, a wholly-owned subsidiary of TriGem Computer, provides
inspection, repair and repackaging services for PCs returned to us. We are
assessed a per unit service charge for the testing and repackaging of returned
PCs determined to be non-defective. If the PC is defective and repair service
is required, we receive a partial credit of the purchase price that we paid for
the PC. The TriGem Computer warranty is effective for 14 months from the date
the PC is shipped to us. Additionally, Korea Data Systems Co. and Jean Company
have agreed to warranty monitors sold to us for 18 and 36 months respectively.
We offer a 12 month warranty covering defects in materials or workmanship on
every PC and monitor we sell.

Sales and Marketing

   Our sales and marketing strategy is focused on selling our products and
services through leading retailers. In recent years, retailers attracted fewer
PC buyers as a result of the availability of custom configured systems from
direct vendors. We believe that the introduction of sub-$600 PCs has increased
the number of first-time PC buyers, many of whom viewed high prices as a
barrier to PC ownership. Since first-time buyers are less likely to want or
need custom configurations and less likely to already have Internet access, the
introduction of the sub-$600 PC has also enabled retail stores to re-emerge as
a viable method of selling PCs by increasing the number of first-time PC
buyers. Our strategy of selling primarily through leading retailers has enabled
us to leverage their sales and marketing efforts. As a result, we have been
able to establish our brand while maintaining a relatively small sales and
marketing organization. As of June 30, 1999, our sales and marketing
organization consisted of a total of 8 employees. Our sales and marketing staff
is located at our headquarters in Irvine, California.

Competition

   The markets for our PCs and Internet services are highly competitive and
rapidly evolving. For sales of PCs to consumers, we compete principally against
traditional PC vendors, including Compaq, Dell, Gateway, Hewlett-Packard, IBM
and others. In addition, we compete or may compete with low-price PC vendors,
such as Free-PC, Future Power, Gobi and Microworkz. For the provision of
Internet access and services, we will compete with a variety of entities
including online services, traditional Internet service providers, cable
companies and telecommunications providers. In addition, we compete or may
compete with a limited number of PC vendors that have begun offering Internet
access services in combination with their PCs.

   The PC industry is highly competitive and we expect this competition to
increase significantly. We expect pricing pressures in the PC market to
continue, particularly as a result of the introduction of a variety of

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<PAGE>

product rebate programs that include Internet access with the purchase of a PC.
Additionally, traditional PC vendors may reduce their prices to compete with us
at our price points or offer additional services. There are relatively few
barriers preventing our competitors from capitalizing on the convergence of the
PC and Internet markets. As a result, new integrated computing and Internet
services offerings pose a threat to our business.

   The Internet access services market is also highly competitive and we expect
competition in this market to intensify in the future. This market is new and
subject to rapid change, including the introduction of new technologies, price
declines and well-funded promotional campaigns. As we begin providing our
e-machines.net Internet service, we will compete with many large companies that
have substantially greater market presence, financial, technical, marketing and
other resources than we have. Potential competitors include the following:

  .  established online services, such as America Online, Microsoft Network
     and Prodigy;

  .  local, regional and national Internet service providers, including
     EarthLink and MindSpring;

  .  nonprofit or educational institutions providing Internet service;

  .  national telecommunications companies, including AT&T, MCI WorldCom and
     GTE;

  .  regional Bell operating companies, including BellSouth and SBC
     Communications;

  .  competitive local exchange carriers, including Covad Communications and
     Rhythms NetConnections;

  .  online cable services, including Excite@Home, Time Warner and Road
     Runner;

  .  alternative e-commerce Internet advertising vendors, including Free-PC
     and NetZero; and

  .  potential new entrants to the Internet services market such as computer
     hardware vendors, including Compaq, Dell, Gateway and Micron Electronics
     or computer retailers, such as Best Buy.

   The consolidation of existing competitors, new entrants to the PC and
Internet service markets or alliances between PC vendors and Internet service
providers may result in greater competition for us. In addition to America
Online, some of our current or future strategic partners may become our
competitors. Our entry into the Internet services market may have a negative
effect on our relationship with America Online or our relationships with other
partners. Competition is likely to remain intense as large, diversified
telecommunications and media companies acquire Internet service providers, as
Internet service providers and PC vendors merge and as Internet service
providers consolidate.

Customers

   We currently sell our products to leading retailers, catalog and on-line
merchandisers in the United States and Canada. Our customer list includes the
following:

   America Online             Future Shop                Office Depot
   Best Buy                   Insight                    Outpost.com
   BrandsMart                 Nexcom                     QVC
   Circuit City               J&R Computer World         Sears
   Costco                     MicroCenter                Staples
   Creative Computers         MicroWarehouse             TigerDirect
   Fry's Electronics          Nationwide                 Value America
                           Electronics

   For the six months ended June 30, 1999, approximately 70% of our gross
revenues were from sales to our four largest retail customers. Sales to Office
Depot represented 25% of our gross revenues for the six month period ended
June 30, 1999. Further, sales to Best Buy, Circuit City and MicroCenter each
represented more than 10% of our gross revenues for the six month period ended
June 30, 1999. Since our first shipment in November 1998 through December 31,
1998, sales to Best Buy, MicroCenter and Office Depot each represented more
than 10% of our gross revenues. This concentration of sales allows us to
maintain a low-cost infrastructure while establishing preferred vendor status
with large leading retailers. We intend to continue to sell the majority of our
products to a limited number of large retailers for the foreseeable future.

                                       39
<PAGE>

Facilities

   Our principal administrative, marketing and distribution facilities are
located in Irvine, California. We lease approximately 147,000 square feet at
this facility pursuant to a lease that expires in 2004, unless terminated
earlier or extended as described below. Under the terms of the lease, we make
monthly payments of approximately $84,000, increasing to approximately $97,000
over the term of the lease. We have an option to extend the term of the lease
for an additional 60-month period. Of the total facility, pursuant to a verbal
agreement, we sublease approximately 48,000 square feet to TriGem America for
monthly payments of approximately $27,000, increasing to approximately $32,000
over the term of the sublease. TriGem America uses this space to refurbish our
returned PCs.

Legal Proceedings

   In July 1999, Compaq Computer Corporation filed a complaint against us,
TriGem Computer, TriGem America and Korea Data Systems as defendants in the
U.S. District Court for the Southern District of Texas based on the defendants'
alleged infringement of 13 patents held by Compaq related to improved system
processing speed, enhanced video graphics, peripheral compatability and overall
system architecture. The complaint seeks an accounting, treble damages, a
preliminary and permanent injunction from further alleged infringement,
attorneys' fees and other unspecified damages. We are currently in the process
of assessing the complaint. As a result, we are currently unable to estimate
the total expenses, possible loss or range of loss that may be ultimately
connected with these allegations. We cannot assure you that Compaq will not
succeed in obtaining monetary damages or an injunction against the production
of our PC products. Our defense of the claims could result in significant
expenses and diversion of management's attention and other resources. In
addition, we cannot assure you that the results of this litigation would not
result in our business being significantly harmed.

   In August 1999, Apple Computer, Inc. filed a complaint against us as a
defendant in the U.S. District Court for the Northern District of California
based on our alleged unfair and unauthorized use of the design and trade dress
of the iMac computer. The complaint seeks a constructive trust of profits from
sales of our eOne PC, treble damages, a preliminary and permanent injunction
from further distribution of our eOne PC, attorneys' fees and punitive damages.
We are currently in the process of assessing the complaint. As a result, we are
currently unable to estimate the total expenses, possible loss or range of loss
that may be ultimately connected with these allegations. We cannot assure you
that Apple will not succeed in obtaining monetary damages or an injunction
against the production of eOne PC products. Our defense of the claims could
result in significant expenses and diversion of management's attention and
other resources. In addition, we cannot assure you that the results of this
litigation would not result in our business being significantly harmed.

   It is common in the PC manufacturing industry for patent, trademark and
other intellectual property claims to be asserted against companies. We receive
notices from time to time that our technology allegedly infringes on
intellectual property rights held by others. As a result, we may be required to
defend legal actions relating to allegedly protected technology. Various other
lawsuits, claims and proceedings have been or may be asserted against us,
including those related to product liability, intellectual property,
environmental, safety and health and employment matters. Litigation is
expensive and time consuming regardless of the merit of the claim and could
divert management's attention from our business. Moreover, the outcome of
litigation cannot be predicted with certainty. Some lawsuits, claims or
proceedings may be disposed of unfavorably to us.

Employees

   We operate with a minimal number of employees, significantly reducing our
fixed cost base. As of June 30, 1999, we employed 49 people, including 8 in
sales and marketing, 21 in operations and 20 in finance and accounting. None of
our employees are represented by a labor union, and we have no collective
bargaining agreements. We consider our relations with our employees to be good.

                                       40
<PAGE>

                                   MANAGEMENT

Executive Officers and Directors

   The following table sets forth information with respect to our executive
officers and directors as of August 18, 1999.

<TABLE>
<CAPTION>
   Name                  Age                       Position
   ----                  ---                       --------
<S>                      <C> <C>
Stephen A. Dukker.......  46 President, Chief Executive Officer and Director

Steven H. Miller........  43 Vice President, Chief Financial Officer and Secretary

James L. Mertz..........  36 Vice President, Operations

Hong Soon Lee...........  39 Chairman of the Board

Chul Chung..............  39 Director

Lap Shun Hui............  43 Director

Jung Koh................  46 Director

Nathan Morton (1)(2)....  50 Director

C. Toms Newby, III           Director
 (1)(2).................  32
</TABLE>
---------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.

   Stephen A. Dukker has served as our President, Chief Executive Officer and a
member of our board of directors since founding us in September 1998. From
October 1997 through August 1998, Mr. Dukker was Senior Vice President of
Merchandising and Operations of Computer City. Prior to that, Mr. Dukker was
President of OPTi, a manufacturer of PC multimedia and core logic
semiconductors, from January 1995 through September 1997. From May 1994 through
October 1994, Mr. Dukker was President of Videologic, Inc. Mr. Dukker currently
serves on the board of directors of OPTi and Digital Persona. Mr. Dukker
attended the University of Chicago.

   Steven H. Miller has served as our Vice President, Chief Financial Officer
and Secretary since June 1999. Mr. Miller was employed by Ingram Micro, Inc.
from May 1992 through May 1999, most recently as Vice President and Controller.
Mr. Miller is a CPA and received a B.A. in Economics from the University of
California, Santa Barbara.

   James L. Mertz has served as our Vice President of Operations since
September 1998. From August 1997 through September 1998, Mr. Mertz was Director
of Build-to-Order and Private Label programs for Computer City. Previously, Mr.
Mertz had served in various positions, including as a regional manager and a
general manager, at Comp USA from October 1989 through August 1997.

   Hong Soon Lee has been Chairman of our board of directors since September
1998. Mr. Lee is currently President, Chief Executive Officer and a member of
the board of directors of TriGem Computer and has served in various positions
at TriGem Computer since June 1994. In addition, Mr. Lee has been a director of
TriGem Corporation since July 1997. Mr. Lee received a B.S. from Korea
University and a M.S. in Engineering from the Florida Institute of Technology.

   Chul Chung has been a member of our board of directors since September 1998.
Mr. Chung also serves as Executive Vice President of Worldwide Operations for
TriGem Computer, a position he has held since August 1997. From March 1989
through September 1997, Mr. Chung was President and Chief Executive Officer of
Human Computer, a subsidiary of TriGem Computer. Mr. Chung received a B.S. from
Seoul National University, and both a M.S. and Ph.D. from the Korea Advanced
Institute of Science & Technology.

                                       41
<PAGE>

   Lap Shun Hui has been a member of our board of directors since September
1998. Mr. Hui is currently President and a member of the board of directors of
KDS USA, a position he has held since June 1995. From January 1993 through June
1995, Mr. Hui was Chief Executive Officer of Orchestra Multisystems, a company
that was acquired by KDS USA. Mr. Hui received a B.S. in Business from the
State University of New York at Buffalo and a M.B.A. from McMaster University,
Ontario, Canada.

   Jung Koh has been a member of our board of directors since our formation in
September 1998. Mr. Koh also serves as Vice Chairman of Korea Data Systems Co.,
a position he has held since 1983. In addition, Mr. Koh has been a member of
the board of directors of Du Go since 1983. Mr. Koh received a B.A. from Rhode
Island College.

   Nathan Morton has been a member of our board of directors since August 1999.
Mr. Morton is currently Chairman of both Buildnet, Inc. and Handtech.com,
positions he has held since November 1998. In addition, Mr. Morton currently
serves as Chairman of Starpower and as Senior Partner of Channel Marketing.
From July 1997 through September 1998, Mr. Morton was Co-Chairman and Chief
Executive Officer of Computer City. Prior to that, Mr. Morton served as
President and Chief Executive Officer of Open Environment from March 1994
through February 1996. Mr. Morton has a B.A. from State University of New York
at Buffalo.

   C. Toms Newby, III has been a member of our board of directors since August
1999. Mr. Newby is currently a General Partner at Technology Crossover
Ventures, a position he has held since April 1996, and a member of the board of
directors of Emerald Solutions, Inc. From 1994 through April 1996, Mr. Newby
was an associate at Montgomery Securities in the Corporate Finance Technology
Group. Mr. Newby received a B.S. from the University of North Carolina and a
M.B.A. from Stanford University.

Board of Directors

   We currently have authorized seven directors. Our amended and restated
certificate of incorporation filed in connection with this offering provides
that the terms of office of the members of the board of directors will be
divided into three classes: Class I, whose term will expire at the annual
meeting of stockholders to be held in 2000, Class II, whose term will expire at
the annual meeting of stockholders to be held in 2001, and Class III, whose
term will expire at the annual meeting of stockholders to be held in 2002. At
each annual meeting of stockholders after the initial classification, the
successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. Any additional directorships resulting from an increase in
the number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of the total number of
directors. This classification of our board of directors may have the effect of
delaying or preventing changes in our control or management.

 Committees

   Our board of directors has an audit committee and a compensation committee.
The audit committee consists of Messrs. Morton and Newby. The audit committee
reviews our internal accounting procedures and consults with and reviews the
services provided by our independent accountants. The compensation committee
consists of Messrs. Morton and Newby. The compensation committee reviews the
compensation and benefits of our employees and directors and makes
recommendations to our board of directors.

 Compensation

   Directors do not receive cash compensation from us for the services they
provide as directors, although non-employee directors are reimbursed for
expenses incurred in connection with attending board and committee meetings.

                                       42
<PAGE>

 Compensation Committee Interlocks and Insider Participation

   Prior to August 1999, our board of directors did not maintain a standing
compensation committee, and the entire board participated in all decisions
regarding compensation of our executive officers. In August 1999, the board
formed the compensation committee and appointed Messrs. Morton and Newby as
committee members. None of the members of the compensation committee is
currently or has ever been at any time since our formation, one of our officers
or employees. No member of the compensation committee serves as a member of the
board of directors or compensation committee of any entity that has one or more
officers serving as a member of our board of directors or compensation
committee.

Executive Officers

   Executive officers are appointed by our board of directors and serve until
their successors are qualified and appointed. There are no family relationships
among any of our directors or executive officers.

 Compensation

   The following table sets forth the compensation earned by our Chief
Executive Officer during the year ended December 31, 1998. None of our other
executive officers earned more than $100,000 during the year ended December 31,
1998.

<TABLE>
<CAPTION>
                                                           Annual Compensation
                                                           --------------------
      Name and Principal Positions                          Salary     Bonus
      ----------------------------                         --------------------
      <S>                                                  <C>       <C>
      Stephen A. Dukker................................... $  96,923 $  126,000
       President and Chief Executive Officer
</TABLE>

 Option Grants in Last Fiscal Year

   Our Chief Executive Officer, the only one of our executive officers named in
the compensation table above, received no option grants in the year ended
December 31, 1998.

Employment Agreements

   In June 1999, we entered into an employment agreement with Stephen A.
Dukker, our President and Chief Executive Officer, which agreement was amended
and restated in August 1999. The agreement provides for an annual base salary
of $300,000 with a variable bonus. For the period from September 18, 1998
through June 30, 1999, the bonus was equal to $1 for each central processor
unit shipped during the period. For the period July 1, 1999 through November
30, 1999, Mr. Dukker's bonus is a fully vested option to purchase 227,897
shares of our common stock at an exercise price of $1.61 per share. The
agreement provides that if we terminate Mr. Dukker's employment without cause,
if Mr. Dukker voluntarily terminates his employment after he is relocated, if
his duties or benefits are materially reduced, or if his employment terminates
because of death or disability, we must continue to pay his base salary and
bonus through the term of the agreement which ends in September 2001.

Limitations on Directors' and Officers' Liability and Indemnification

   Our certificate of incorporation limits the liability of our directors to
the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability associated
with any of the following:

  .  any breach of their duty of loyalty to the corporation or its
     stockholders;

  .  acts or omissions not in good faith or which involve intentional
     misconduct or a knowing violation of law;

                                       43
<PAGE>

  .  unlawful payments of dividends or unlawful stock repurchases or
     redemption; or

  .  any transaction from which the director derived an improper personal
     benefit.

   The limitation of a director's liability does not apply to liabilities
arising under the federal securities laws and does not affect the availability
of equitable remedies such as injunctive relief or rescission.

   Our certificate of incorporation and bylaws also provide that we shall
indemnify our directors and executive officers and may indemnify our other
officers and employees and other agents to the fullest extent permitted by law.
We believe that indemnification under our bylaws covers at least negligence and
gross negligence on the part of indemnified parties. Our bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether our bylaws would permit indemnification.

   We have entered into indemnification agreements with each of our directors
and intend to enter into indemnification agreements with each of our officers.
The indemnification agreements contain or will contain, as applicable,
provisions that require us to, among other things, indemnify our officers and
directors against liabilities that may arise by reason of their status or
service as directors or officers (other than liabilities arising from willful
misconduct of a culpable nature), to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified,
and to cover our directors and officers under any of our liability insurance
policies applicable to our directors and officers. We believe that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and executive officers.

Stock Plans

 1998 Stock Plan

   Our 1998 stock plan was approved by our board of directors in September
1998. We have reserved a total of 3,200,000 shares of our common stock for
issuance under the plan. The plan provides for the granting to our employees of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and for the granting to employees, including
officers and directors, nonemployee directors and consultants of nonstatutory
stock options and stock purchase rights. Unless terminated sooner, this plan
will terminate automatically in 2008.

   Our 1998 stock plan is administered by our board of directors and, thus, the
board determines the terms of the options or stock purchase rights granted,
including the exercise price, the number of shares subject to each option or
stock purchase right, the vesting and the form of consideration payable upon
such exercise. In addition, the board has the authority to amend, suspend or
terminate the plan, provided that no such action may affect any share of common
stock previously issued and sold or any option previously granted and then
outstanding under the plan.

   Options and stock purchase rights granted under our 1998 stock plan are not
generally transferable by the optionee, and each option and stock purchase
right is exercisable during the lifetime of the optionee only by the optionee.
Options granted under the plan must generally be exercised within three months
of the end of optionee's status as our employee or consultant, or within twelve
months after his or her termination by death or disability, but in no event
later than the expiration of the option's ten year term. In the case of stock
purchase rights, unless the board determines otherwise, the agreement
evidencing the grant shall provide that we have a repurchase option exercisable
upon the voluntary or involuntary termination of his or her employment for any
reason (including death or disability). In this event, the purchase price per
share will be equal to the original price and may be paid by cancellation of
his or her outstanding indebtedness to us, if any. Our repurchase option shall
lapse at a rate determined by the board. The exercise price of any incentive
stock options granted under this plan and any nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, must be at least equal to the fair market

                                       44
<PAGE>

value of our common stock on the date of grant. With respect to any participant
who owns stock possessing more than 10% of the voting power of all classes of
our outstanding capital stock, the exercise price of any incentive stock option
granted must equal at least 110% of the fair market value on the grant date and
the term of such incentive stock option must not exceed five years. The term of
all other options granted under the plan may not exceed ten years.

   Our 1998 stock plan provides that in the event of our merger with or into
another corporation, a sale of substantially all of our assets, each option or
right shall be assumed or an equivalent option or right substituted by the
successor corporation. If the outstanding options or rights are not assumed or
substituted, our board shall provide for the optionee to have the right to
exercise the option or stock purchase right as to all of the optioned stock,
including shares as to which it would not otherwise be exercisable for a period
of 15 days from the date of such notice, and the option or stock purchase right
will terminate upon the expiration of such period.

                                       45
<PAGE>

                           RELATED PARTY TRANSACTIONS

Relationship with TriGem Computer, TriGem Corporation, TriGem America, Korea
Data Systems Co., Korea Data Systems America and KDS USA

   TriGem Computer, a Korean company, is the parent company of TriGem
Corporation, a California corporation. Prior to this offering TriGem
Corporation owned 28.5% of our outstanding common stock after giving effect to
the conversion of all preferred stock outstanding or issuable upon regulatory
approval. Hong Soon Lee, Chairman of our board of directors and one of our
stockholders, is also the President, Chief Executive Officer and a member of
the board of directors of TriGem Computer and a director of TriGem Corporation.
Chul Chung, a member of our board of directors and one of our stockholders is
also Executive Vice President of Worldwide Operations for TriGem Computer.

   Korea Data Systems Co., a Korean company, is the parent company of Korea
Data Systems America. Prior to this offering Korea Data Systems America owned
28.2% of our outstanding common stock after giving effect to the conversion all
outstanding Series A preferred stock. Jung Koh, a member of our board of
directors and one of our stockholders also serves as Vice Chairman of Korea
Data Systems Co.

   We have entered into a number of agreements, both written and verbal, with
TriGem Computer, TriGem Corporation, TriGem America, Korea Data Systems Co.,
Korea Data Systems America and KDS USA. These agreements are described below.

 Trademark Assignment

   Under an agreement entered into on June 10, 1999 and amended on August 16,
1999, Korea Data Systems America transferred to us the trademark "E-MACHINES"
for 419,538 shares of our common stock, which we issued to it on August 18,
1999. We agreed to license back to Korea Data Systems America use of the
trademark solely in the Republic of Korea.

 Lease

   We lease approximately 147,000 square feet of office and warehouse space
located at 14350 Myford Road, Irvine, California from the Irvine Company under
a written lease entered into on November 30, 1998. Our monthly rent is
approximately $84,000 subject to annual increases that will increase our rent
in the fifth year of the lease to approximately $97,000. The lease terminates
in 2004, subject to our right to extend the term. Our performance under the
lease is guaranteed by Korea Data Systems America. Pursuant to a verbal
agreement, we sublease approximately 48,000 square feet of this space to TriGem
America, a subsidiary of TriGem Computer, for a monthly rental of approximately
$27,000 increasing to approximately $32,000 over the term of the sublease.

 Subordinated Notes

   In connection with our initial capitalization, we issued a subordinate note
payable to TriGem Corporation in the amount of $270,000 and a subordinated note
payable to Korea Data Systems America in the amount of $290,000. See
"Capitalization Agreements" for a description of our initial capitalization.
The subordinated notes bear interest at 5.79% and are due on June 7, 2004. The
subordinated notes may be prepaid without penalty at our option.

 Supply of PCs and Monitors

   We currently source all of our PCs and monitors that we sell from KDS USA, a
company that is wholly-owned by Lap Shun Hui, a member of our board of
directors and one of our stockholders. All of the these eTower PCs in turn are
manufactured by TriGem Computer, the eOne PC is manufactured by Korea Data
Systems Co. and all of our monitors are manufactured by Korea Data Systems Co.
and by Jean Company, Ltd., an unaffiliated third party. KDS USA orders PCs for
us through TriGem America, a wholly-owned subsidiary of TriGem Computer. We
have no obligation to order, take minimum delivery or purchase at pre-
negotiated prices from KDS USA, TriGem Computer or Korea Data Systems Co.
Additionally, TriGem Computer and Korea Data Systems Co. have no contractual
obligation to supply us with PCs and monitors.

                                       46
<PAGE>

 Inventory Purchases and Extended Payment Terms

   During the period from inception until December 31, 1998, we purchased an
aggregate of approximately $71 million in PCs and monitors from TriGem
Corporation and KDS USA. Pursuant to a verbal agreement with TriGem Corporation
and Korea Data Systems Co., we financed our inventory purchases by extending
payment of our accounts payable up to 90 days. Under a verbal agreement between
us, TriGem Corporation, Korea Data Systems Co. and KDS USA, we transferred
approximately $58 million of our accounts payable obligations as of December
31, 1998 to KDS USA. Pursuant to a verbal agreement with KDS USA, trade
payables are subject to payment terms that allow us 90 days to pay and that
provide a discount on PC payables proportional to the number of days that we
pay early. The effective interest rate as of June 30, 1999 was a 10% annual
rate. During the six month period ended June 30, 1999, we purchased an
aggregate of $352.8 million in PCs and monitors from KDS USA. As of June 30,
1999, approximately $134.4 million in payables were outstanding to KDS USA. In
connection with these inventory purchases, approximately $888,000 of finance
charges was incurred for the period ended December 31, 1998, and $5 million of
finance charges were incurred for the period ended June 30, 1999.

 Warranties and PC Repair Service

   Under a verbal agreement, TriGem Computer provides warranties to us on PCs
sold for 14 months from shipment and provides PC repair services for PCs
returned to us by our retail customers or PC buyers through its wholly-owned
subsidiary TriGem America. We are assessed a $15 per unit service charge for
the testing and repackaging of PC returns determined to be nondefective. If a
PC is defective, we receive a credit of 15% of the purchase price of the PC
from KDS USA.

   Under verbal agreements, Korea Data Systems Co. warrants its monitors for 18
months and Jean Company warrants its monitors for 36 months (parts and labor
included).

 Cooperative Advertising Costs

   For the period from inception until December 31, 1998, TriGem Computer
agreed to credit us $363,000 for cooperative advertising credits from component
suppliers. In July 1999, this amount was offset against amounts due to KDS USA.

 Freight Costs

   For the period from inception until December 31, 1998, TriGem Computer
agreed to credit us $173,000 in freight costs for products shipped to us from
TriGem Computer. In July 1999, this amount was offset against amounts due to
KDS USA.

                                       47
<PAGE>

Capitalization Agreements

   On June 10, 1999, pursuant to agreements reached in September 1998, we
issued an aggregate of 77,600,000 shares of our common stock at a price per
share of $0.03. Among the purchasers of our common stock were the following
officers, directors and stockholders of more than 5% of our outstanding shares,
and their immediate family members:

<TABLE>
<CAPTION>
                                                                       Aggregate
                                                            Number of  Purchase
  Stockholder                                                 Shares     Price
  -----------                                               ---------- ---------
<S>                                                         <C>        <C>
TriGem Corporation......................................... 29,200,000 $730,000


Korea Data Systems America................................. 28,400,000  710,000


Stephen A. Dukker..........................................  8,000,000  200,000


Chul Chung.................................................  2,400,000   60,000


Jung Koh...................................................  2,400,000   60,000


Hong Soon Lee..............................................  2,400,000   60,000


Hong Sun Lee...............................................  1,600,000   40,000


Lap Shun Hui...............................................  1,600,000   40,000


Dae Soo Koh................................................  1,600,000   40,000
</TABLE>

   Hong Sun Lee is Hong Soon Lee's brother and Dae Soo Koh is Jung Koh's
brother. Both Hong Sun Lee and Dae Soo Koh were members of our board of
directors until August 1999 when they resigned in connection with the Series A
preferred stock financing.

   Messrs. Dukker, Chung, Hui, Jung Koh, Dae Soo Koh, Hong Soon Lee and Hong
Sun Lee paid for their shares with full recourse promissory notes. Each of the
notes matures in June 2004 and bears interest until maturity at 5.79% per year.
Each note is secured with the shares issued to each purchaser.

   On June 10, 1999, we also entered into a Shareholders Agreement with the
above purchasers of our common stock. This agreement superseded an earlier
agreement that had been entered into solely by two of our principal
stockholders, TriGem Corporation and Korea Data Systems America, on April 1,
1999. The Shareholders Agreement terminated upon the closing of the sale of our
Series A preferred stock in August 1999. When it was in effect, this Agreement
provided for board review of significant business decisions, a voting agreement
as to election of directors and a buy-sell agreement among TriGem Corporation
and Korea Data Systems America. When it was in effect, it also provided for
limited preferential supply arrangements with TriGem Computer and Korea Data
Systems Co.

Series A Preferred Stock Financing

   On August 18, 1999, we sold an aggregate of 24,279,369 shares of our Series
A preferred stock (including 5,560,776 shares issuable upon regulatory
approval) at a price per share of $6.38.

   America Online, a stockholder of more than 5% of our outstanding shares
prior to this offering, purchased 7,832,079 shares (including 5,560,776 shares
issuable to America Online upon regulatory approval) for an aggregate price of
$50.0 million. C. Toms Newby, III, one of our directors, is a managing member
of Technology Crossover Management III, L.L.C., the general partner of TCV III
(GP), TCV III, L.P., TCV III (Q), L.P. and TCV III Strategic Partners. Entities
affiliated with Technology Crossover Management III, L.L.C. purchased 3,602,757
shares for an aggregate price of approximately $23.0 million.

   In connection with the sale of our Series A preferred stock, we also entered
into an Amended and Restated Rights and Restrictions Agreement with the
purchasers of our preferred stock and all holders of our common stock. This
agreement superseded a Rights and Restrictions Agreement entered into on June
10, 1999 with

                                       48
<PAGE>

certain purchasers of our common stock. The Amended and Restated Rights and
Restrictions Agreement includes the following key terms:

  .  Demand Registration: At any time after six months following this
     offering, the holders of at least 50% of the shares of common stock
     issuable upon conversion of our Series A preferred stock can request
     that we register all or a portion of their shares, so long as the total
     offering price of the shares to the public is at least $15,000,000. We
     will be required to file only one registration statement in response to
     their demand registration rights. We may postpone the filing of a
     registration statement for up to 120 days once in a 12 month period if
     we determine that the filing would not be in the best interests of us
     and our stockholders.

  .  Piggy-back Registration: If we register any securities for public sale,
     the holders of the shares of common stock and common stock issuable upon
     conversion of our Series A preferred stock will have the right to
     include their shares in the registration statement. However, this right
     does not apply to a registration statement relating to any of our
     employee benefit plans or a corporate reorganization. These registration
     rights expire three years after this offering is completed.

  .  Form S-3 Registration: The holders not less than an aggregate of 25% of
     the shares of common stock and the common stock issuable upon conversion
     of our Series A preferred stock can request that we register their
     shares if we are eligible to file a registration statement on Form S-3
     and if the total price of the shares offered to the public is at least
     $2,500,000. These holders may only require us to file two registration
     statements on Form S-3 in any 12 month period and only three
     registration statements in all. We may postpone the filing of a
     registration statement for up to 120 days once in a 12 month period if
     we determine that the filing would be seriously detrimental to us and
     our stockholders.

  .  Standoff: For 180 days after completion of this offering, or 90 days
     after a subsequent offering of our shares, a holder may not transfer
     shares without our consent or our underwriters' consent. This
     restriction is subject to our executive officers agreeing to the same
     restrictions and is to remain in effect for two years from the date of
     this offering.

  .  Right of First Refusal: Before a holder may sell shares of our stock to
     a third party, the holder is required to notify us of the sale and the
     terms. We then have the right to purchase some or all of the shares on
     terms equal to or better than the terms offered to the third party.

  .  Maintenance Right: Before selling additional shares of our stock, we are
     obligated to notify our stockholders of the proposed sale and the terms.
     Each stockholder then has the right to purchase, on the same terms,
     shares sufficient to maintain its existing ownership percentage.

  .  Voting Arrangements: The stockholders agreed regarding how shares are
     voted in electing the board of directors and the terms and conditions
     under which the composition may be altered.

   Holders of Series A preferred stock have the right, subject to applicable
legal or regulatory limitations, to purchase shares in the initial public
offering up to an aggregate amount of $10 million. Each holder has the right to
elect to purchase a pro-rata share of an amount of shares equal to $10,000,000
divided by the per share public offering price of this offering. A holder's
pro-rata share is determined by dividing its shares of Series A preferred stock
by the total amount of outstanding Series A preferred stock. Within five days
after the date of the preliminary prospectus with respect to the initial public
offering, we are required to send to holders a copy of the prospectus and a
notice with respect to their right to purchase their pro-rata share. Holders
that wish to purchase their pro-rata portion of shares will be required to
respond to us within the time period specified in the notice.

   Upon completion of this offering, all outstanding shares of our preferred
stock will be automatically converted into 24,279,369 shares (including the
5,560,776 shares of preferred stock issuable to America Online

                                       49
<PAGE>

upon regulatory approval) of our common stock. The holders of our Series A
preferred stock have registration rights with respect to the common stock
issuable upon the conversion of the preferred stock as described above, and
those rights are subject to the standoff provision. The right of first refusal,
maintenance right and voting arrangement provisions of the Amended and Restated
Rights and Restrictions Agreement terminate upon completion of this offering.

Relationship with America Online, Inc.

   In June 1999, we entered into a marketing agreement with America Online
under which America Online will provide rebates to our PC buyers to
significantly reduce the net effective price of our PCs. To obtain a rebate,
our PC buyers must enter into an agreement with America Online to subscribe to
America Online's CompuServe Internet access service over a predetermined period
of time at a stated monthly fee. We will share in the payments made by
subscribers to America Online for internet access. America Online purchased
2,271,303 shares of our Series A preferred stock on August 18, 1999, and has
committed to purchase an additional 5,560,776 shares upon receipt of regulatory
approval. See "Related Party Transactions--Series A Preferred Stock Financing."
Additionally, we granted America Online a warrant to purchase shares of our
common stock at an aggregate exercise price of $3.6 million. This warrant
expires five years after the date of grant. The number of shares that may be
purchased upon exercise of the warrant is equal to the aggregate exercise price
divided by the greater of 1.25 times the initial offering price of our common
stock or $7.98. If there is no successful completion of an initial public
offering, the number of shares issuable upon exercise of the warrant is equal
to the aggregate exercise price of the warrant divided by $11.82. Upon receipt
of regulatory approval, we will issue America Online an additional warrant to
purchase shares of common stock at an aggregate exercise price of $8.9 million
under the same terms as the earlier warrant. The maximum number of shares that
America Online may receive, subject to anti-dilution adjustments, upon exercise
of its warrants is 1,566,219.

Option Grants to Executive Officers, Directors and Principal Stockholders

   Since inception in September 1998, we have granted to our executive officers
and directors options for shares of common stock in the amounts indicated.

  .  On September 28, 1998, we granted Jim Mertz an option for 80,000 shares
     of our common stock at an exercise price of $0.03 per share.

  .  On June 15, 1999, we granted Steven H. Miller an option for 200,000
     shares of our common stock at an exercise price of $3.75 per share.

  .  On August 18, 1999, we granted Stephen A. Dukker an option for 227,897
     shares of our common stock at an exercise price of $1.61 per share,
     which was issued in connection with our obligations under Mr. Dukker's
     employment agreement.

Employment and Indemnification Agreements

   We have entered into an employment agreement with our President and Chief
Executive Officer, Stephen A. Dukker. See "Management--Employment Agreements."
We have entered into agreements with each of our directors that provide for
indemnification and intend to enter into indemnification agreements with our
executive officers. See "Management--Limitations on Directors' and Officers'
Liability and Indemnification."

                                       50
<PAGE>

                             PRINCIPAL STOCKHOLDERS

   The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of August 18, 1999 and as adjusted
to reflect the sale of common stock offered hereby by the following:

  .  each stockholder known by us to own beneficially more than 5% of our
     common stock;

  .  our President and Chief Executive Officer, the only one of our executive
     officers named in the compensation table;

  .  each member of our board of directors; and

  .  all members of our board of directors and executive officers as a group.

   As of August 18, 1999 there were 78,019,538 shares of our common stock
outstanding. Except as otherwise indicated, we believe that the beneficial
owners of the common stock listed below, on the information furnished by them,
have sole voting power and investment power with respect to such shares.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after
August 18, 1999 are deemed outstanding, while such shares are not deemed
outstanding for purposes of computing percentage ownership of any other person.
For purposes of computing the number of shares of common stock issuable upon
conversion of preferred stock outstanding, as of August 18, 1999, we have
assumed that all 24,279,369 shares of preferred stock are outstanding,
including the 5,560,776 shares of preferred stock issuable to America Online
upon regulatory approval not currently outstanding as of the date of this
prospectus. Unless otherwise indicated below, the persons and entities named in
the table have sole voting and investment power with respect to all shares
beneficially owned, subject to community property laws where applicable. The
address for those individuals for whom an address is not otherwise indicated is
eMachines, Inc., 14350 Myford Road, Suite 100, Irvine, CA 92606.

<TABLE>
<CAPTION>
                                                         Percentage of Shares
                                                              Outstanding
                                                        -----------------------
                                             Number of  Prior to
Name or Group of Beneficial Owners             Shares   Offering After Offering
----------------------------------           ---------- -------- --------------
<S>                                          <C>        <C>      <C>
TriGem Corporation.......................... 29,200,000   28.5%          %
 14350 Myford Road
 Irvine, CA 92606

Korea Data Systems America, Inc. ........... 28,819,538   28.2
 12300 Edison Way
 Garden Grove, CA 92841

America Online, Inc.(1).....................  8,889,340    8.7
 22000 AOL Way
 Dulles, VA 20166

Stephen A. Dukker(2)........................  8,227,897    8.0

C. Toms Newby, III(3).......................  3,602,757    3.5

Chul Chung..................................  2,400,000    2.3
 45-2 YOIDO
 Youngdeungpo Seoul, Korea

Jung Koh....................................  2,400,000    2.3
 Korea World Trade Center Bldg., Room #204
 159, Samsung-dong
 Kangnam-gu Seoul, Korea
</TABLE>

                                       51
<PAGE>

<TABLE>
<CAPTION>
                                                         Percentage of Shares
                                                              Outstanding
                                                        -----------------------
                                             Number of  Prior to
Name or Group of Beneficial Owners             Shares   Offering After Offering
----------------------------------           ---------- -------- --------------
<S>                                          <C>        <C>      <C>
Hong Soon Lee...............................  2,400,000    2.3
 45-2 YOIDO
 Youngdeungpo Seoul, Korea

Lap Shun Hui................................  1,600,000    1.6
 12350 Edison Way
 Garden Grove, CA 92841

Nathan Morton...............................        --       *

All directors and officers as a group (8
 persons)................................... 20,630,654   20.2%
</TABLE>
---------------------
* Less than 1% of the outstanding shares of common stock.

(1) Includes 1,057,261 shares of common stock issuable (including 750,655
    shares issuable pursuant to a warrant not outstanding as of the date of the
    prospectus, but to be issued upon regulatory approval) pursuant to the
    exercise of warrants at an assumed exercise price of $11.82 per share. See
    "Description of Capital Stock--Options and Warrants" for a discussion of
    the exercise price of these warrants.

(2) Includes 227,897 shares subject to options which are exercisable within 60
    days of August 18, 1999.

(3) Includes 26,161 shares held by TCV III (GP), 124,263 shares held by TCV
    III, L.P., 3,302,768 shares held by TCV III (Q), L.P. and 149,565 shares
    held by TCV III Strategic Partners, L.P. Mr. Newby is a managing member of
    Technology Crossover Management III, L.L.C., the general partner of each of
    these entities and disclaims beneficial ownership of the shares held by
    these entities except with respect to his pecuniary interest.

                                       52
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

   Upon the completion of this offering, we will be authorized to issue
250,000,000 shares of common stock, $0.0000125 par value per share, and
25,000,000 shares of preferred stock, $0.01 par value per share. The following
description of our capital stock is only a summary. You should refer to our
certificate of incorporation and bylaws as in effect upon the closing of this
offering, which are included as exhibits to the registration statement of which
this prospectus forms a part, and by the provisions of applicable Delaware law.

Common Stock

   As of August 18, 1999, there were 78,019,538 shares of common stock
outstanding, after an eight-for-one stock split that occurred on August 13,
1999. These shares were held of record by approximately nine stockholders.
There will be     shares of common stock outstanding (assuming no exercise of
the underwriters' over-allotment option and no exercise of outstanding options
after August  , 1999) after giving effect to the sale of our common stock in
this offering. There are 757,097 shares issuable upon exercise of outstanding
options, excluding shares of common stock issuable to America Online under
their warrants. See "Description of Capital Stock--Options and Warrants" for a
description of our outstanding grants. See "Management--Stock Plans" for a
description of our stock plan.

   Dividend Rights. Subject to preferences that may apply to shares of our
preferred stock outstanding at the time, the holders of outstanding shares of
our common stock are entitled to receive dividends out of assets legally
available at the times and in the amounts as our board of directors may
determine.

   Voting Rights. Each holder of our common stock is entitled to one vote for
each share of common stock held on all matters submitted to a vote of
stockholders. We do not provide for cumulative voting of directors in our
certificate of incorporation.

   No preemptive or similar rights. Holders of our common stock are not
entitled to preemptive rights and our common stock is not subject to conversion
or redemption.

   Right to receive liquidation distributions. Upon a liquidation, dissolution
or winding-up of our company, the holders of common stock are entitled to share
ratably with holders of any participating preferred stock in all assets
remaining after payment of all liabilities and the liquidation preferences of
any outstanding preferred stock. Each outstanding share of common stock is, and
all shares of common stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.

Preferred Stock

   As of August 18, 1999, there were 24,279,369 shares of convertible Series A
preferred stock outstanding (including 5,560,776 shares issuable to America
Online upon regulatory approval) which were held of record by approximately 35
stockholders. All outstanding shares of Series A preferred stock and those
shares of preferred stock issuable upon receipt of regulatory approval will be
converted into an aggregate of 24,279,369 shares of common stock automatically
upon completion of this offering.

   Upon completion of this offering, our board is authorized, without action by
the stockholders, to issue 25,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions of each
wholly unissued series and any of its qualifications, limitations or
restrictions. These rights, preferences and privileges may include dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any
series or the designation of any series, all or any of which may be greater
than the rights of the common stock. The issuance of preferred stock could
adversely affect the voting power of holders of common stock and the likelihood
that the holders of common stock will receive dividend payments and payments
upon liquidation. The issuance of preferred stock, while providing flexibility
in connection with possible acquisitions and other corporate purposes, could,
among other things, have the effect of delaying, deferring or preventing a
change in control of our company and may adversely affect the market price of
our common stock and the voting and other rights of the holders of our common
stock. We have no current plan to issue any shares of preferred stock.

                                       53
<PAGE>

Registration Rights

   Pursuant to an amended and restated rights and restrictions agreement we
entered into with all holders of our common and preferred stock prior to this
offering, the holders of these shares are entitled to rights with respect to
the registration of these shares under the Securities Act as described below.

   Demand Registration Rights. At any time after six months following this
offering, the holders of at least 50% of the shares of common stock issuable
upon conversion of our Series A preferred stock can request that we register
all or a portion of their shares, so long as the total offering price of the
shares to the public is at least $15,000,000. We will be required to file only
one registration statement in response to their demand registration rights. We
may postpone the filing of a registration statement for up to 120 days once in
a 12 month period if we determine that the filing would not be in the best
interests of us and our stockholders.

   Piggyback Registration Rights. If we register any securities for public
sale, the holders of the shares of common stock and common stock issuable upon
conversion of our Series A preferred stock will have the right to include their
shares in the registration statement. However, this right does not apply to a
registration statement relating to any of our employee benefit plans or a
corporate reorganization. These registration rights expire three years after
this offering is completed.

   Form S-3 Registration Rights. The holders of not less than an aggregate of
25% of the shares of common stock and the common stock issuable upon conversion
of our Series A preferred stock can request that we register their shares if we
are eligible to file a registration statement on Form S-3 and if the total
price of the shares offered to the public is at least $2,500,000. These holders
may only require us to file two registration statements on Form S-3 in any 12
month period and only three registration statements in all. We may postpone the
filing of a registration statement for up to 120 days once in a 12 month period
if we determine that the filing would be seriously detrimental to us and our
stockholders.

   We will pay all of the expenses, except underwriters' and brokers' discounts
and commissions, incurred in connection with the demand registrations and
piggyback registrations described above. The participating holders will bear
all expenses incurred in connection with the exercise of their Form S-3
registration rights.

   The registration rights described above will expire with respect to a
particular stockholder if it can sell all of its shares in a three month period
following this offering under Rule 144 of the Securities Act.

Options and Warrants

   As of June 30, 1999, options to purchase 609,200 shares of common stock were
outstanding and subject to our 1998 stock plan. An additional 2,590,800 shares
are authorized to be issued under the plan. See "Management--Stock Plans." As a
bonus for the period from July 1, 1999 through November 30, 1999, Mr. Dukker
was granted a fully vested option to purchase 227,897 shares of our common
stock at an exercise price of $1.61 per share. We have also issued a warrant to
purchase shares of common stock at an aggregate exercise price of $3.6 million
in connection with a marketing agreement with America Online. See "Related
Party Transactions--Relationship with America Online, Inc." for a description
of the marketing agreement. The number of shares that may be purchased upon
exercise of the warrant is equal to the aggregate exercise price divided by the
greater of 1.25 times the initial offering price of our common stock or $7.98.
If there is no successful completion of an initial public offering, the number
of shares issuable upon exercise of the warrant is equal to the aggregate
exercise price of the warrant divided by $11.82. This warrant will remain
outstanding after the completion of the offering until August 18, 2004, unless
sooner exercised. We will issue America Online an additional warrant to
purchase shares of common stock at an aggregate exercise price of $8.9 million
upon receipt of regulatory approval on the same terms as the earlier warrant.
The maximum number of shares that America Online may receive, subject to anti-
dilution adjustments, upon exercise of its warrants is 1,566,219.

                                       54
<PAGE>

Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions

 Delaware Law

   We are subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents some
Delaware corporations from engaging, under some circumstances, in a "business
combination," which includes a merger or sale of more than 10% of the
corporation's assets with any "interested stockholder," meaning a stockholder
who owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of the stockholder, for three years following the
date that the stockholder became an "interested stockholder" unless:

  .  the transaction is approved by the board of directors prior to the date
     the interested stockholder attained that status;

  .  upon consummation of the transaction that resulted in the stockholder's
     becoming an interested stockholder, the interested stockholder owned at
     least 85% of the voting stock of the corporation outstanding at the time
     the transaction commenced; or

  .  on or subsequent to such date the business combination is approved by
     the board and authorized at an annual or special meeting of stockholders
     by at least two-thirds of the outstanding voting stock that is not owned
     by the interested stockholder.

   A Delaware corporation may opt out of this provision with an express
provision in its original certificate of incorporation or an express provision
in its certificate or incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
However, we have not opted out of this provision. The statute could prohibit or
delay mergers or other takeover or change-in-control attempts and, accordingly,
may discourage attempts to acquire us.

 Charter and Bylaw Provisions

   Our certificate of incorporation and bylaws will provide, subject to
appropriate corporate action, that:

  .  following the completion of this offering, stockholders may not act by
     written consent without a meeting;

  .  following the completion of this offering, stockholders may not call
     special meetings of the stockholders; and

  .  our board of directors will be divided into three classes, each serving
     staggered three-year terms, which means that only one class of directors
     will be elected at each annual meeting of stockholders, with the other
     classes continuing for the remainder of their respective terms, and
     directors may only be removed for cause.

   In addition, our certificate of incorporation does not provide for
cumulative voting. We also indemnify officers and directors against losses that
they may incur in investigations and legal proceedings resulting from their
services to us, which may include services in connection with the takeover
defense measures.

   These provisions of our certificate of incorporation and bylaws may have the
effect of delaying, deferring or discouraging another person from acquiring
control of us, including takeover attempts that might result in a premium over
the market price for the shares of our common stock.

Transfer Agent and Registrar

   The transfer agent and registrar for the common stock is     .

Nasdaq Stock Market National Market Listing

   We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "EEEE."

                                       55
<PAGE>

                        SHARES ELIGIBLE FOR FUTURE SALE

   Upon completion of this offering, we will have     shares of common stock
outstanding based on shares outstanding as of     , 1999. Of these shares, the
    shares sold in this offering will be freely transferable without
restriction under the Securities Act, unless they are held by "affiliates" as
that term is used under the Securities Act and the Regulations promulgated
thereunder.

   Of these shares, the remaining      shares were sold by us in reliance on
exemptions from the registration requirements of the Securities Act, are
restricted securities within the meaning of Rule 144 under the Securities Act
and become eligible for sale in the public market as follows:

  .  beginning 90 days after the effective date,     shares will become
     eligible for sale, subject to the provisions of Rules 144 and 701;

  .  beginning 180 days after the effective date,     additional shares will
     become eligible for sale, subject to the provisions of Rules 144, 144(k)
     or 701, upon the expiration of agreements not to sell such shares
     entered into between the underwriters and such stockholders;

  .  beginning on     , 1999, the remaining    shares will become eligible
     for sale, subject to the provisions of Rule 144.

   Beginning 180 days after the date of this prospectus, approximately
additional shares subject to vested options as of the date of completion of
this offering will be available for sale subject to compliance with Rule 701
and upon the expiration of agreements not to sell such shares entered into
between the underwriters and such stockholders. Any shares subject to lock up
agreements may be released at any time without notice by the underwriters.

   In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned restricted shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of completion of this
offering, a number of shares that does not exceed the greater of 1% of the then
outstanding shares of common stock (approximately     shares immediately after
this offering), or the average weekly trading volume in the common stock during
the four calendar weeks preceding such sale, subject to the filing of a Form
144 with respect to such sale and certain other limitations and restrictions.
In addition, a person who is not deemed to have been our affiliate at any time
during the 90 days preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years, would be entitled to sell such
shares under Rule 144(k) without regard to the requirements described above.

   Any of our employees, officers or directors of or consultant who purchased
his or her shares prior to the date of completion of this offering or who holds
vested options as of that date pursuant to a written compensatory plan or
contract is entitled to rely on the resale provisions of Rule 701, which
permits nonaffiliates to sell their Rule 701 shares without having to comply
with the public-information, holding- period, volume-limitation or notice
provisions of Rule 144 and permits affiliates to sell their Rule 701 shares
without having to comply with Rule 144's holding-period restrictions, in each
case commencing 90 days after the date of completion of this offering. However,
we and our officers, directors and stockholders have agreed not to sell or
otherwise dispose of any shares of our common stock for the 180-day period
after the date of this prospectus without the prior written consent of the
underwriters. See "Underwriting."

   As soon as practicable after the date of completion of this offering, we
intend to file a registration statement on Form S-8 under the Securities Act to
register shares of common stock reserved for issuance under our 1998 stock
plan, thus permitting the resale of such shares by nonaffiliates in the public
market without restriction under the Securities Act. Such registration
statements will become effective immediately upon filing.

   Prior to this offering, there has been no public market for our common
stock, and any sale of substantial amounts in the open market may adversely
affect the market price of our common stock offered hereby.

                                       56
<PAGE>

                                  UNDERWRITING

   Under the terms and subject to the conditions contained in an underwriting
agreement dated      , 1999 we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, BancBoston Robertson
Stephens Inc., Hambrecht & Quist LLC and Salomon Smith Barney Inc. are acting
as representatives, the following respective numbers of shares of common stock:

<TABLE>
<CAPTION>
                                                                        Number
                               Underwriter                             of Shares
                               -----------                             ---------
   <S>                                                                 <C>
   Credit Suisse First Boston Corporation.............................
   BancBoston Robertson Stephens Inc..................................
   Hambrecht & Quist LLC..............................................
   Salomon Smith Barney Inc...........................................

                                                                          ---
     Total............................................................
                                                                          ===
</TABLE>

   The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of nondefaulting underwriters may be increased or the
offering of common stock may be terminated.

   We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to     additional shares at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.

   The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $    per share. The
underwriters and selling group members may allow a discount of $    per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.

   The following table summarizes the compensation and estimated expenses we
will pay.

<TABLE>
<CAPTION>
                                              Per Share             Total
                                         ------------------- -------------------
                                          Without    With     Without    With
                                           Over-     Over-     Over-     Over-
                                         allotment allotment allotment allotment
                                         --------- --------- --------- ---------
   <S>                                   <C>       <C>       <C>       <C>
   Underwriting Discounts and
   Commissions paid by us...............  $         $         $         $
   Expenses payable by us...............  $         $         $         $
</TABLE>

   The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.

   We and our executive officers, directors and certain other of our security
holders have agreed not to offer, sell, contract to sell, announce an intention
to sell, pledge or otherwise dispose of, directly or indirectly, or file with
the Securities and Exchange Commission a registration statement under the
Securities Act relating to, any shares of common stock or securities
convertible into or exchangeable or exercisable for any common stock without
the prior written consent of Credit Suisse First Boston Corporation for a
period of 180 days after the date of this prospectus.

                                       57
<PAGE>

   The underwriters have reserved for sale, at the initial public offering
price (1) up to     shares of the common stock for employees, directors and
certain other persons associated with us who have expressed an interest in
purchasing common stock in this offering and (2) up to an additional     shares
for the holders of our preferred stock in connection with a pre-existing
contractual right between us and those holders. The number of shares available
for sale to the general public in this offering will be reduced to the extent
these persons purchase the reserved shares. Any reserved shares not so
purchased will be offered by the underwriters to the general public on the same
terms as the other shares.

   We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.

   We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "EEEE."

   In August 1999, we issued an aggregate of 24,279,369 shares of our Series A
preferred stock (including 5,560,776 not outstanding as of the date of this
prospectus that are issuable to America Online upon regulatory approval) at a
per share price of $6.83 in a private placement. Credit Suisse First Boston
Corporation acted as the placement agent for this private placement, and it
received a customary fee for its services. In addition, Merchant Capital, Inc.,
an affiliate of Credit Suisse First Boston Corporation, purchased 156,641
shares of Series A preferred stock.

   Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include: the information in this
prospectus and otherwise available to the underwriters; the history and the
prospects for the industry in which we will compete; the ability of our
management; the prospects for our future earnings; the present state of our
development and our current financial condition; the general condition of the
securities markets at the time of this offering; and the recent market prices
of, and the demand for, publicly traded common stock of generally comparable
companies.

   The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids in accordance with Regulation
M under the Exchange Act.

  .  Over-allotment involves syndicate sales in excess of the offering size,
     which creates a syndicate short position.

  .  Stabilizing transactions permit bids to purchase the underlying security
     so long as the stabilizing bids do not exceed a specified maximum.

  .  Syndicate covering transactions involve purchases of the common stock in
     the open market after the distribution has been completed in order to
     cover syndicate short positions.

  .  Penalty bids permit the representatives to reclaim a selling concession
     from a syndicate member when the common stock originally sold by the
     syndicate member are purchased in a syndicate covering transaction to
     cover syndicate short positions.

   These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

                                       58
<PAGE>

                          NOTICE TO CANADIAN RESIDENTS

Resale Restrictions

   The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.

Representations of Purchasers

   Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under the securities laws, (ii) where
required by law, that the purchaser is purchasing as principal and not as
agent, and (iii) the purchaser has reviewed the text above under "Resale
Restrictions."

Rights of Action (Ontario Purchasers)

   The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.

Enforcement of Legal Rights

   All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or these persons. All or a substantial portion of the assets of
the issuer and these persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or these
persons in Canada or to enforce a judgment obtained in Canadian courts against
the issuer or these persons outside of Canada.

Notice to British Columbia Residents

   A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. This report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.

Taxation and Eligibility for Investment

   Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.

                                       59
<PAGE>

                                 LEGAL MATTERS

   The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Legal matters will be passed upon for the underwriters by Morrison
& Foerster LLP, Palo Alto, California.

                                    EXPERTS

   The financial statements included in this prospectus and the related
financial statement schedule included elsewhere in the registration statement
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein and elsewhere in this registration statement,
and are included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.

                             ADDITIONAL INFORMATION

   We have filed with the Securities and Exchange Commission, Washington, D.C.,
a registration statement on Form S-1 under the Securities Act with respect to
the shares of common stock offered hereby. This prospectus does not contain all
the information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and our common
stock, reference is made to the registration statement and to the exhibits and
schedules filed therewith. Statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of the contract or
other document filed as an exhibit to the registration statement, each
statement being qualified in all respects by this reference. A copy of the
registration statement may be inspected by anyone without charge at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of all or any portion of the
registration statement may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
prescribed fees. The Commission maintains a web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.

                                       60
<PAGE>

                                eMachines, Inc.

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Independent Auditors' Report .............................................. F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity (Deficiency)............................ F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>

                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders of eMachines, Inc.

   We have audited the accompanying balance sheet of eMachines, Inc. (the
"Company") as of December 31, 1998 and the related statements of operations,
stockholders' equity (deficiency) and cash flows for the period September 18,
1998 (inception) to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

   We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

   In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998 and the
results of its operations and its cash flows for the period September 18, 1998
(inception) to December 31, 1998 in conformity with generally accepted
accounting principles.

Deloitte & Touche LLP
Los Angeles, California

August 23, 1999

                                      F-2
<PAGE>

                                eMachines, Inc.

                                 BALANCE SHEETS

                December 31, 1998 and June 30, 1999 (unaudited)

                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                       December 31,  June 30,
                                                           1998        1999
                                                       ------------ -----------
                                                                    (unaudited)
<S>                                                    <C>          <C>
                        ASSETS
Current assets:
  Cash................................................   $ 3,791     $ 10,911
  Accounts receivable, less allowances ($239 and
   $8,972 at December 31, 1998 and June 30, 1999,
   respectively)......................................    43,303      122,609
  Inventories.........................................    12,270       22,225
  Prepaid and other current assets....................       127        2,626
                                                         -------     --------
    Total current assets..............................    59,491      158,371
Property and equipment, Net (Note 3)..................       268        1,449
Other assets..........................................       252          493
                                                         -------     --------
                                                         $60,011     $160,313
                                                         =======     ========
       LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
  Trade payables-related party (Note 8)...............   $57,785     $134,438
  Accounts payable....................................       327        4,235
  Accrued rebates.....................................     1,838       18,372
  Accrued expenses and other current liabilities......       852        7,828
                                                         -------     --------
    Total current liabilities.........................    60,802      164,873
                                                         -------     --------
Subordinated notes payable to stockholders (Note 4)...       560          560
                                                         -------     --------
Commitments and contingencies (Note 7)................

Stockholders' deficiency (Notes 5 and 9):
  Preferred stock, $.01 par value; 50,000,000 shares
   authorized; no shares outstanding..................       --           --
  Common stock, $.0000125 par value; 250,000,000
   shares authorized; 77,600,000 shares outstanding at
   December 31, 1998 and June 30, 1999................         1            1
  Additional paid-in capital..........................     2,527        3,765
  Unearned stock compensation.........................      (577)      (1,675)
  Notes receivable from stockholders..................      (500)        (500)
  Accumulated deficit.................................    (2,802)      (6,711)
                                                         -------     --------
    Total stockholders' deficiency....................    (1,351)      (5,120)
                                                         -------     --------
                                                         $60,011     $160,313
                                                         =======     ========
</TABLE>

                See accompanying notes to financial statements.

                                      F-3
<PAGE>

                                eMachines, Inc.

                            STATEMENTS OF OPERATIONS

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)

                (dollars in thousands, except share information)

<TABLE>
<CAPTION>
                                                      Period from
                                                     September 18,      Six
                                                          1998        Months
                                                     (inception) to    Ended
                                                      December 31,   June 30,
                                                          1998         1999
                                                     -------------- -----------
                                                                    (unaudited)
<S>                                                  <C>            <C>
Net revenues.......................................    $   58,283   $  351,313
Cost of revenues...................................        58,088      338,790
                                                       ----------   ----------
  Gross profit.....................................           195       12,523
Operating expenses:
  Sales and marketing..............................           840        5,517
  Customer service and technical support...........           269        2,522
  General and administrative.......................           988        3,293
  Stock-based compensation (Note 5)................            11          140
                                                       ----------   ----------
    Total operating expenses.......................         2,108       11,472
                                                       ----------   ----------
Income (loss) from operations......................        (1,913)       1,051
Financing charges and interest expense, net (Notes
 4 and 8)..........................................          (889)      (4,960)
                                                       ----------   ----------
Net loss...........................................    $   (2,802)  $   (3,909)
                                                       ==========   ==========
Basic and diluted net loss per common share........    $    (0.04)  $    (0.05)
                                                       ==========   ==========
Shares used in computing basic and diluted net loss
 per common share..................................    77,600,000   77,600,000
                                                       ==========   ==========
</TABLE>



                See accompanying notes to financial statements.

                                      F-4
<PAGE>

                                eMachines, Inc.

                STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)

                (dollars in thousands, except share information)

<TABLE>
<CAPTION>
                            Common Stock    Additional   Unearned
                          -----------------  Paid-in      Stock       Notes    Accumulated
                            Shares   Amount  Capital   Compensation Receivable   Deficit    Total
                          ---------- ------ ---------- ------------ ---------- ----------- -------
<S>                       <C>        <C>    <C>        <C>          <C>        <C>         <C>
Balance, at September
 17, 1998...............         --    --        --          --         --           --        --
 Capital Contributions
  (Note 5)..............  77,600,000  $  1    $1,939         --       $(500)         --    $ 1,440
 Compensatory stock
  options...............         --    --        588     $  (588)       --           --        --
 Amortization of
  unearned stock
  compensation..........         --    --        --           11        --           --         11
 Net loss...............         --    --        --                              $(2,802)   (2,802)
                          ----------  ----    ------     -------      -----      -------   -------
Balance, at December 31,
 1998...................  77,600,000     1     2,527        (577)      (500)      (2,802)   (1,351)
 Compensatory stock
  options*..............         --    --      1,238      (1,238)       --           --        --
 Amortization of
  unearned stock
  compensation*.........         --    --        --          140        --           --        140
 Net loss*..............         --    --        --          --         --        (3,909)   (3,909)
                          ----------  ----    ------     -------      -----      -------   -------
Balance, at June 30,
 1999*..................  77,600,000  $  1    $3,765     $(1,675)     $(500)     $(6,711)  $(5,120)
                          ==========  ====    ======     =======      =====      =======   =======
</TABLE>
---------------------
* Unaudited



                See accompanying notes to financial statements.

                                      F-5
<PAGE>

                                eMachines, Inc.

                            STATEMENTS OF CASH FLOWS

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)

                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                      Period from
                                                     September 18,      Six
                                                          1998        Months
                                                     (inception) to    Ended
                                                      December 31,   June 30,
                                                          1998         1999
                                                     -------------- -----------
                                                                    (unaudited)
<S>                                                  <C>            <C>
Cash flows from operating activities:
  Net loss..........................................    $ (2,802)    $ (3,909)
  Adjustments to reconcile net loss to net cash
   provided by operating activities:
    Provision for bad debts, sales returns and sales
     incentives.....................................         239        8,733
    Depreciation....................................          30          103
    Stock-based compensation expense................          11          140
    Changes in operating assets and liabilities:
      Accounts receivable...........................     (43,542)     (88,039)
      Inventories...................................     (12,270)      (9,955)
      Prepaid and other current assets..............        (127)      (2,499)
      Trade payables-related party..................      57,785       76,653
      Accounts payable..............................         327        3,908
      Accrued rebates...............................       1,838       16,534
      Accrued expenses and other current
       liabilities..................................         852        6,976
                                                        --------     --------
        Net cash provided by operating activities...       2,341        8,645
                                                        --------     --------
Cash flows from investing activities:
  Acquisition of property and equipment.............        (298)      (1,284)
  Other assets......................................        (252)        (241)
                                                        --------     --------
        Net cash used in investing activities.......        (550)      (1,525)
                                                        --------     --------
Cash flows from financing activities:
  Issuance of common stock..........................       1,440          --
  Issuance of subordinated notes payable to
   stockholders.....................................         560          --
                                                        --------     --------
        Net cash provided by financing activities...       2,000          --
                                                        --------     --------
Net increase in cash................................       3,791        7,120
Cash, beginning of period...........................         --         3,791
                                                        --------     --------
Cash, end of period.................................    $  3,791     $ 10,911
                                                        ========     ========
Supplemental disclosure of cash flow information:
  Issuance of common stock in exchange for notes
   receivable.......................................    $    500          --
                                                        ========     ========
</TABLE>

                See accompanying notes to financial statements.

                                      F-6
<PAGE>

                                eMachines, Inc.

                         NOTES TO FINANCIAL STATEMENTS

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)

                    (in thousands, except share information)

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

   eMachines, Inc. (the "Company"), a Delaware corporation, was incorporated in
September 1998 to market and distribute low-priced personal computers ("PCs").
The Company is 37.6% and 36.6% owned by TriGem Corporation ("TriGem") and Korea
Data Systems (America) Inc. ("KDS America"), respectively. The Company is
headquartered in Irvine, California.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Unaudited Interim Financial Information--The interim financial information
as of June 30, 1999 and for the six months ended June 30, 1999 is unaudited and
has been prepared on the same basis as the audited financial statements. In the
opinion of management, such unaudited information includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the interim information. Operating results for the six months
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.

   Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of net revenues and expenses during the
reporting period. Actual results could differ from those estimates.

   Concentration of Credit Risk--Financial instruments that potentially subject
the Company to credit risk are principally bank deposits and accounts
receivable. Cash is deposited with high credit quality financial institutions.
Accounts receivable are derived from net revenues earned from retail customers
in the United States and are denominated in U.S. dollars. The Company performs
ongoing credit evaluations of its customers and maintains an allowance for
potential credit losses. The Company's sales are concentrated in the U.S.
retail channel and, as a result, the Company maintains individually significant
receivable balances with certain retailers. While the Company frequently
monitors and manages this risk, financial difficulties on the part of one or
more of the Company's retail customers may have a material adverse effect on
the Company. For the period from September 18, 1998 (inception) to December 31,
1998, Office Depot, Best Buy, Inc., and MicroCenter accounted for 31%, 24% and
15% of gross revenues, respectively. These customers accounted for
approximately 30%, 24% and 10% of total accounts receivable at December 31,
1998, respectively. For the sixth months ended June 30, 1999, Office Depot,
Circuit City, Best Buy, Inc., and MicroCenter accounted for 25%, 17%, 18% and
10%, of gross revenue, respectively. These customers accounted for
approximately 28%, 16%, 26% and 6% of total accounts receivable at June 30,
1999, respectively.

   Financial Instruments--The Company's financial instruments include notes
receivable from stockholders and subordinated notes payable to stockholders. At
December 31, 1998, the fair values of these instruments cannot be determined
due to their related party nature.

   Inventories--Inventories consist principally of personal computers and
monitors and are stated at the lower of cost, determined by the moving average
method, or market.

   Property and Equipment--Property and equipment are stated at cost.
Depreciation is provided for using the straight-line method over the estimated
useful lives of the assets.

                                      F-7
<PAGE>

                                eMachines, Inc.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)
                    (in thousands, except share information)


   Revenue Recognition, Returns and Sales Incentives--Revenue on product sales
is recognized upon shipment. Revenue is recorded net of allowances for rebates
and other sales incentives. The allowances for sales returns, rebates and other
sales incentives are accrued concurrently with the recognition of revenue.
Products are sold to customers under a limited one-year warranty against
material defects, which period is covered by the terms provided to the Company
by the product's manufacturer, a related party (see Note 8).

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

   Income Taxes--The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes," which requires recognition of deferred
income tax liabilities and assets for the expected future income tax
consequences of events that have been included in the financial statements or
income tax returns. Under this method, deferred income tax liabilities and
assets are determined based on the temporary difference between the financial
statement and income tax basis of assets and liabilities using presently
enacted tax rates in effect. Valuation allowances are established when
necessary to reduce deferred income tax assets to the amounts that are more
likely than not to be realized.

   Net Loss Per Share--The Company computes net income (loss) per share in
accordance with SFAS No. 128, "Earnings Per Share" which requires dual
presentation of basic earnings per share ("EPS") and diluted EPS. Basic EPS is
computed using the weighted average number of common shares outstanding during
the period. Diluted EPS is computed using the weighted average number of common
shares and potentially dilutive shares outstanding during the period. Potential
common shares consist of shares issuable upon the exercise of stock options
(using the treasury stock method). Common share equivalents are excluded from
the computation in loss periods as their effect would be antidilutive.

   At December 31, 1998 and June 30, 1999, the Company had 270,000 and 609,200
common stock purchase options outstanding which could potentially dilute basic
earnings per share in the future, but were excluded in the computation of
diluted net loss per share in the periods presented, as their effect would have
been antidilutive.

   Effects of Recent Accounting Pronouncements--In June 1997, the Financial
Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive
Income," which requires an enterprise to report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources, and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. The Company had no
comprehensive income items to report for the period from September 18, 1998
(inception) to December 31, 1998 and the six months ended June 30, 1999. The
Company currently operates one reportable segment under SFAS No. 131. Adoption
of these statements at our inception did not impact the Company's financial
position, results of operations or cash flows.

                                      F-8
<PAGE>

                                eMachines, Inc.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)
                    (in thousands, except share information)


   In June 1998, SFAS No 133 "Accounting for Derivative Instruments and Hedging
Activities" was released. The statement requires the recognition of all
derivatives as either assets or liabilities in the balance sheet and the
measurement of those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the planned use of the derivative and
the resulting designation. The Company is required to implement the statement
in the first quarter of fiscal 2001. The Company has not used derivative
instruments and believes the impact of adoption of this statement will not have
a significant effect on the financial statements.

3. PROPERTY AND EQUIPMENT

   Property and equipment, net consists of:

<TABLE>
<CAPTION>
                                                   Useful  December 31, June 30,
                                                    Lives      1998       1999
                                                   ------- ------------ --------
      <S>                                          <C>     <C>          <C>
      Furniture and office equipment.............. 5 years     $ 27      $  414
      Computers and information systems........... 5 years      271         595
      Machinery and equipment..................... 5 years                  324
      Leasehold improvements...................... 5 years                  249
                                                               ----      ------
                                                                298       1,582
      Accumulated depreciation....................              (30)       (133)
                                                               ----      ------
      Property and equipment, net.................             $268      $1,449
                                                               ====      ======
</TABLE>

4. SUBORDINATED NOTES PAYABLE TO STOCKHOLDERS

   On December 18, 1998, the Company issued subordinated notes payable to
TriGem and KDS America, both stockholders of the Company (see Note 8), in the
amount of $270 and $290, respectively, bearing interest at 5.79%. Commencing
November 30, 1999, interest payments are due each May 31 and November 30.
Principal and any unpaid interest are due on June 7, 2004. The notes may be
prepaid at the Company's option without penalty.

5. STOCKHOLDERS' EQUITY

   In June of 1999, the stockholders of the Company formally executed a stock
purchase agreement that defines the terms and conditions of the Company's
initial capitalization. The stock purchase agreement memorializes the binding
verbal agreements under which the stockholders of the Company had been
operating since inception. The Company issued 77,600,000 shares of common stock
for an aggregate purchase price of $1,940. Of the total, $500 is evidenced by
promissory notes, which bear interest at an annual rate of 5.79% and are due on
June 7, 2004. The notes are collateralized by a pledge of the Company's common
stock and are full recourse notes. All shares issued in connection with the
stock purchase agreement have been treated as issued and outstanding since
incorporation.

   Stock Option Plans--The Company has a stock option plan (the "Plan") under
which employees, consultants and directors may be granted options to purchase
common stock up to an aggregate of 3,200,000 shares. Options are generally
granted at not less than the fair market value at grant date, vest over five
years, and expire ten years after the grant date. When the exercise price of
employee stock options issued under the

                                      F-9
<PAGE>

                                eMachines, Inc.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)
                    (in thousands, except share information)

Plan equals the fair value of the underlying stock on the date of grant, no
compensation expense is recorded. Compensation expense is recognized for the
fair value of options granted to nonemployees and to the extent the fair value
of the underlying stock exceeds the exercise price of employee stock options.
The fair value of options granted to nonemployees during the period from
September 18, 1998 (inception) to December 31, 1998 was not significant. There
were no options granted to nonemployees during the six month period ended June
30, 1999. During the period from September 18, 1998 (inception) to December 31,
1998, and the six month period ended June 30, 1999, the Company issued employee
common stock options with exercise prices less than the fair value of its
underlying common stock. The fair value of the common stock, based upon
securities transactions entered into by the Company with certain unrelated
third parties, was $6.38 per share for the respective periods. Accordingly, the
Company recorded $588 and $1,238 as the intrinsic value of such options. Stock-
based compensation of $11 and $140 was amortized to expense during the period
from September 18, 1998 (inception) to December 31, 1998 and the six months
ended June 30, 1999, respectively. At December 31, 1998 and June 30, 1999 the
Company had $577 and $1,675, respectively, in deferred stock compensation
related to these options, which will be amortized to expense through 2004.

   A summary of option transactions under the Plan follows:

<TABLE>
<CAPTION>
                                                         Weighted-
                                                          Average    Range of
                                                Number   Exercise    Exercise
                                               of Shares   Price      Prices
                                               --------- --------- -------------
   <S>                                         <C>       <C>       <C>
   Granted during 1998........................  270,000    $0.06   $0.03 - $0.13
                                                -------
   Outstanding, December 31, 1998.............  270,000    $0.06   $0.03 - $0.13
   Granted....................................  339,200    $2.75   $1.25 - $3.75
                                                -------
   Outstanding, June 30, 1999.................  609,200    $1.56   $0.03 - $3.75
                                                =======
</TABLE>

   As of June 30, 1999, there were 2,590,800 shares available for future grant.

   Additional information regarding options outstanding as of June 30, 1999 is
as follows:

<TABLE>
<CAPTION>
                                                 Outstanding Options as of
                                                       June 30, 1999
                                              --------------------------------
                                                                   Weighted-
                                                        Weighted-   Average
                                                         Average   Remaining
                                               Number   Exercise  Contractual
   Range of Exercise Prices                   of Shares   Price   Life (years)
   ------------------------                   --------- --------- ------------
   <S>                                        <C>       <C>       <C>
   $0.03.....................................  176,000    $0.03       9.2
   $0.13.....................................  121,600     0.13       9.4
   $1.25.....................................   96,400     1.25       9.8
   $3.75.....................................  215,200     3.75       9.9
                                               -------
                                               609,200    $1.56       9.6
                                               =======
</TABLE>

   There were no options exercisable at June 30, 1999.

                                      F-10
<PAGE>

                                eMachines, Inc.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)
                    (in thousands, except share information)


   Accounting for Stock-Based Compensation--As permitted under SFAS No. 123,
the Company has elected to follow APB Opinion No. 25 and related
Interpretations in accounting for stock-based awards to employees. Pro forma
information regarding net income and earnings per share is required by SFAS No.
123. This information is required to be determined as if the Company had
accounted for its stock-based awards to employees under the fair value method
of that statement. The fair value of each option grant was estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants during the period from September
18, 1998 (inception) through December 31, 1998 and the six months ended June
30, 1999: risk-free interest rates of 4.4 percent and 5.2 percent, expected
lives of five years for both periods, and volatility and dividend yield of zero
for both periods.

   The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
The weighted-average estimated fair value of employee stock options granted
during period from September 18, 1998 (inception) to December 31, 1998 and the
six months ended June 30, 1999 was $4.41 and $4.27 per share, respectively.

   For purposes of pro forma disclosures, the estimated fair value of the
options is assumed to be amortized to expense over the options' vesting period.
Had the Company accounted for its stock-based awards to employees under the
fair value method prescribed by SFAS No. 123, the net loss reported during the
period from September 18, 1998 (inception) through December 31, 1998 and the
six months ended June 30, 1999 would have been increased by approximately $3
and $26, respectively, and there would have been no impact on reported earnings
per share.

6. INCOME TAXES

   The Company's deferred income tax assets are comprised of the following:

<TABLE>
<CAPTION>
                                                                    December 31,
                                                                        1998
                                                                    ------------
      <S>                                                           <C>
      Reserves not recognized for income tax purposes..............   $   169
      Accrued expenses.............................................       844
      Net operating loss carryforwards.............................       168
      Valuation allowance..........................................    (1,181)
                                                                      -------
      Net deferred income tax assets...............................   $   --
                                                                      =======
</TABLE>

   The Company established a 100% valuation allowance at December 31, 1998 and
June 30, 1999 due to the uncertainty of realizing future income tax benefits
from its net operating loss carryforwards and other deferred income tax assets.

                                      F-11
<PAGE>

                                eMachines, Inc.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)
                    (in thousands, except share information)


   The provision for income taxes differs from the amount computed by applying
the federal statutory income tax rate to income before taxes as follows:

<TABLE>
<CAPTION>
                                                                 Period from
                                                              September 18, 1998
                                                                (inception) to
                                                              December 31, 1998
                                                              ------------------
      <S>                                                     <C>
      Tax computed at federal statutory rate.................       (35.0)
      State taxes and other..................................         0.8
      Increase in valuation allowance........................        34.2
                                                                    -----
      Total..................................................         -- %
                                                                    =====
</TABLE>

   At December 31, 1998, the Company had net operating loss carryforwards of
approximately $427 and $214 for federal and state income tax purposes,
respectively. These losses will expire in 2018 for federal income tax purposes
and 2003 for state income tax purposes.

7. COMMITMENTS AND CONTINGENCIES

   Operating Leases--The Company leases its corporate office and warehouse
space under an operating lease expiring in 2004. The lease, which is guaranteed
by KDS America, a stockholder, is renewable at the Company's option for an
additional five-year term. Future minimum rental commitments under the lease
agreement as of December 31, 1998, excluding sublease rentals, are as follows:

<TABLE>
      <S>                                                                 <C>
      1999............................................................... $  891
      2000...............................................................  1,099
      2001...............................................................  1,149
      2002...............................................................  1,187
      2003...............................................................  1,170
      2004...............................................................    194
                                                                          ------
                                                                          $5,690
                                                                          ======
</TABLE>

   Rental expenses under operating leases during the period from September 18,
1998 (inception) to December 31, 1998 and the six months ended June 30, 1999
amounted to approximately $6 and $285, respectively.

   The Company subleases a portion of its warehouse space to TriGem America
Corporation, a related party (see Note 8). The total minimum rentals to be
received in the future under the sublease, which expires in 2004, amounted to
$1,738 as of June 30, 1999. Sublease rental income during the six-month period
ended June 30, 1999, amounted to approximately $93.

 Legal Proceedings

   In July 1999, Compaq Computer Corporation filed a complaint against the
Company, TriGem Computer Inc., TriGem America Corporation and Korea Data
Systems as defendants in the U.S. District Court for the Southern District of
Texas based on the defendant's alleged infringement of 13 patents held by
Compaq related

                                      F-12
<PAGE>

                                eMachines, Inc.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)
                    (in thousands, except share information)

to improved system processing speed, enhanced video graphics, peripheral
compatibility and overall system architecture. The complaint seeks an
accounting, treble damages, a preliminary and permanent injunction from further
alleged infringement, attorneys' fees and other unspecified damages. The
Company and its legal counsel are currently in the process of assessing the
complaint. As a result, the Company is currently unable to estimate the total
expenses, possible loss or range of loss that may be ultimately connected with
these allegations.

   In August 1999, Apple Computer, Inc. filed a complaint against the Company
as a defendant in the U.S. District Court for the Northern District of
California based on the Company's alleged unfair and unauthorized use of the
design and trade dress of the iMac computer. The complaint seeks a constructive
trust of profits from sales of the Company's eOne PC, treble damages, a
preliminary and permanent injunction from further distribution of the Company's
eOne PC, attorneys' fees and punitive damages. The Company and its legal
counsel are currently in the process of assessing the complaint. As a result,
the Company is currently unable to estimate the total expenses, possible loss
or range of loss that may be ultimately connected with these allegations.

   Employment Agreement--In August 1999, the Company entered into an amended
and restated employment agreement with its President and Chief Executive
Officer, who is also a stockholder. Under the terms of the agreement the
Company is obligated for a three-year term, commencing September 18, 1998, to
pay the executive officer a minimum annual salary of $300 and an annual bonus.
From September 18, 1998 through June 30, 1999, the bonus was equal to $1 for
each CPU unit (dollars not in thousands) shipped. For all services rendered by
the executive from July 1, 1999 through November 30, 1999, the Company is
obligated to grant the executive an option to purchase 227,897 shares of the
Company's common stock at an exercise price of $1.61 per share, which is less
than the fair value of the underlying common stock. The fair value of the
common stock based upon securities transactions entered into by the Company
with certain unrelated third parties, was $6.38 per share at the time the
Company became obligated to grant the option. Accordingly, in August 1999 the
Company recorded $1,100 as the intrinsic value of the options, which will be
expensed in the third quarter of 1999. Approximately $126 and $700 of bonus
expense under the employment agreement is reflected in the accompanying
statements of operations for the period from September 18, 1998 (inception) to
December 31, 1998, and the six months ended June 30, 1999, respectively.

8. RELATED PARTIES

   Related Party Balances and Transactions--Two of the Company's major
stockholders, TriGem and KDS America, are the wholly owned subsidiaries of
Korean companies; TriGem Computer Inc. ("TriGem Computer") and Korea Data
Systems Co. Ltd. ("KDS Ltd."), respectively. During the period from
September 18, 1998 (inception) through June 30, 1999, all of the Company's
eTower PCs were manufactured by TriGem Computer. In August 1999, the Company
introduced the eOne PC which is manufactured by KDS Ltd. All of the monitors
sold by the Company are either manufactured by KDS Ltd., or supplied by KDS
Ltd. through its relationship with Jean Company Ltd. ("Jean"), an unrelated
third party. During the period from September 18, 1998 (inception) to December
31, 1998, the Company purchased its PCs and monitors from TriGem America
Corporation ("TriGem America"), another wholly owned subsidiary of TriGem
Computer, and Korea Data Systems (USA), Inc. ("KDS USA"), respectively. Under
an agreement between the Company, TriGem America, KDS Ltd., Jean, and KDS USA,
$57,785 of the Company's accounts payable obligations as of December 31, 1998
to TriGem America, KDS Ltd., and Jean, collectively, were transferred to KDS
USA. KDS USA is wholly owned by a Board member of the Company.

                                      F-13
<PAGE>

                                eMachines, Inc.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)
                    (in thousands, except share information)

During the six months ended June 30, 1999, the Company purchased its PCs and
monitors directly from KDS USA. The Company has no obligation to order, take
minimum delivery or purchase at pre-negotiated prices from TriGem Computer or
KDS Ltd., including their subsidiaries and affiliates.

   Since its inception in September 1998, through the six months ended June 30,
1999, the Company operated under various arrangements with TriGem Computer,
TriGem America, KDS Ltd., and KDS USA. The following is a summary of these
arrangements:

     Inventory Purchases and Extended Payment Terms--During the period from
  September 18, 1998 (inception) to December 31, 1998 and the six months
  ended June 30, 1999, the Company purchased $70,989 and $352,764,
  respectively, of inventories from TriGem Corporation and KDS USA,
  collectively, under extended payment terms which resulted in an effective
  interest rate of 12% from September 18, 1998 (inception) through March 31,
  1999 and 10% from April 1, 1999 through June 30, 1999. As of December 31,
  1998 and June 30, 1999, payables of approximately $57,785 and $134,438,
  respectively, were outstanding to KDS USA. Approximately $888 and $4,969 of
  finance charges were incurred in connection with the inventory purchases.

     PC Repair Service--The Company has an arrangement with TriGem America to
  provide PC repair services for PCs returned to the Company by its
  customers. Under the terms of the arrangement, the Company is assessed a
  $15 per unit service charge (dollars not in thousands) for the testing and
  repackaging of PC returns determined to be nondefective. For the period
  from September 18, 1998 (inception) to December 31, 1998 and the six months
  ended June 30, 1999, these charges, which are included in cost of revenues,
  amounted to approximately $43 and $634, respectively. Approximately $43 and
  $672 of accrued service charges from TriGem America are included in accrued
  expenses and other current liabilities as of December 31, 1998 and June 30,
  1999.

   Trademark Assignment Agreement--Under an agreement entered into on June 10,
1999, and amended on August 16, 1999, KDS America transferred to the Company
the trademark "E-MACHINES" for 419,538 shares of the Company's common stock,
which the Company issued to KDS America on August 18, 1999. In connection with
the agreement the Company agreed to license KDS America use of the trademark in
the Republic of Korea.

9. SUBSEQUENT EVENTS

   America Online Agreement--In June 1999, a Marketing Agreement with America
Online, Inc. ("AOL") was executed whereby the Company agreed to pre-install and
distribute America Online's AOL and CompuServe services or other AOL products
and services on the Company's PCs. The agreement also provides for an Internet
Service Provider ("ISP") rebate program. Under the terms of this agreement,
consumers who purchase the Company's PCs and enter into a three-year Internet
service contract with AOL's CompuServe service are eligible to receive an ISP
rebate directly from AOL of up to $400. The Marketing Agreement expires in June
2004 and contains an additional five-year renewal option.

   Stock Split -- In July 1999, the Board of Directors authorized an eight-for-
one stock split that became effective on August 13, 1999 and an increase in the
authorized shares of its common stock to 200,000,000 shares. In conjunction
with the stock split, the par value of the common stock was reduced from
$.0001 to $.0000125. All references in the accompanying consolidated financial
statements to number of shares,

                                      F-14
<PAGE>

                                eMachines, Inc.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)
                    (in thousands, except share information)

sales prices and per share amounts of the Company's common stock have been
retroactively restated to reflect the increased number of common shares
outstanding. In addition, stockholders' equity has been restated to give
retroactive recognition to the stock split by reclassifying from additional
paid-in capital to common stock the par value of the additional shares arising
from the split.

   Preferred stock--In August 1999, the Board of Directors amended the
Company's certificate of incorporation to authorize the Company to issue two
classes of stock, to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares which the Company is authorized to issue is
three hundred million (300,000,000) shares. Two hundred fifty million
(250,000,000) shares ("Shares") shall be Common Stock, par value $0.0000125 per
share, and fifty million (50,000,000) shares shall be preferred stock, par
value $0.01 per share. Of the authorized shares of Preferred Stock, a total of
twenty-five million (25,000,000) shares shall be designated Series A Preferred
Stock ("Series A Preferred"). On August 18, 1999 the Company issued 24,279,369
shares of Series A Preferred Stock (including 5,560,776 shares issuable upon
regulatory approval) for proceeds of $146,660 (net of approximately $8,335 in
offering costs). The amended certificate of incorporation and bylaws authorize
the Board of Directors to designate preferred stock with special rights,
including voting and dividend rights, that could make it more difficult for a
third party to acquire the Company, including takeover attempts that might
result in a premium over the market price for shares of the Company's common
stock. The Company's charter documents also eliminate the right of stockholders
to call a special meeting of stockholders, require stockholders to comply with
advance notice requirements before raising a matter at a meeting of
stockholders and eliminate the ability of stockholders to take action by
written consent. The significant terms of the Series A Preferred Stock include:

     Conversion--The Series A Preferred Stock is convertible, at the option
  of the holder, at the conversion rate then in effect, at any time after
  issuance of such share. Each share of Preferred Stock shall automatically
  be converted into shares of Common Stock at the Conversion Price at the
  time in effect for such share of Preferred Stock immediately upon the
  earlier of (i) the closing an underwritten firm commitment public offering
  of the Company's Common Stock yielding gross proceeds to the Company (prior
  to expenses and underwriting commissions) in excess of $30,000 and at a
  price per share greater than 133% of the Series A Preferred Stock original
  issuance price per share (as adjusted for any stock dividends, combinations
  or splits with respect to such shares), and (ii) the election to convert
  all Preferred Stock into Common Stock by holders of at least a majority of
  the then outstanding shares of Preferred Stock. The initial conversion rate
  is one-to-one and is subject to adjustment based upon subdivisions or
  combinations of Common Stock and certain dividends, distributions and
  common stock equivalents.

     Mandatory Redemption--The Company shall offer to redeem the unconverted
  shares of Series A Preferred Stock outstanding on January 1, 2004, reduced
  by the number of shares converted into Common Stock after January 1, 2004
  through the date of redemption, as follows:

<TABLE>
<CAPTION>
              Cumulative
              Redemption               Redemption
              Percentage                  Date
              ----------               -----------
              <S>                      <C>
               33.3%.................. August 2004
               66.7%.................. August 2005
              100.0%.................. August 2006
</TABLE>

     The redemption price is payable in cash and is equal to the sum of the
  original issue price plus cumulative but unpaid dividends. If any portion
  of the redemption amount is not paid by the Company on

                                      F-15
<PAGE>

                                eMachines, Inc.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)
                    (in thousands, except share information)

  the redemption date, dividends will continue to accrue on the shares
  tendered for redemption and late fees will accrue at an annual rate of 15%
  until the entire redemption amount is paid.

     Liquidation Preference--In the event of the liquidation, dissolution or
  winding up of the Company, the holders of Series A Preferred Stock will be
  entitled to receive, in preference to the holders of Common Stock, the
  amount of $6.38 per share, which presently is equal to the aggregate amount
  of $154,995, plus declared and unpaid dividends, if any. After payment has
  been made to the holders of the Series A Preferred Stock, any remaining
  assets are distributable ratably to the holders of Common Stock.

     Voting--Each holder of shares of Series A Preferred Stock is entitled to
  the number of votes equal to the number of shares of Common Stock into
  which each share is then convertible. Series A Preferred Stock holders also
  have the following voting rights:

       Board of Directors--Three of the company's current common
    stockholders are entitled to elect a total of five of the Company's
    seven board members. Holders of Series A Preferred Stock, voting
    together as a class, are entitled to elect one member to the Company's
    Board of Directors. All remaining members of the Board of Directors
    shall be elected by the holders of the then-outstanding shares of
    Common Stock and Series A Preferred Stock, voting together as a single
    class.

       Protective Provisions--As long as 4,000,000 shares of the Series A
    Preferred Stock is outstanding, the Company is required to obtain the
    written consent of at least 50% of the preferred shareholders before
    taking certain corporate actions.

     Dividends--The holders of Series A Preferred Stock are entitled to
  receive noncumulative dividends only when and if declared by the Company's
  Board of Directors, equal to $0.45 per share per year. Dividends shall be
  paid to the holders of Series A Preferred Stock prior to any cash dividends
  paid to the holders of Common Stock. The Company has not declared any
  dividends to date with respect to the Series A Preferred Stock or Common
  Stock.

   AOL Warrants--In connection with the August 1999 Series A Preferred Stock
financing, AOL purchased 2,271,303 shares of the Company's Series A Preferred
Stock and committed to purchase an additional 5,560,776 shares upon receipt of
regulatory approval. On August 18, 1999, the Company granted AOL a warrant to
purchase common stock of an aggregate exercise price of $3,625. This warrant
expires five years after the date of grant. The number of shares that may be
purchased upon exercise of the warrant is equal to the aggregate exercise price
divided by the greater of 1.25 times the initial public offering price of the
Company's common stock and $7.98. If there is no successful completion of an
initial public offering, the number of shares issuable upon exercise of the
warrant is equal to the aggregate exercise price of the warrant divided by
$11.82. Upon receipt of regulatory approval, the Company is obligated to issue
AOL an additional warrant to purchase shares of common stock at an aggregate
exercise price of $8,875 under the same terms as the earlier warrant. The
maximum number of shares that AOL may receive upon exercise of their warrants
is 1,566,219.

                                      F-16
<PAGE>

                                     [LOGO]
<PAGE>

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

   The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by eMachines in connection with
the sale of Common Stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fee.

<TABLE>
      <S>                                                               <C>
      SEC registration fee............................................. $55,600
      NASD filing fee..................................................  20,500
      Nasdaq National Market listing fee...............................       *
      Printing and engraving costs..................................... 300,000
      Legal fees and expenses..........................................       *
      Accounting fees and expenses.....................................       *
      Blue Sky fees and expenses.......................................   5,000
      Transfer Agent and Registrar fees................................   5,000
      Miscellaneous expenses...........................................       *
                                                                        -------
        Total.......................................................... $
                                                                        =======
</TABLE>
---------------------
*  To be filed by amendment.

Item 14. Indemnification of Directors and Officers

   Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.

   Article X of the Registrant's Amended and Restated Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.

   Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the Registrant if
such person acted in good faith and in a manner reasonably believed to be in
and not opposed to the best interest of the Registrant, and, with respect to
any criminal action or proceeding, the indemnified party had no reason to
believe his or her conduct was unlawful.

   The Registrant has entered into indemnification agreements with its
directors and intends to enter into indemnification agreements with its
executive officers, in addition to indemnification provided for in the
Registrant's Bylaws.

Item 15. Recent Sales of Unregistered Securities

   During the past three years, the Registrant has issued unregistered
securities as described below.

   (a) On June 10, 1999, the Registrant sold an aggregate of 77,600,000 shares
of its common stock in exchange for cash and notes in an aggregate amount of
approximately $1.9 million pursuant to an initial capitalization agreement.

   (b) As of June 30, 1999, an aggregate of 609,200 shares of common stock are
issuable upon exercise of options under the Registrant's 1998 stock option
plan.

   (c) On August 18, 1999, the Registrant sold an aggregate of 24,279,369
shares of Series A preferred stock (including 5,560,776 shares issuable upon
regulatory approval) in exchange for cash in an aggregate amount of
approximately $155.0 million pursuant to a stock purchase agreement.

                                      II-1
<PAGE>

   (d) On August 18, 1999, the Registrant issued 419,538 shares of its common
stock to Korea Data Systems America in connection with the transfer of a
trademark to the Registrant.

   (e) On August 18, 1999, the Registrant issued a warrant to purchase shares
of its common stock at an aggregate exercise price of $3.6 million. Upon
receipt of regulatory approval, the Registrant will issue an additional warrant
to purchase shares of its common stock at an aggregate exercise price of $8.9
million. The maximum number of shares issuable, subject to anti-dilution
adjustments, upon exercise of the warrants is 1,566,219.

   (f) On August 18, 1999, the Registrant granted an option to purchase 227,897
shares of its common stock at an exercise price of $1.61 per share to Mr.
Stephen Dukker in connection with an employment agreement between Mr. Dukker
and the Registrant.

   Except as indicated above, none of the foregoing transactions involved any
underwriters, underwriting discounts or commissions, or any public offering,
and the Registrant believes that each transaction was exempt from the
registration requirements of the Securities Act by virtue of Section 4(2)
thereof, Regulation D promulgated thereunder or Rule 701 pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under such Rule 701. The recipients in such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate
legends were affixed to the share certificates and instruments issued in such
transactions. All recipients had adequate access, through their relationships
with the Registrant, to information about the Registrant.

Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits

<TABLE>
<CAPTION>
 Exhibit
 Number
 -------
 <C>     <S>
  1.1*   Form of Underwriting Agreement

  3.1    Amended and Restated Certificate of Incorporation of the Registrant

  3.2*   Form of Amended and Restated Certificate of Incorporation of the
         Registrant to be filed upon the closing of the offering

  3.3    Amended and Restated Bylaws

  3.4*   Amended and Restated Bylaws of the Registrant to be in effect after
         the closing of the offering

  4.1*   Specimen Common Stock Certificate

  5.1*   Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation

 10.1    Form of Security Agreement entered into between the Registrant and
         each of Chul Chung, Stephen A. Dukker, Lap Shun Hui, Dae Soo Koh, Jung
         Koh, Hong Soon Lee and Hong Sun Lee dated as of June 10, 1999

 10.2    Form of Promissory Note from each of Chul Chung, Stephen A. Dukker,
         Lap Shun Hui, Dae Soo Koh, Jung Koh, Hong Soon Lee and Hong Sun Lee
         dated as of June 10, 1999

 10.3    Amended and Restated Rights and Restrictions Agreement dated as of
         August 18, 1999

 10.4    Subordinated Promissory Note dated as of June 7, 1999 for TriGem
         Corporation

 10.5    Subordinated Promissory Note dated as of June 7, 1999 for Korea Data
         Systems America, Inc.

 10.6    Form of Indemnification Agreement between the Registrant and each of
         its directors and executive officers

 10.7*   1998 Stock Plan and form of agreements thereunder
</TABLE>


                                      II-2
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number
 -------
 <C>     <S>
 10.8*+  Marketing Agreement between the Registrant and America Online dated as
         of June 17, 1999


 10.9    Amended and Restated Employment Agreement dated as of August 18, 1999
         for Stephen Dukker


 10.10   Trademark Assignment Agreement dated as of June 10, 1999


 10.11   Agreement (Amending Trademark Assignment) dated as of August 16, 1999


 10.12   Industrial Lease between the Registrant and the Irvine Company dated
         as of November 30, 1998


 10.13   Common Stock Purchase Warrant issued on August 18, 1999 to America
         Online, Inc.


 10.14   Option to Purchase Common Stock issued on August 18, 1999 to Stephen
         Dukker


 23.1    Consent of Deloitte & Touche, LLP, Independent Accountants


 23.2*   Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
         (see Exhibit 5.1)


 24.1    Power of Attorney (see page II-4)


 27.1*   Financial Data Schedules
</TABLE>
---------------------
* To be filed by amendment.
+ We intend to seek confidential treatment pursuant to Rule 406 for portions of
  the referenced exhibits.

(b) Financial Statement Schedules

<TABLE>
<CAPTION>
                Schedule                         Page
                --------                         ----
         <S>                                     <C>
         II - Valuation and Qualifying Accounts  S-1
</TABLE>

   Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

Item 17. Undertakings

   The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

   Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

   The undersigned Registrant hereby undertakes that:

  . For purposes of determining any liability under the Securities Act, the
    information omitted from the form of Prospectus filed as part of this
    Registration Statement in reliance upon Rule 430A and contained in a form
    of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
    or 497(h) under the Securities Act shall be deemed to be part of this
    Registration Statement as of the time it was declared effective.

  . For the purpose of determining any liability under the Securities Act,
    each post-effective amendment that contains a form of Prospectus shall be
    deemed to be a new registration statement relating to the securities
    offered therein, and the offering of such securities at that time shall
    be deemed to be the initial bona fide offering thereof.

                                      II-3
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
State of California, on the 31st day of August, 1999.

                                          eMachines, Inc.

                                                   /s/ Stephen A. Dukker
                                          By: _________________________________
                                                     Stephen A. Dukker,
                                               President and Chief Executive
                                                          Officer

                               POWER OF ATTORNEY

   KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen A. Dukker and Steven H. Miller and each
of them, his attorneys-in-fact, each with the power of substitution, for him
and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that such attorneys-in-fact and agents or any of them, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.

   Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
        /s/ Stephen A. Dukker          President, Chief Executive   August 31, 1999
______________________________________  Officer and Director
         (Stephen A. Dukker)            (Principal Executive
                                        Officer)

         /s/ Steven H. Miller          Executive Vice President     August 31, 1999
______________________________________  and Chief Financial
          (Steven H. Miller)            Officer (Principal
                                        Financial Officer)

            /s/ Chul Chung             Director                     August 31, 1999
______________________________________
             (Chul Chung)

           /s/ Lap Shun Hui            Director                     August 31, 1999
______________________________________
            (Lap Shun Hui)

             /s/ Jung Koh              Director                     August 31, 1999
______________________________________
              (Jung Koh)
</TABLE>

                                      II-4
<PAGE>

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
          /s/ Hong Soon Lee            Director                     August 31, 1999
______________________________________
           (Hong Soon Lee)

          /s/ Nathan Morton            Director                     August 31, 1999
______________________________________
           (Nathan Morton)

        /s/ C. Toms Newby, III         Director                     August 31, 1999
______________________________________
</TABLE> (C. Toms Newby, III)

                                      II-5
<PAGE>

                                  SCHEDULE II

                                eMachines, Inc.

                       VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                   Balance  Additions  Balance
                                                      at    charged to at end
                                                  beginning  cost and    of
                   Description                    of period  expenses  period
                   -----------                    --------- ---------- -------
<S>                                               <C>       <C>        <C>
Allowance for doubtful accounts receivable and
 sales returns:
Period from September 18 (inception), 1998 to
 December 31, 1998...............................    --       $  239   $  239
Six months ended June 30, 1999 (unaudited).......    239       8,733    8,972
</TABLE>

                                      S-1
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Exhibit
 Number
 -------
 <C>     <S>
  1.1*   Form of Underwriting Agreement

  3.1    Amended and Restated Certificate of Incorporation of the Registrant

  3.2*   Form of Amended and Restated Certificate of Incorporation of the
         Registrant to be filed upon the closing of the offering

  3.3    Amended and Restated Bylaws

  3.4*   Amended and Restated Bylaws of the Registrant to be in effect after
         the closing of the offering

  4.1*   Specimen Common Stock Certificate

  5.1*   Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation

 10.1    Form of Security Agreement entered into between the Registrant and
         each of Chul Chung, Stephen A. Dukker, Lap Shun Hui, Dae Soo Koh, Jung
         Koh, Hong Soon Lee and Hong Sun Lee dated as of June 10, 1999

 10.2    Form of Promissory Note from each of Chul Chung, Stephen A. Dukker,
         Lap Shun Hui, Dae Soo Koh, Jung Koh, Hong Soon Lee and Hong Sun Lee
         dated as of June 10, 1999

 10.3    Amended and Restated Rights and Restrictions Agreement dated as of
         August 18, 1999

 10.4    Subordinated Promissory Note dated as of June 7, 1999 for TriGem
         Corporation

 10.5    Subordinated Promissory Note dated as of June 7, 1999 for Korea Data
         Systems America, Inc.

 10.6    Form of Indemnification Agreement between the Registrant and each of
         its directors and executive officers

 10.7*   1998 Stock Plan and form of agreements thereunder

 10.8*+  Marketing Agreement between the Registrant and America Online dated as
         of June 17, 1999

 10.9    Amended and Restated Employment Agreement dated as of August 18, 1999
         for Stephen Dukker

 10.10   Trademark Assignment Agreement dated as of June 10, 1999

 10.11   Agreement (Amending Trademark Assignment) dated as of August 16, 1999

 10.12   Industrial Lease between the Registrant and the Irvine Company dated
         as of November 30, 1998

 10.13   Common Stock Purchase Warrant issued on August 18, 1999 to America
         Online, Inc.

 10.14   Option to Purchase Common Stock issued on August 18, 1999 to Stephen
         Dukker

 23.1    Consent of Deloitte & Touche, LLP, Independent Accountants

 23.2*   Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
         (see Exhibit 5.1)

 24.1    Power of Attorney (see page II-4)

 27.1*   Financial Data Schedules
</TABLE>
---------------------
* To be filed by amendment.
+ We intend to seek confidential treatment pursuant to Rule 406 for portions of
  the referenced exhibits.
[{"type": "S-1", "sequence": "1", "description": "FORM S-1", "secsgml_size_bytes": 304404}]
{"company-data": {"conformed-name": "EMACHINES INC /DE/", "cik": "0001090710", "assigned-sic": "", "irs-number": "943311182", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-86219", "film-number": "99703646"}, "business-address": {"street1": "14350 MYFORD ROAD SUITE 100", "city": "IRVINE", "state": "CA", "zip": "92606", "phone": "7144812828"}, "mail-address": {"street1": "14350 MYFORD ROAD SUITE 100", "city": "IRVINE", "state": "CA", "zip": "92606"}}
As filed with the Securities and Exchange Commission on August 31, 1999
                                                      Registration No. 333-
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                 -----------

                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
                                 -----------

                                eMachines, Inc.
            (Exact Name of Registrant as Specified in its Charter)
Delaware                           3571                           943311182
 (State or Other Jurisdiction of    (Primary Standard Industrial           (I.R.S. Employer
  Incorporation or Organization)    Classification Code Number)         Identification Number)
14350 Myford Road, Suite 100
                           Irvine, California 92606
                                (714) 481-2828
  (Address, including zip code, and telephone number, including area code, of
                   Registrant's principal executive offices)

                                 -----------

                               Stephen A. Dukker
                            Chief Executive Officer
                         14350 Myford Road, Suite 100
                           Irvine, California 92606
                                (714) 481-2828
(Name, address, including zip code, and telephone number, including area code,
                             of agent for service)

                                 -----------

                                  Copies to:
John A. Fore, Esq.                            William D. Sherman, Esq.
        Wilson Sonsini Goodrich & Rosati                    Stephen J. Schrader, Esq.
            Professional Corporation                         Justin L. Bastian, Esq.
               650 Page Mill Road                            Rochelle A. Krause, Esq.
          Palo Alto, California 94304                        Morrison & Foerster LLP
                 (650) 493-9300                                 755 Page Mill Road
                                                           Palo Alto, California 94304
                                                                  (650) 813-5600
-----------

   Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.

   If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
   If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
   If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
                 ---------------
   If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
                 ---------------
   If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]

                        CALCULATION OF REGISTRATION FEE

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Proposed Maximum
           Title of Each Class of                Aggregate         Amount of
        Securities to be Registered          Offering Price (1) Registration Fee
--------------------------------------------------------------------------------
Common Stock, $0.0000125 par value.........     $200,000,000        $55,600
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(1)  Estimated pursuant to Rule 457(o) solely for the purpose of computing the
     amount of the registration fee.
                                 -----------

   The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall hereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to such
Section 8(a), may determine.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted.             +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                  SUBJECT TO COMPLETION, DATED AUGUST 31, 1999

                                        Shares

                                     [LOGO]

                                eMachines, Inc.
                                  Common Stock
                                   --------

  Prior to this offering, there has been no public market for our common stock.
The initial public offering price of our common stock is expected to be between
$     and $     per share. We have applied to list our common stock on The
Nasdaq Stock Market's National Market under the symbol "EEEE."

  The underwriters have an option to purchase a maximum of     additional
shares to cover over-allotments of shares.

  Investing in our common stock involves risks. See "Risk Factors" on page 6.
Underwriting
                                              Price to    Discounts and  Proceeds to
                                               Public      Commissions    eMachines
                                            ------------- ------------- -------------
Per Share..................................      $             $             $
Total......................................     $             $             $
Delivery of the shares of common stock will be made on or about       , 1999.

  Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

Credit Suisse First Boston

            BancBoston Robertson Stephens

                         Hambrecht & Quist

                                                           Salomon Smith Barney

                   The date of this prospectus is     , 1999.
------------

                               TABLE OF CONTENTS
Page
                                      ----
Prospectus Summary..................    3

Risk Factors........................    6

Special Note Regarding Forward-
 Looking Statements.................   20

Use of Proceeds.....................   20

Dividend Policy.....................   20

Capitalization......................   21

Dilution............................   22

Selected Financial Data.............   23

Management's Discussion and Analysis
 of Financial Condition and Results
 of Operations......................   24

Business............................   32
Page
                                     ----
Management..........................   41

Related Party Transactions..........   46

Principal Stockholders..............   51

Description of Capital Stock........   53

Shares Eligible for Future Sale.....   56

Underwriting........................   57

Notice to Canadian Residents........   59

Legal Matters.......................   60

Experts.............................   60

Additional Information..............   60

Index to Financial Statements.......  F-1
------------

   You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.

                     Dealer Prospectus Delivery Obligation

   Until     , 1999 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
PROSPECTUS SUMMARY

   This summary highlights information described more fully elsewhere in this
prospectus. This summary is not complete and does not contain all the
information you should consider before investing in our common stock. You
should read the entire prospectus, including the Financial Statements and
related Notes, before making an investment decision.

                                eMachines, Inc.

   We are a leading provider of low-price, high-quality branded personal
computers, or PCs. Since our first sale in November 1998 when we introduced our
eTower PCs, we have sold over one million PCs. According to Ziff Davis Market
Intelligence, we sold the third highest number of PCs through retailers in the
United States in June 1999. We also offer an integrated computing and Internet
access solution, currently through our relationship with America Online, Inc.,
and plan to launch e-machines.net, our private label Internet access service,
in the fourth quarter of 1999.

   The explosive growth in the popularity of the Internet has increased demand
for PCs as the PC has proven to be the predominant means of accessing the
Internet. We believe the combination of this growing demand for Internet access
and the introduction of the sub-$600 PC creates an opportunity for our low-
price, high-quality integrated computing and Internet access solution. As part
of our integrated solution, our PC buyers may receive rebates in connection
with long-term Internet access service subscriptions, or ISP rebates. We
currently offer our ISP rebates through our relationship with America Online
and, in the future, we plan to directly offer ISP rebates with our planned e-
machines.net service. Our ISP rebates enable consumers to purchase our PCs for
a net effective price of as low as $0 and to gain access to the Internet for a
monthly fee. In addition, our PC buyers who do not enter into a long-term
contract but subscribe to e-machines.net on a month-to-month basis may qualify
for our planned program that will enable subscribers to upgrade the
configuration of their eTower model PC for a low fee. We believe that our
products, services and programs will appeal to a wide variety of consumers,
especially first-time PC buyers, who are looking for an inexpensive and
powerful means of accessing the Internet.

   Our operating model allows us to cost-effectively offer our PCs and
integrated computing and Internet access solution for the following reasons:

  .  we are able to maintain low fixed costs, capital expenditures and
     manufacturing and operating costs by outsourcing most of our major
     operating and manufacturing functions;

  .  we maintain low distribution, marketing and administration costs by
     distributing and advertising our products and services through a limited
     number of large retailers, including Best Buy, Circuit City, Office
     Depot and Staples; and

  .  we achieve high inventory turnover through product management and
     outsourcing of manufacturing.

   We were incorporated in Delaware in September 1998. Our principal executive
offices are located at 14350 Myford Road, Suite 100, Irvine, California 92606
and our telephone number is (714) 481-2828. Our web site is located at
"www.e4me.com." Information contained on our web site does not constitute a
part of this prospectus.

                                  ------------

   E-MACHINES(R) is our registered United States trademark. eMachines(TM),
eTower(TM), eView(TM) and eOne(TM) are also our trademarks. This prospectus
contains other trademarks and trade names of other companies.

                                       3
The Offering

Common stock offered....................      shares

Common stock to be outstanding after
 this offering..........................      shares

Use of proceeds.........................  General corporate purposes, including
                                          working capital and financing our ISP
                                          rebate program with respect to our
                                          planned e-machines.net service

Proposed Nasdaq National Market
 symbol.................................  EEEE

                         Summary Financial Information
                       (in thousands, except share data)
Period From
                                                   Sept. 18, 1998  Six Months
                                                   (inception) to     Ended
                                                   Dec. 31, 1998  June 30, 1999
                                                   -------------- -------------
Statements of Operations Data:
  Net revenues....................................   $   58,283    $  351,313
  Cost of revenues................................       58,088       338,790
                                                     ----------    ----------
  Gross profit....................................          195        12,523
  Income (loss) from operations...................       (1,913)        1,051
  Net loss .......................................       (2,802)       (3,909)
  Basic and diluted net loss per share............   $    (0.04)   $    (0.05)
                                                     ==========    ==========
  Shares used in computing basic and diluted net
   loss per share.................................   77,600,000    77,600,000
                                                     ==========    ==========
June 30, 1999
                                                 -------------------------------
                                                                      Pro Forma
                                                  Actual   Pro Forma As Adjusted
                                                 --------  --------- -----------
Balance Sheet Data:
  Cash ......................................... $ 10,911  $157,571     $
  Working capital...............................   (6,502)  140,158
  Total assets..................................  160,313   306,973
  Long-term obligations.........................      560       560
  Redeemable convertible preferred stock........       --        --       --
  Total stockholders' equity (deficiency).......   (5,120)  141,540
The total number of outstanding shares of our common stock and the pro forma
data above are based on:

  .  77,600,000 shares of our common stock outstanding as of June 30, 1999;

  .  the sale of 24,279,369 shares of our preferred stock in August 1999
     (including 5,560,776 not outstanding as of the date of this prospectus
     that are issuable to America Online upon regulatory approval) and the
     automatic conversion of these shares of preferred stock upon completion
     of this offering into 24,279,369 additional shares of common stock; and

  .  the issuance of 419,538 additional shares of our common stock on August
     18, 1999, as consideration for the assignment of our trademark.

   See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.

                                       4
The pro forma as adjusted data above has been adjusted to reflect the sale
of        shares of common stock in this offering at an assumed initial public
offering price of $      per share (less underwriting discounts and commissions
and estimated offering expenses).

   The above information excludes:

  .  609,200 shares of common stock issuable upon exercise of options
     outstanding as of June 30, 1999, having a weighted average exercise
     price of $1.56 per share, and 2,590,800 additional shares authorized to
     be issued under our stock plan;

  .  227,897 shares of common stock issuable upon exercise of an option
     granted to our President and Chief Executive Officer, with an exercise
     price of $1.61 per share; and

  .  shares of common stock issuable to America Online upon exercise of its
     warrants. See "Related Party Transactions--Relationship with America
     Online, Inc." for a discussion of the America Online warrants.

   Unless otherwise specifically stated, information throughout this
prospectus:

  .  reflects the conversion of all outstanding shares of preferred stock,
     including the 5,560,776 shares of preferred stock not outstanding as of
     the date of this prospectus that are issuable to America Online upon
     regulatory approval, into 24,279,369 shares of common stock
     automatically upon the closing of this offering;

  .  assumes no exercise of the underwriters' over-allotment option; and

  .  reflects the eight-for-one stock split of our common stock effected on
     August 13, 1999 (all share and per share amounts of our common stock
     have been retroactively restated to reflect the stock split).

                                       5
RISK FACTORS

   You should carefully consider the following risks before making an
investment decision. The risks described below are intended to highlight risks
that are specific to us and are not the only ones that we face. Additional
risks and uncertainties, such as those that generally apply to our industry or
to companies undertaking initial public offerings, may also impair our business
operations. You should also refer to the other information in this prospectus,
including the discussions in "Special Note Regarding Forward-Looking
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as our Financial Statements and
the related Notes.

Because we have operated for a very limited period of time and our business is
still rapidly changing, we may have difficulty accurately predicting future
operating results and you have limited information upon which to evaluate our
business

   We were incorporated in September 1998 and sold our first PC in November
1998. To date, most of our revenues have been derived from the sale of PCs and
monitors, and from the provision of customer support and other technical
services. Our business is changing rapidly, and we expect to derive a portion
of our future net revenues from America Online, our Internet access service
provider, and our own planned Internet access services. We intend to introduce
our own branded Internet access service, e-machines.net, during the fourth
quarter of this year. Our limited operating history and our evolving business
make it very difficult for us and for investors to evaluate or predict our
future business prospects. In addition, we may change our business strategy as
a result of changing market conditions. You should consider our business and
prospects in light of the risks and difficulties typically encountered by
companies in the early stages of development, particularly those in the rapidly
changing PC and Internet access service markets. For example, we may be unable
to:

  .  obtain a sufficient supply of PCs and monitors on a timely basis;

  .  timely and effectively introduce new PCs, monitors and Internet access
     services;

  .  attract and retain our PC buyers as subscribers to Internet access
     services offered by America Online or us;

  .  raise sufficient capital to support our growth or any future ISP rebate
     programs;

  .  build significant brand name recognition;

  .  compete successfully in the highly competitive PC and Internet access
     service markets;

  .  successfully manage the outsourcing of a significant portion of our
     operations, including the manufacture and distribution of our PCs and
     monitors, customer service and support and Internet access services; and

  .  attract, retain and efficiently integrate new senior management
     personnel.

We have incurred significant losses since our inception and may continue to
incur losses in the future

   We have incurred net losses since our inception and at June 30, 1999 we had
an accumulated deficit of $6.7 million. While we experienced a period of rapid
revenue growth following our inception, we may not be able to maintain this
revenue growth and we may not become profitable. In addition, pricing pressures
in both the PC and Internet access service markets may cause us to decrease the
prices of our PCs or Internet access services, which would harm our operating
results. Also, we have maintained relatively low operating costs by outsourcing
most of our business operations. We may not be able to successfully manage
these outsourcing relationships. As a result, our ability to achieve
profitability may be significantly harmed.

                                       6
A number of factors could cause our quarterly operating results to fluctuate
significantly and cause our stock price to be volatile

   We expect our operating results to fluctuate significantly in the future due
to a number of factors, many of which are outside of our control. Our PC
business currently generates low operating margins, and we expect this to
continue for the foreseeable future. Thus, slight variations in the sales
prices of our PCs, component or manufacturing costs or operating costs could
significantly affect our operating results in future periods. In addition, the
Internet access services market is highly competitive and subject to rapid
change. If our planned Internet access services are not successful, our
operating results will be harmed. If our operating results do not meet the
expectations of securities analysts and investors, our common stock price could
significantly decline. Some of the other factors that could affect our
quarterly operating results include:

  .  our ability or our suppliers' ability to effectively develop and support
     new PC models;

  .  new product or Internet access service announcements and introductions
     by us or our competitors;

  .  fluctuations in the amount of, and the number of our PC buyers claiming,
     product rebates;

  .  the number of subscribers who default on their long-term Internet access
     service contracts;

  .  reductions in the sales prices of PCs, monitors or Internet access
     services offered by us or our competitors;

  .  changes in the mix of the PCs and monitors we sell;

  .  changes in the dollar amount of ISP rebates we offer;

  .  achieving and maintaining a low-cost business model and managing third-
     party relationships necessary to do so;

  .  the cost of, and our key suppliers' ability to obtain sufficient
     supplies of, PCs and monitors and the components for them;

  .  our key suppliers' ability to manufacture sufficient quantities of PCs
     and monitors, and maintain the quality of our products;

  .  loss of subscribers due to changes in consumer demand for America
     Online's CompuServe or our own e-machines.net service;

  .  the popularity of, and seasonal or other fluctuations in demand for, our
     PCs, monitors and Internet access services; and

  .  our ability to adequately reserve for price protection credits to
     retailers, product returns, warranty claims or anticipated defaults
     relating to our Internet access services, as well as the cost of our
     "PC rEnewal" program.

   Historically, demand for PCs and PC-related services has generally been
stronger in the fourth quarter of each year. We believe this seasonal impact on
business will increase to the extent that PCs continue to become more consumer-
oriented or entertainment-driven products. As a result, we expect our net
revenues to generally be greater in the fourth quarter and generally lower in
the first quarter of each year.

Because our business depends on outsourcing a substantial portion of our
operations, if we were unable to do so in the future, our business would be
significantly harmed

   Historically, we have had relatively low manufacturing and operating costs
because we outsource most of our operating and manufacturing functions,
including system assembly, warehouse labor, distribution, research, product
design, warranty services and customer support. In addition, we have had
relatively low distribution costs because we distribute our products primarily
through a limited number of large retailers. We may not be successful in
managing our relationships with any of these third parties and if existing
third-party suppliers

                                       7
cannot provide these services at commercially reasonable prices, or at all, and
we are not able to find suitable alternative suppliers, our business would be
significantly harmed. Moreover, we may not be able to monitor or control
effectively the quality of the PCs and monitors manufactured by our suppliers
and, in the case of Internet access services, the reliability of our suppliers'
network. Low-quality products, poor customer service, capacity constraints
within our suppliers' networks resulting in slow Internet connectivity or
similar inadequacies may harm our brand name, both as a PC vendor and as an
Internet service provider, which would significantly harm our business.

Because we currently depend solely on a single manufacturer for our eTower PCs,
a single manufacturer for our eOne PCs and a limited number of manufacturers
for our monitors, if supply is reduced or discontinued, our business would be
significantly harmed

   TriGem Computer currently manufactures all of our eTower PCs. Korea Data
Systems Co. manufactures our eOne PCs and, together with the Taiwanese
manufacturer Jean Company, all of our monitors. TriGem Computer's PC production
facility in Korea is currently operating at full capacity. In order to meet
anticipated demand for our products and the products of other customers, TriGem
Computer has recently entered into an outsourcing manufacturing agreement with
a facility in Xiamen, China and intends to open an additional facility in
Shenyang, China during the second half of 1999. Building and bringing a new
manufacturing facility up to full production capacity is a lengthy, costly and
difficult process. These facilities may not achieve their scheduled production
levels on a timely basis, or at all. Even if these new facilities do meet
projected production levels, the products manufactured may not meet our high-
quality standards. Additionally, TriGem Computer, Korea Data Systems Co. and
Jean Company provide other vendors with PCs and monitors. As a result, we may
not benefit from any increased production capacity. If we are unable to obtain
a sufficient supply of PCs or monitors to meet the demand for our products, our
business would be significantly harmed.

Our suppliers depend on a limited number of key suppliers for microprocessors
and other components used in our products

   Our suppliers generally use standard parts and components available from a
number of vendors. However, our suppliers are dependent on Intel Corporation
and Advanced Micro Devices, Inc. for their supply of microprocessors. If, in
the future, our suppliers are unable to obtain sufficient quantities of
microprocessors from Intel or Advanced Micro Devices, or if these companies
stop producing microprocessors that meet our needs, our suppliers could
experience increases in component costs or delays in product shipments that
would significantly harm our business. Even where multiple vendors are
available, our suppliers' strategy has been to concentrate purchases from a
single source to obtain favorable pricing. Our business would be significantly
harmed if supply shortages led to price increases or production delays for our
products.

We operate under a number of verbal agreements with our key suppliers and their
subsidiaries, the terms of which may be changed in a manner adverse to us

   We currently operate under a number of verbal agreements with our key
suppliers and their subsidiaries. TriGem Computer provides warranties to us on
PCs sold and provides repair services for returned PCs through its wholly-owned
subsidiary, TriGem America. Korea Data Systems Co. and Jean Company provide us
a warranty for monitors under a verbal agreement as well. Under a verbal
agreement with KDS USA, our inventory trade payable terms are extended out to
90 days with a cash discount on PC purchases proportional to the number of days
we pay early. We also sublease space to TriGem America under our warehouse
lease under a verbal agreement. These verbal agreements are described in more
detail under "Related Party Transactions." Since these agreements are not in
written form, we may not be able to continue to operate our business under
these terms and these terms may be subject to future change. If we are unable
to continue to operate under these verbal agreements or these verbal agreements
are changed in a manner adverse to us, our business would be significantly
harmed.

                                       8
The international operations of our suppliers of PCs and monitors expose us to
currency, trade, regulatory, political and other risks

   All of our PCs and monitors are currently being manufactured in Korea, China
and Malaysia by TriGem Computer, Korea Data Systems Co. and Jean Company. These
suppliers' operations, and in turn our operating results, are subject to a
number of risks associated with international operations including:

  .  fluctuations in currency values;

  .  export duties, import controls and trade barriers;

  .  restrictions on the transfer of funds;

  .  political and economic instability; and

  .  compliance with foreign laws.

Because we have partnered with America Online, any reduction in the popularity
of its AOL or CompuServe services would significantly harm our business

   The Internet access service industry is highly competitive. To the extent
any particular Internet service provider becomes unpopular with a significant
number of subscribers, that provider's business may be materially harmed.
Pursuant to our agreement with America Online, we offer America Online's AOL
and CompuServe services in connection with our PCs. We are, therefore,
substantially dependent on America Online's ability to maintain AOL and
CompuServe's position as two of the preferred Internet access services. Our
relationship with America Online may not be as successful as we anticipate if
other PC vendors offer similar integrated computing and Internet solutions with
more favorable terms than ours.

   America Online is not prohibited from entering into similar agreements with
other PC vendors or retailers, so long as the terms are no more favorable than
ours. For example, America Online has entered into an agreement with Circuit
City, one of our largest customers, for a limited time to offer consumers a
rebate of up to $400 with the purchase of various PCs. In addition, another
retailer recently announced that it plans to offer its own branded low-price
PCs in connection with Internet access service from America Online. If
consumers use the Circuit City rebate offer in connection with the purchase of
another company's PC, or if consumers find other rebate offers more attractive,
any competitive advantage we may gain from our ISP rebate program would be
significantly harmed.

If we are unable to successfully compete with established Internet service
providers, our business will be significantly harmed

   We plan to enter a new market where we have no previous experience. The
Internet access services market is highly competitive and we expect competition
in this market to intensify in the future. This market is new and subject to
rapid change, including the impact of new technologies, declining prices and
well-funded promotional campaigns. If we begin providing our own branded
Internet access services, we will compete with many large companies that have
substantially greater market presence, and financial, technical, marketing and
other resources than we have. In addition, as consumers begin to access the
Internet through emerging Internet appliances such as the television, we may
face additional competition. Potential competitors include the following:

  .  established online services, such as America Online, Microsoft Network
     and Prodigy Communications Corp.;

  .  local, regional and national Internet service providers, including
     EarthLink Network, Inc. and MindSpring Enterprises, Inc.;

  .  nonprofit or educational institutions providing access to the Internet;

  .  national telecommunications companies, including AT&T Corp., MCI
     WorldCom, Inc. and GTE Corp.;

                                       9
.  regional Bell operating companies, including BellSouth and SBC
     Communications, Inc.;

  .  competitive local exchange carriers, including Covad Communications
     Group, Inc. and Rhythms NetConnections, Inc.;

  .  online cable services, including Excite@Home, Time Warner and Road
     Runner;

  .  alternative e-commerce Internet advertising vendors, including Free-PC
     and NetZero Inc.; and

  .  potential new entrants to the Internet access services market such as
     computer hardware vendors, including Compaq Computer Corporation, Dell
     Computer Corporation, Gateway, Inc. and Micron Electronics, Inc. or
     computer retailers, such as Best Buy Co., Inc.

   In addition to America Online, some of our current or future strategic
partners may become our competitors. Our entry into the Internet access
services market may have a negative effect on our relationship with America
Online or our relationships with other parties. Competition is likely to remain
intense as large, diversified telecommunications and media companies acquire
Internet service providers, as Internet service providers and PC vendors merge
and as Internet service providers consolidate. The consolidation of existing
competitors with or into larger entities, or entry of new entities into the
Internet access services market, would likely result in greater competition for
us.

If we do not maintain our reputation and expand our name recognition, we will
not remain competitive and our business will be significantly harmed

   Developing and maintaining awareness of our "eMachines" brand name is
critical to achieving widespread acceptance of our PCs and monitors and our
branded Internet access service. Promotion and enhancement of our brand will
depend largely on our success in providing high quality products and services,
which is uncertain. If our PC buyers do not perceive our products and services
to be of high quality, our brand name and reputation could be significantly
harmed. Furthermore, the importance of brand recognition will increase as
competition in our market increases. The substantial resources of other PC
vendors may enable them to enter the Internet access industry quickly. As a
result, we may have only a limited opportunity to enter, and maintain a
significant market share of, the Internet access services market. If we fail to
successfully promote our brand name or if we incur significant expenses
promoting and maintaining our brand name, our business could be significantly
harmed.

   Our ability to successfully promote and position our brand will depend
largely on the effectiveness of our marketing efforts, our retail customers'
marketing efforts and our ability to develop reliable and desired products at
competitive prices. Therefore, we may need to increase our financial commitment
to create and maintain brand awareness among potential PC buyers. Currently, we
depend exclusively on our retail customers to advertise our PCs. If these
retailers reduce or cease advertising our PCs, we would have to increase our
own sales and marketing expenses and our business would be significantly
harmed.

We are involved in litigation that may be costly and time-consuming

   In July 1999, Compaq Computer Corporation filed a complaint against us,
TriGem Computer, TriGem America and Korea Data Systems Co. as defendants in the
U.S. District Court for the Southern District of Texas based on the defendants'
alleged infringement of 13 patents held by Compaq related to improved system
processing speed, enhanced video graphics, peripheral compatibility and overall
system architecture. The complaint seeks an accounting, treble damages, a
preliminary and permanent injunction from further alleged infringement,
attorneys' fees and other unspecified damages. We are currently in the process
of assessing the complaint. As a result, we are currently unable to estimate
the total expenses, possible loss or range of loss that may be ultimately
connected with these allegations. We cannot assure you that Compaq will not
succeed in obtaining monetary damages or an injunction against the production
of our PC products. Our defense of the claims could result in significant
expenses and diversion of management's attention and other resources. In
addition, we cannot assure you that the results of this litigation would not
result in our business being significantly harmed.

                                       10
In August 1999, Apple Computer, Inc. filed a complaint against us as a
defendant in the U.S. District Court for the Northern District of California
based on our alleged unfair and unauthorized use of the design and trade dress
of the iMac computer. The complaint seeks a constructive trust of profits from
sales of our eOne PC, treble damages, a preliminary and permanent injunction
from further distribution of our eOne PC, attorneys' fees and punitive damages.
We are currently in the process of assessing the complaint. As a result, we are
currently unable to estimate the total expenses, possible loss or range of loss
that may be ultimately connected with these allegations. We cannot assure you
that Apple will not succeed in obtaining monetary damages or an injunction
against the production of our eOne PCs. Our defense of the claims could result
in significant expenses and diversion of management's attention and other
resources. In addition, we cannot assure you that the results of this
litigation would not result in our business being significantly harmed.

   Various other lawsuits, claims and proceedings have been or may be asserted
against us, including those related to product liability, intellectual
property, environmental, 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, the outcome of
litigation cannot be predicted with certainty. Some lawsuits, claims or
proceedings may be disposed of unfavorably to us.

Our business as a high technology company may subject us to claims that our
trademarks or other intellectual property, or intellectual property used in our
products, infringes the rights of third parties which could cause us to incur
significant costs

   It is common in the PC industry to receive communications from time to time
from other parties asserting that they possess patent rights, copyrights,
trademark rights or other intellectual property rights which cover our
products. We receive notices from time to time that our technology allegedly
infringes on intellectual property rights held by others. Any assertions of
this nature may make us subject to legal proceedings and claims in the ordinary
course of our business. For example, in July 1999, Compaq filed a lawsuit
against us alleging that our products infringe a number of its patents. In
addition, in August 1999, Apple filed a lawsuit against us alleging that our
eOne product infringed against the design and trade dress of the iMac computer.
For a discussion of these lawsuits, see the immediately preceding risk factor.
If the final judgment of any legal action is decided against us, our business
could be significantly harmed. Intellectual property litigation is expensive
and time consuming regardless of the merits of the claim, and could divert our
management's attention from our business. Any potential intellectual property
litigation could also force us to do one or more of the following:

  .  stop using the challenged intellectual property or selling our products
     or services that incorporate it;

  .  obtain, if possible, a license to use the challenged intellectual
     property or to sell products or services that incorporate it, although a
     license may not be available on reasonable terms, or at all; or

  .  redesign those products or services that are based on or incorporate the
     challenged intellectual property.

   If we are forced to take any of the foregoing actions, we may be unable to
sell our products or services and our business would be significantly harmed.

Misappropriation by others of our trademarks and other proprietary rights could
harm our reputation, affect our competitive position and cause us to incur
significant costs to defend our rights

   We believe our trademarks and other proprietary rights are critical to our
success and competitive position. If we are unable to protect our trademarks
and other proprietary rights against unauthorized use by others, our reputation
and brand name would be damaged and our competitive position would be
significantly harmed. One of our trademarks is registered in the United States.
We seek to limit access to our proprietary information and our third-party
licensors' proprietary information. Nonetheless, we may not be able to deter
misappropriation of our proprietary information and material in light of the
following risks:

  .  nonrecognition or inadequate protection of our proprietary rights in
     certain foreign countries;

                                       11
.  undetected misappropriation of our proprietary information or materials;
     and

  .  unenforceability of confidentiality agreements entered into by our
     employees.

Because we depend on licenses of intellectual property from third parties to
produce our products, the loss of any of these licenses would significantly
harm our business

   We are required to obtain licenses from software providers in order to
market and sell our products and services. In particular, we currently pre-
install Windows 98 and Microsoft Works on our PCs pursuant to a license.
However, if we are unable to maintain these licenses, or obtain the necessary
licenses in the future, we may be forced to market products without these
technological features or software. We may also be forced to discontinue sales
of our products which incorporate allegedly protected technology for which we
have no license or defend legal actions taken against us relating to our use of
the allegedly protected technology. Our inability to obtain licenses on
competitive terms necessary to sell our PCs at a profit would significantly
harm our business.

We have no prior experience in providing Internet access services and if we are
unsuccessful, our business will be significantly harmed

   Our future success is partially dependent on the success of our e-
machines.net Internet access service. We intend to begin offering this service
to our PC buyers in the fourth quarter of 1999. However, we may decide to
postpone the introduction of our e-machines.net Internet service or decide to
pursue alternative Internet strategies as a result of changing market
conditions. If introduced, this service will compete directly with America
Online's CompuServe service as well as other Internet access services. We may
not successfully introduce e-machines.net or attract subscribers to this
service. The success of e-machines.net depends on a variety of other factors,
including:

  .  the quality and reliability of our service;

  .  our ability to develop new products and services;

  .  our pricing policies and the pricing policies of our competitors;

  .  our ability to introduce new services before our competitors; and

  .  general economic trends.

If we do not maintain and strengthen our relationships with our retail and
strategic partners, our ability to generate revenues will suffer and our
business will be significantly harmed

   We are substantially dependent on retailers to sell our PCs and monitors.
Since inception, we have derived a significant portion of our gross revenues
from sales to a limited number of large retailers. For the six months ended
June 30, 1999, approximately 70% of our gross revenues were from sales to our
four largest retail customers. We expect to continue to derive a large
percentage of our gross revenues from sales to a limited number of leading
retailers. However, our retail customers are not contractually committed to
future purchases of our products and could discontinue carrying our products at
any time. In addition, we compete with an increasing number of companies for
access to limited shelf space with these retailers. Generally, these retailers
limit the number of PC brands they carry and may stop carrying our PCs at any
time. Any significant disruption of our relationship with any of our major
retailers, or any significant reduction in purchases by them, could
significantly harm our business.

If we are unable to sell Internet access services to our PC buyers, our
business would be significantly harmed

   Our future success depends in part on our ability to sell Internet access
services to our PC buyers. The PC industry and the Internet industry are
currently evolving and converging. We believe that this convergence will

                                       12
result in the PC becoming the Internet appliance that attracts consumers to
enter into long-term Internet access service contracts. Our business would be
harmed if a significant number of buyers do not also purchase Internet access
service from either America Online or us. In addition, if Internet access
services fees decline significantly or become free, our ISP rebate program will
be unattractive to consumers and our business would be significantly harmed.

If we are unable to monitor and manage our product rebate programs, our
business could be significantly harmed

   We currently offer product rebates to buyers of our PCs. We have limited
historical data to assist us in determining what percentage of consumers will
claim these product rebates. At the same time, we must approximate future
product rebate redemptions in order to price our products effectively. Our
business would be significantly harmed if an unexpectedly large number of our
PC buyers redeemed the product rebates to which they were entitled, thereby
reducing the effective average selling price of our products below the level we
anticipated.

Our business would be significantly harmed if our PC buyers who elect to
receive an ISP rebate and enter into long-term contracts for Internet access
services fail to honor their commitments

   We intend to directly offer an ISP rebate to our PC buyers who subscribe to
our planned e-machines.net for a three year period. In addition, with each new
subscriber, we may pre-pay UUNET, an MCI WorldCom company that provides
Internet infrastructure services, a nonrefundable fee for the Internet services
that we will outsource to UUNET. As prices for Internet access services
decline, subscribers may default and subscribe to a lower-priced service. If
significant numbers of our PC buyers who elect to enter into long-term
contracts for Internet access services fail to honor their contractual
subscription obligations after receiving an ISP rebate, we will lose the amount
of the ISP rebate that we paid and the amount of any prepayment to UUNET that
has not been recovered through monthly subscription fees, and our business
would be significantly harmed. Further, although we intend to establish
reserves in anticipation of a certain number of defaults, we have limited
experience in determining the appropriate amount of these reserves. If our
reserves are inadequate, we may incur unexpected losses.

   In addition, if recurring monthly net revenues are discontinued due to the
default by buyers of our PCs who subscribe to America Online's CompuServe
Internet access service, our business could be significantly harmed. Because we
operate our business on narrow margins, any change in our expected net revenues
from Internet access service monthly payments or e-commerce could adversely
affect our business.

If we extend credit to retailers that do not repay us, or that pay late, we may
have unexpected losses, which would significantly harm our business

   We extend credit to our retail customers, which exposes us to credit risk.
Most of our outstanding accounts receivable are from a limited number of large
retailers. As of June 30, 1999, the five highest outstanding accounts
receivable balances totaled $102.4 million, representing 83% of our gross
accounts receivable, with one customer accounting for $34.8 million,
representing 28% of our gross accounts receivable. In the event that we fail to
monitor and manage effectively the resulting credit risk and a material portion
of our accounts receivable is not paid in a timely manner or becomes
uncollectible, our business would be significantly harmed and we could incur a
significant loss associated with any outstanding accounts receivable.

Technology in the PC industry changes rapidly, therefore, we must continually
introduce new products and services to remain competitive or our business will
be significantly harmed

   We must introduce new PCs with features that address the needs and
preferences of consumers to remain competitive. The PC industry is
characterized by short product life cycles resulting from rapid changes in
technology and consumer preferences and declining product prices. We must
regularly introduce new PCs and services, including new computer configurations
and offerings, to maintain retailer and consumer interest in our

                                       13
products. These new PCs or services may not be successful. Further, the
successful introduction of new products or services by us or our competitors
may significantly harm the sale of, or gross margins on, our existing products.
We may not be able to adapt to future changes in the PC industry because we do
not maintain a research and development group. Currently, we work closely with
TriGem Computer to evaluate the latest developments in PC-related technology.
In the future, we may not have access to new technology, successfully
incorporate new technology into our products or be able to deliver commercial
quantities of new products or features in a timely and cost-effective manner.
If any of these events occur, our business would suffer.

Products that contain, or are rumored to contain, design defects could result
in significant costs to us or otherwise significantly harm our business

   The design and production of PC components is highly complex and, since we
do not design or produce our own products, we rely on our suppliers and
component manufacturers to provide us with high-quality products. If any of our
products contain defective components, we could experience delays in shipment
of our products and increased costs. If defects are discovered after we have
shipped our affected products in volume, we could be harmed in the following
ways:

  .  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
     significant damage to our brand; and

  .  our PC buyers could file suits against us alleging damages caused by
     defective products.

Because average selling prices of PCs decline rapidly, if we fail to properly
manage our inventory our business could be significantly harmed

   The average selling prices of PCs are subject to rapid declines. To address
the problems created by excess inventory in the face of rapid price decreases,
PC vendors must carefully manage their inventory. Additionally, due to our
narrow margins, we must manage our inventory more efficiently than traditional
PC vendors. From time to time in the past, our inventory has been limited by
the capacity of our manufacturers and may be limited in the future. We may be
unsuccessful in managing the supply of our PCs and monitors to meet demand in
the future. Our business is dependent on our ability to quickly sell our PC
products through the retail channel. We must carefully monitor market demand
for, and supply of, our products in an effort to match supply to consumer
demand. If we overestimate the supply needed to meet consumer demand, our
business could be significantly harmed. If we underestimate needed supply or
otherwise maintain too little inventory, we may not be able to react quickly to
sudden increases in market demand for a given product, which may significantly
harm our business.

   In connection with the introduction of new products, we may be required to
discount prices of existing products or to give other sales incentives to
retailers. As a result, we may experience price protection adjustments to a
significant degree in the future. For example, in the second quarter of 1999,
we offered a significant price protection to certain retailers in connection
with the introduction of our next generation of products. In addition,
retailers generally have the right to return a portion of excess inventory
purchased in the prior quarter within a limited period of time. Increased
inventory levels in our distribution channels, whether due to a decrease in
consumer demand for our products, lower-than-anticipated demand for PCs in
general, problems in managing product transitions or component pricing
movements could significantly harm our profitability. Production delays at the
beginning of a new PC product cycle could affect our sales of newer products
and how we manage the sale of older PC product inventory held by retailers. If
we are unable to sell our aging products at anticipated prices, our business
could suffer. In managing our supply chain, we must accurately forecast
consumer demand for our products. The amount we establish as reserves for price
adjustments in the event we must credit a retail customer for a price decrease
may be insufficient and any future returns or price protection charges may
significantly harm our business.

                                       14
Increased popularity of non-PC Internet access devices could result in lower
sales of our PCs

   Our future business depends on PCs remaining the predominant Internet access
device. Internet services are currently accessed primarily by PCs. However,
television set-top boxes, hand held products and other non-PC devices may
increasingly be used to access the Internet. Television set-top boxes equipped
with modems and cable modems allow users to transmit data at substantially
faster speeds than the analog modems currently incorporated in our PCs. If
consumers prefer this or any other alternative devices to PCs to access the
Internet, sales of our PCs may slow, we may be unable to attract subscribers to
our Internet access service and our business would be significantly harmed.

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

   We believe a significant number of our PC buyers are purchasing our products
and services as a means of connecting to the Internet. As a result, our future
success is substantially dependent upon continued growth in Internet use. The
adoption of the Internet for commerce and communications generally requires the
understanding and acceptance of a new way of purchasing goods and exchanging
information. The use and acceptance of the Internet may not increase for a
number of other reasons, including the following:

  .  actual or perceived lack of security of information, such as credit card
     numbers;

  .  high cost or lack of availability of access;

  .  congestion of traffic or other usage delays on the Internet;

  .  inconsistent quality of service;

  .  possible outages due to year 2000 difficulties or other damage to the
     Internet;

  .  uncertainty regarding intellectual property ownership; and

  .  government regulation of the Internet.

   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 if the Internet does not become a viable and widespread
commercial and communication medium, our business could be significantly
harmed.

If demand for PCs does not continue to grow, our business will be significantly
harmed

   Our future success is significantly dependent on the continued strong demand
for PCs generally and for low-price PCs in particular. The PC market is
characterized by rapid new product and technology introductions and generally
declining prices for existing products. Demand for PCs might be significantly
reduced if consumers perceive little technological advantage in new PCs or
believe that the price of a new PC is not worth the perceived technical
advantage. Further, if consumers view anticipated changes as significant, such
as the introduction of a new operating system or microprocessor architecture,
overall market demand for PCs may decline because potential consumers may
postpone their purchases until release of the new PCs or in anticipation of
lower prices on existing PCs following the introduction of new models. Reduced
demand could result in excessive inventories that could take several quarters
to correct. If any of these events occur, our business would be significantly
harmed.

Our business would be significantly harmed if we are unable to compete
successfully in the PC industry

   The PC industry is highly competitive and we expect this competition to
increase significantly, particularly in the low-price PC market. We have been
able to gain market share by selling high-quality PCs at prices significantly
lower than those offered by established PC vendors. We expect pricing pressures
in the PC market to continue, particularly as more vendors combine Internet
access with the purchase of a PC. PC vendors may

                                       15
continue to reduce their prices to compete with us at our low price points.
Large PC vendors such as Compaq, Gateway, Hewlett-Packard and IBM have
significantly greater financial, marketing and technical resources than we do
and may decide to accept lower margins or losses on a sustained basis on their
low-price PC sales to regain market share. The introduction of low-price PCs
combined with brand strength, extensive distribution channels and financial
resources of the larger PC vendors may cause us to lose market share.

   Most major PC vendors have begun to offer Internet access services. Some PC
vendors are trying to increase their sales of higher-price PCs by offering
additional services, such as free Internet access for a limited period of time.
In addition, other PC vendors are adopting programs similar to ours that rebate
a portion of the purchase price of PCs in exchange for entering into long-term
Internet services contracts. There are relatively few barriers preventing
competitors from entering this market. As a result, new market entrants pose a
threat to our business. We do not own any patented technology that precludes or
inhibits competitors from entering the low-price PC market. 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.
For example, a retailer recently announced that it plans to offer its own
branded low-price PCs in connection with Internet access service from America
Online. Our PC and monitor suppliers are not contractually bound to meet our
demand for products and can divert some or all of their output to others,
including our competitors, or sell directly to the retail channel. If any of
these events were to occur, our business would be significantly harmed unless
we were able to successfully compete with these parties and source other low-
cost manufacturers of high-quality PCs and monitors.

If we, our key suppliers or our retailers fail to be ready for the year 2000
calendar change, our business may be disrupted and be significantly harmed

   The year 2000 issue refers to the potential for disruption to business
activities caused by system failures or miscalculations that are triggered by
advancement of date records past the year 1999. Many existing computer programs
use only two digits to identify a year. These programs were designed and
developed without addressing the impact of the upcoming change in the century.
If not corrected, many computer software applications could fail or create
erroneous results by, at or beyond the year 2000. We use software, computer
technology and other services provided by third-party vendors that may fail due
to the year 2000 calendar change. A failure due to year 2000 issues involves
numerous risks including:

  .  potential product warranty or other claims from our consumers;

  .  negative impact on market demand for PCs in general until preparations
     for the calendar change by existing and potential consumers is complete;
     and

  .  manufacturing, information, facility and development systems problems,
     both those that are unique to us and those that affect geographical
     areas, such as Korea, where our business, employees or suppliers reside
     or operate.

   Our PCs may operate in complex network environments, including the Internet,
and may directly or indirectly interact with a number of other hardware
systems, any of which may not be ready for the year 2000 calendar change.
Further, consumers may install software on our PCs that is not ready for the
year 2000 calendar change. We may discover that our PCs contain errors or
defects associated with the year 2000 date functions. We are unable to predict
to what extent our business may be affected if our PCs, the systems that they
operate in conjunction with, including the Internet, or consumers' software
experience material year 2000 problems. Known or unknown errors or defects in
our PCs or that affect our PCs, whether or not originating with our PCs, could
result in delays or losses of net revenues, interruptions of Internet service,
cancellations of subscriptions by our consumers, diversions of our resources,
damage to our brand name or reputation, increased service and warranty costs or
litigation costs. Any of these costs could adversely affect our business. Our
suppliers are currently in the process of assessing their year 2000 readiness.
In the event we or our suppliers are not year 2000 ready, we could experience
product delays. Further, regardless of whether we experience year 2000
problems, consumers may reduce their spending on PCs during the latter part of
1999 in anticipation of

                                       16
the potential effects of the year 2000, waiting until the beginning of 2000 to
buy a new PC so that they know a particular PC did not suffer problems
associated with the year 2000 calendar change. Any reduction in consumer demand
for our PCs due to year 2000 worries could have a material adverse effect on
our business.

The loss of key personnel or our inability to attract and retain additional
personnel when needed could significantly harm our business

   Our future success will depend, in part, on our ability to attract and
retain key management and personnel. Competition in the PC and Internet access
services industries is high. If we are unable to retain existing personnel and
attract and retain additional personnel, our business could be significantly
harmed. Our success also depends on the skills, experience and performance of
our senior management and other key personnel, many of whom have worked
together for only a short period of time. For example, Steven H. Miller, our
Chief Financial Officer, joined us in June 1999. We will also need to hire
additional personnel with expertise in the Internet access services market. If
we do not quickly and efficiently integrate these and other new executives, our
business could suffer. Our operations are substantially dependent on the
continued services of certain members of senior management, especially our
President and Chief Executive Officer, Stephen A. Dukker. Other than Mr.
Dukker, all of our senior management and other key personnel are at-will
employees. Further, we do not maintain "key man" life insurance with respect to
any of our employees. Loss of any key employees could significantly harm our
business.

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

   Immediately after the offering, our three principal stockholders, TriGem
Corporation, Korea Data Systems America and Stephen A. Dukker, will own
approximately  % of our common stock ( % if the underwriters' over-allotment
option is exercised in full). If these stockholders acted or voted together,
they would have the power to elect our directors and to exercise a controlling
influence over our business and affairs, including:

  .  any determinations over whether to change the source of our supply of
     PCs and monitors;

  .  the appointment of new management;

  .  any determinations with respect to mergers, acquisitions or other
     business combinations;

  .  future issuances of debt and equity securities; and

  .  the approval of any action requiring the consent of the stockholders,
     including amendments to our certificate of incorporation.

   In addition, this concentration of ownership could prevent a change in
control that might otherwise be beneficial to stockholders.

We may have potential conflicts of interest with our principal stockholders
which could be resolved in a manner that is inconsistent with other
stockholders' interests

   Conflicts of interest may arise between us and our principal stockholders in
a number of areas relating to our present and ongoing relationships, which
could be resolved in a manner which is inconsistent with stockholders'
interests. Conflicts of interests which may arise include:

  .  the ongoing indirect supply relationships between us and our principal
     corporate stockholders that may result in terms that may not be as
     favorable to us as arrangements we could negotiate at arm's length
     between unrelated parties;

  .  potential competitive business activities;

  .  potential acquisitions or financing transactions;

  .  sales or other dispositions by these principal stockholders of shares of
     our common stock, including through the exercise of their registration
     rights; and

  .  tax and intellectual property matters.

                                       17
If we are not able to manage our growth successfully, our business could be
significantly harmed

   Our ability to successfully offer products and services and implement our
business plan in a rapidly changing market requires an effective planning and
management process. Our net revenues increased from $58.3 million for the
period from our inception to December 31, 1998, to $351.3 million for the six
months ended June 30, 1999. We are increasing the scope of our operations, and
we have recently hired a significant number of additional employees. As of June
30, 1999, our total number of employees was 49, of which 26 joined us during
the second quarter of 1999. This growth has placed, and will continue to place,
a significant strain on our management systems, infrastructure and resources.
We will need to continue improving our product distribution systems, financial
and managerial controls, and reporting systems and procedures. We will also
need to continue to expand, train and manage our workforce. We also expect to
manage an increasing number of relationships with various retail customers and
other third parties. If we fail to successfully execute in these areas, our
business could be significantly harmed.

   We operate with a minimal number of employees to maintain a cost effective
business model. As a result, we do not have the ability to assume various
operations in the event that one of our third party suppliers is no longer
available to perform those functions. Further, our executive management team
does not have prior experience in the management and administration of a public
company. If our senior management team does not efficiently and effectively
integrate and gain experience in these duties, our business may be
significantly harmed.

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

   Our current 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. Sales
of a substantial number of shares of our common stock after this offering could
cause our stock price to fall. In addition, the sale of these shares could
impair our ability to raise capital through the sale of additional stock. You
should read "Shares Eligible for Future Sale" for a full discussion of shares
that may be sold in the public market in the future.

Our management has broad discretion over the use of the proceeds from this
offering

   Our management has broad discretion over the use of the proceeds of this
offering. Accordingly, it is possible that our management may allocate the
proceeds differently than investors in this offering would have preferred, or
that we will fail to maximize our return on the proceeds. See "Use of Proceeds"
for a more complete description of our current intention regarding the net
proceeds of this offering.

As a new investor you will experience immediate and substantial dilution

   If you purchase common stock in this offering, you will pay more for your
shares than the amount paid by existing stockholders which acquired shares
before this offering. As a result, the value of your investment based on the
value of our net tangible assets, as recorded on our books, will be less than
the amount you pay for shares of common stock in this offering. In addition,
the total amount of our capital will be less than what it would have been had
all the existing stockholders and optionees paid the same amount per share of
common stock as you will pay in this offering. See "Dilution" for a more
complete description of the dilution of your investment in our common stock
upon the completion of this offering.

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

   Our certificate of incorporation and bylaws are designed to make it
difficult for a third party to acquire control of us, even if a change in
control would be beneficial to stockholders. For example, our amended and
restated certificate of incorporation to be filed upon completion of this
offering, authorizes our board of directors to issue up to 25,000,000 shares of
preferred stock without previously designated rights and privileges. Without
stockholder approval, the board of directors has the authority to attach
special rights, including voting and dividend rights, to this preferred stock.
With these rights, preferred stockholders could make it more difficult for a
third party to acquire our company, including takeover attempts that might
result in a premium over the market price for shares of our common stock.

                                       18
Our charter documents will, subject to appropriate corporate action, create
a classified board of directors, eliminate the right of stockholders to call a
special meeting of stockholders, and eliminate the ability of stockholders to
take action by written consent. As a Delaware corporation, we are also subject
to the Delaware anti-takeover statute contained in Section 203 of the Delaware
General Corporation Law. See "Description of Capital Stock--Delaware Anti-
Takeover Law and Certain Charter and Bylaw Provisions" for a more complete
description of Section 203 of the Delaware General Corporation Law. These
provisions could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders.

Our stock price may be volatile

   There has not previously been a public market for our common stock. We
cannot predict the extent to which investor interest in eMachines will lead to
the development of a trading market or how liquid that market might become. The
initial public offering price for our shares will be determined by negotiations
between us and the representatives of the underwriters and may not be
indicative of prices that will prevail in the trading market.

   In addition, the stock markets in general, and The Nasdaq National Stock
Market and technology companies in particular, have experienced extreme price
and volume fluctuations that have often been unrelated or disproportionate to
the operating performance of such companies. The trading prices of many
comparable technology companies' stocks are at or near historical highs. These
trading prices are substantially above historic levels and may not be
sustained. These broad market and industry factors may seriously impact the
market price of our common stock, regardless of our actual operating
performance.

                                       19
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

   This prospectus contains forward-looking statements that relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"intend," "potential" or "continue" or the negative of such terms or other
comparable terminology. These forward-looking statements include, but are not
limited to, statements about our plans, objectives, expectations and intentions
and other statements contained in the prospectus that are not historical facts.
These statements are only predictions. We cannot guarantee future results,
levels of activity, performance or achievements. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including the risk outlined under "Risk Factors" and
elsewhere in this prospectus.

                                USE OF PROCEEDS

   We estimate that the net proceeds to us from the sale of the     shares of
common stock offered will be approximately $     million (approximately $
million if the underwriters' over-allotment option is exercised in full), at an
assumed initial public offering price of $  per share (less underwriting
discounts and commissions and estimated offering expenses).

   We intend to use the net proceeds from this offering for general corporate
purposes, including working capital and financing our ISP rebate program with
respect to our planned e-machines.net service. In addition, we may use a
portion of the net proceeds to acquire complementary products, technologies or
businesses. We currently have no commitments or agreements and are not involved
in any negotiations with respect to any such transactions. Pending use of the
net proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment-grade securities.

                                DIVIDEND POLICY

   We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future.

                                       20
CAPITALIZATION

   The following table sets forth our unaudited capitalization as of June 30,
1999 on the following three bases:

  .  on an actual basis;

  .  on a pro forma basis to reflect the sale of 24,279,369 shares of our
     preferred stock in August 1999 (including 5,560,776 not outstanding as
     of the date of this prospectus that are issuable to America Online upon
     regulatory approval) and the automatic conversion of these shares of
     preferred stock upon completion of this offering into 24,279,369 shares
     of common stock and the issuance of 419,538 shares of our common stock
     on August 18, 1999, as consideration for the assignment of our
     trademark; and

  .  on a pro forma as adjusted basis to reflect the sale of        shares of
     common stock in this offering at an assumed initial public offering
     price of $      per share (less underwriting discounts and commissions
     and estimated offering expenses).

   The table excludes the following:

  .  609,200 shares of common stock issuable upon exercise of options
     outstanding as of June 30, 1999 and 2,590,800 additional shares of our
     common stock authorized to be issued under our 1998 stock plan;

  .  227,897 shares of common stock issuable pursuant to an option granted to
     our President and Chief Executive Officer, with an exercise price of
     $1.61 per share; and

  .  shares of common stock issuable to America Online upon exercise of its
     warrants. For information with respect to the America Online warrants,
     see "Related Party Transactions--Relationship With America Online, Inc."
June 30, 1999
                                                 -------------------------------
                                                                      Pro Forma
                                                 Actual   Pro Forma  As Adjusted
                                                 -------  ---------  -----------
                                                  (in thousands, except share
                                                             data)
Long-term obligations........................... $   560  $    560      $
Redeemable convertible preferred stock, $0.01
 par value: no shares authorized, issued and
 outstanding (actual); 25,000,000 shares
 authorized, no shares issued and outstanding
 (pro forma); no shares authorized, issued and
 outstanding (pro forma as adjusted) ...........     --        --        --

Stockholders' equity:
  Preferred stock, $0.01 par value: 50,000,000
   shares authorized, no shares issued and
   outstanding (actual); 25,000,000 authorized,
   no shares issued or outstanding (pro forma
   and pro forma as adjusted)...................     --        --        --
  Common stock, $0.0000125 par value:
   250,000,000 authorized, 77,600,000 issued and
   outstanding (actual); 102,298,907 issued and
   outstanding (pro forma);     shares issued
   and outstanding (pro forma as adjusted)......       1         1
Additional paid-in capital......................   3,765   150,425
Unearned stock compensation.....................  (1,675)   (1,675)      (  )
Notes receivable from stockholders..............    (500)     (500)      (  )
Accumulated deficit.............................  (6,711)   (6,711)      (  )
                                                 -------  --------      ----
  Total stockholders' equity (deficiency).......  (5,120)  141,540
                                                 -------  --------      ----
    Total capitalization........................ $(4,560) $142,100      $
                                                 =======  ========      ====
21
DILUTION

   If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
common stock after this offering. Pro forma net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the pro forma number of shares of common stock outstanding. Dilution
in pro forma net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of common stock in
the offering made hereby and the net tangible book value per share of common
stock immediately after the completion of this offering.

   Our pro forma net tangible book value as of June 30, 1999 was $141,540 or
$1.38 per share of common stock. Pro forma net tangible book value per share
represents the amount of our stockholders' equity divided by 102,298,907 shares
of our common stock (on a pro forma basis to reflect issuance and conversion of
all preferred stock outstanding or issuable upon regulatory approval and
issuance of the 419,538 shares issued as consideration for the assignment of
our trademark). After giving effect to the sale of the     shares of common
stock offered hereby at an assumed public offering price of $    per share
(less underwriting discounts and commissions and estimated offering expenses),
our pro forma as adjusted net tangible book value as of June 30, 1999 would
have been $    or $    per share. This represents an immediate increase in net
tangible book value of $    per share to existing stockholders and an immediate
dilution in net tangible book value of $    per share to new investors of
common stock in this offering, as illustrated in the following table:
Assumed initial public offering price per share....................       $
 Pro forma net tangible book value per share as of June 30, 1999... $1.38
 Increase per share attributable to new investors.................. $
                                                                    -----
Pro forma as adjusted net tangible book value per share after this
 offering..........................................................       $
                                                                          ----
Dilution per share to new investors................................       $
                                                                          ====
The following table sets forth, as of June 30, 1999, the differences between
the number of shares of common stock purchased from us, the total consideration
paid and the average price per share paid by existing holders of common stock
(on a pro forma basis to reflect issuance and conversion of all preferred stock
outstanding or issuable upon regulatory approval) and by new investors, before
deducting the underwriting discounts and commissions and estimated offering
expenses at an assumed public offering price of $      per share.
Shares Purchased   Total Consideration
                            ------------------- ---------------------- Average Price
                              Number    Percent   Amount     Percent     Per Share
                            ----------- ------- ----------- ---------- -------------
                               (in thousands, except share data)
Existing stockholders... 102,298,907       % $   148,600          %     $1.45
   New investors...........                                                $
                            -----------  -----  -----------  --------
     Total.................              100.0% $               100.0%
                            ===========  =====  ===========  ========
The foregoing discussion and table assume no exercise of the underwriters'
over-allotment option and any stock options outstanding as of June 30, 1999. As
of June 30, 1999, there were options outstanding to purchase 609,200 shares of
common stock at a weighted average exercise price of $1.56 per share, an option
outstanding to purchase 227,897 shares of common stock granted to our President
and Chief Executive Officer with an exercise price of $1.61 per share and
shares of common stock issuable to America Online upon exercise of its
warrants. For information with respect to the America Online warrants, see
"Related Party Transactions--Relationship with America Online, Inc." To the
extent any of these options or warrants are exercised, there will be further
dilution to investors. See "Capitalization," "Management--Stock Plans,"
"Description of Capital Stock" and Note 5 to Notes to Financial Statements.

                                       22
SELECTED FINANCIAL DATA

   You should read the selected financial data set forth below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our Financial Statements and related Notes included
elsewhere in this prospectus. The financial data and other operating
information as of and for the period from inception to December 31, 1998 are
derived from audited financial statements included elsewhere in this
prospectus. The financial data and other operating information as of and for
the six months ended June 30, 1999 are derived from the unaudited financial
statements included elsewhere in this prospectus. We believe the unaudited
financial statements and other operating information contain all adjustments
necessary to present fairly the information included in those statements, and
that the adjustments consist of only normal recurring adjustments. Historical
results are not necessarily indicative of results that may be expected for any
future period.
Sept. 18, 1998  Six Months
                                                   (inception) to     Ended
                                                   Dec. 31, 1998  June 30, 1999
                                                   -------------- -------------
                                                                   (unaudited)
                                                   (in thousands, except share
                                                              data)
Statements of Operations Data:
 Net revenues.....................................   $   58,283    $  351,313
 Cost of revenues.................................       58,088       338,790
                                                     ----------    ----------
    Gross profit..................................          195        12,523
 Operating expenses:
  Sales and marketing.............................          840         5,517
  Customer service and technical support..........          269         2,522
  General and administrative......................          988         3,293
  Stock-based compensation........................           11           140
                                                     ----------    ----------
    Total operating expenses......................        2,108        11,472
                                                     ----------    ----------
 Income (loss) from operations....................       (1,913)        1,051
 Financing charges and interest expense, net......         (889)       (4,960)
                                                     ----------    ----------
 Net loss.........................................   $   (2,802)   $   (3,909)
                                                     ==========    ==========
 Basic and diluted net loss per share.............   $    (0.04)   $    (0.05)
                                                     ==========    ==========
 Shares used in computing basic and diluted net
  loss per share..................................   77,600,000    77,600,000
                                                     ==========    ==========
Dec. 31, 1998  June 30, 1999
Balance Sheet Data:                                -------------- -------------
Cash.............................................   $    3,791    $   10,911
 Working capital deficiency.......................       (1,311)       (6,502)
 Total assets.....................................       60,011       160,313
 Long-term obligations............................          560           560
 Total stockholders' deficiency...................       (1,351)       (5,120)
See Note 1 of Notes to Financial Statements for an explanation of the
determination of the weighted average common and common equivalent shares used
to compute net loss per share.

                                       23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   This prospectus contains forward-looking statements the accuracy of which
involves risks and uncertainties. We use words such as "anticipates,"
"believes," "plans," "expects," "future" and "intends" and similar expressions
to identify forward-looking statements. Prospective investors should not place
undue reliance on these forward-looking statements, which apply only as of the
date of this prospectus. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including the
risks we face described in "Risk Factors" and elsewhere in this prospectus.

Overview

   We were incorporated in September 1998 and sold our first PC in November
1998. Our founding stockholders were Stephen A. Dukker, our Chief Executive
Officer, President and a member of our board of directors, and two wholly-owned
U.S. subsidiaries of Korean PC and monitor manufacturers--TriGem Corporation
and Korea Data Systems America. TriGem Computer, the parent corporation of
TriGem Corporation, manufactures all of our eTower PCs. Korea Data Systems Co.
Ltd., the parent corporation of Korea Data Systems America, manufactures our
eOne PCs and, together with the Taiwanese manufacturer Jean Company, all of our
monitors. We source all the PCs and monitors we sell from KDS USA, a company
wholly-owned by Lap Shun Hui, which in turn purchases them from these
manufacturers. Mr. Hui is a member of our board of directors and one of our
stockholders. Initially, we sourced our PCs through KDS USA primarily because
we could not establish our creditworthiness due to our limited operating
history. We may in the future establish direct relationships with TriGem
Computer or other PC or monitor manufacturers.

   We currently derive a significant portion of our gross revenues from sales
to a limited number of large retailers. In the six months ended June 30, 1999,
approximately 70% of our gross revenues were from sales to our four largest
retail customers. We expect to continue to derive a large percentage of our
gross revenues from sales to a limited number of leading retailers.

   We have operated to date only in the United States and Canada and all of our
sales to date have been made in U.S. dollars. In addition, substantially all of
our purchases from our suppliers to date have been made in U.S. dollars. As a
result, changes in currency exchange rates do not generally have a direct
effect on our financial position. However, we do face foreign business,
political and economic risks because our supply of PCs and monitors are
manufactured outside of the United States. In addition, changes in currency
exchange rates may indirectly affect the cost of our PCs and monitors purchased
from our foreign suppliers, thereby indirectly affecting consumer demand for
our products and our net revenues.

   Our gross margins are affected by fluctuations in demand for our products,
the mix of products sold, the timing of new product implementations, new
product introductions by us and our competitors, changes in our pricing
policies and those of our competitors and component costs.

   Substantially all of our product sales and supplier purchases are done on a
purchase order basis, not pursuant to long-term contracts.

   We outsource technical support, warehouse staffing, inspection/repair and
repackaging of returned PCs and administration of our rebate program to third-
parties. Similarly, we plan to outsource the infrastructure, administration and
technical support of our e-machines.net Internet access service. As a result of
this outsourcing, we have a relatively small internal organization that
consisted of 49 employees as of June 30, 1999. This outsourcing strategy
enables us to minimize capital investment, maintain a low-cost structure and
respond quickly to market changes.

PC and Monitor Revenue

   To date, we have derived substantially all of our net revenues from sales of
PCs and monitors. We sell a limited number of PC configurations to our retail
customers. When appropriate, we intend to introduce

                                       24
enhanced configurations of our eTower PCs and new PC models. Generally, our
lowest-price PC model carries significantly lower gross margins than our other
PC models. We also sell monitors to our retail customers. We do not require
retail customers to buy PCs and monitors as a bundled package. To date, we have
sold substantially more PCs than monitors.

   We recognize revenues from PC and monitor sales at the time products are
shipped to our retail customers. Revenues are recorded net of outbound shipping
costs, returns, price protection and estimated costs for sales incentive
programs. Sales incentive programs consist primarily of cash rebates offered by
us to our PC buyers. In general, we offer a product rebate during a redemption
period which extends for up to thirty days after the PC is purchased. We rely
on historical data to forecast the percentage of our PC buyers who will redeem
their product rebates. If in a given period these redemptions exceed our
expectations, our gross margin and operating results will be adversely
impacted. In addition, we intend to modify from time to time our product rebate
programs in response to changing market conditions. These modifications may
affect the mix of PCs sold, our gross margin and the percentage of rebates
redeemed.

   We also derive limited revenues from the sale of extended service contracts
and technical support provided on an as-needed basis. We offer these services
through Sykes Enterprises, Inc., a third-party customer service provider. Our
PC buyers receive free technical support for 15 days following their initial
support call under our technical support program. After this period, our PC
buyers who require additional support can choose to enter into an extended
service contract or pay on a per incident basis until the problem is resolved.
We recognize revenues from extended service contracts ratably over the contract
period and from technical support calls outside the initial 15 day period of
free support as the services are performed.

Internet Service Revenues

   We have begun to earn and will report Internet service revenues in the third
quarter of 1999. Until we deploy our private label Internet service, which we
anticipate launching in the fourth quarter of 1999, Internet service revenues
will consist of revenues earned under our agreement with America Online. We
will recognize these revenues when reported to us by America Online.

   In June 1999, we entered into a marketing agreement with America Online
under which it will provide rebates to our PC buyers to significantly reduce
the net effective price of our PCs. To obtain an ISP rebate, our PC buyers must
enter into an agreement with America Online to subscribe to America Online's
CompuServe Internet access service over a predetermined period of time at a
stated monthly fee. In addition to the rebate provisions, the marketing
agreement also provides that we will include America Online's software on our
PCs. America Online will pay us recurring revenue or a one-time fee depending
on which service or plan a PC buyer elects.

   In addition, the agreement calls for us to work together with America Online
to design an e-commerce package that will consist of a specially designed
keyboard, desktop icons and America Online services links. Any revenue
generated by the marketing and sale of this package will be shared by America
Online and us. Finally, the agreement provides for the joint development of a
portal on a custom Netscape Netcenter homepage. The Netcenter portal will
include a dedicated area for placement of advertising and links that we can
sell to third parties and an area allowing access to third party content areas
by subscribers to e-machines.net.

                                       25
Results of Operations

   Because of our limited operating history and the rapidly evolving nature of
our business, year-to-year period comparisons are not available and we believe
that quarter-to-quarter period comparisons are not meaningful and should not be
relied upon as an indication of future performance. The following table
presents our operating results for the period from September 18, 1998
(inception) to December 31, 1998, each of the quarters ended March 31, 1999 and
June 30, 1999 and the six-month period ended June 30, 1999.
Period from
                          Sept. 18, 1998    Quarter       Quarter     Six Months
                          (inception) to     Ended         Ended         Ended
                          Dec. 31, 1998  Mar. 31, 1999 June 30, 1999 June 30, 1999
                          -------------- ------------- ------------- -------------
                           (in thousands, except as a percentage of net revenues)
Statements of Operations
 Data:
  Net revenues..........     $58,283       $137,434      $213,879      $351,313
  Cost of revenues......      58,088        131,101       207,689       338,790
                             -------       --------      --------      --------
   Gross profit.........         195          6,333         6,190        12,523
  Operating expenses:
   Sales and marketing..         840          2,719         2,798         5,517
   Customer service and
    technical support...         269            949         1,573         2,522
   General and
    administrative......         988          1,106         2,187         3,293
   Stock-based
    compensation........          11             41            99           140
                             -------       --------      --------      --------
    Total operating
     expenses...........       2,108          4,815         6,657        11,472
                             -------       --------      --------      --------
   Income (loss) from
    operations..........      (1,913)         1,518          (467)        1,051
   Financing charges and
    interest expense,
    net.................        (889)        (2,390)       (2,570)       (4,960)
                             -------       --------      --------      --------
    Net loss............     $(2,802)      $   (872)     $ (3,037)     $ (3,909)
                             =======       ========      ========      ========
As a Percentage of Net
 Revenues:
  Net revenues..........       100.0%         100.0%        100.0%        100.0%
  Cost of revenues......        99.7           95.4          97.1          96.4
                             -------       --------      --------      --------
   Gross profit.........         0.3            4.6           2.9           3.6
  Operating expenses:
   Sales and marketing..         1.4            2.0           1.3           1.6
   Customer service and
    technical support...         0.5            0.7           0.8           0.8
   General and
    administrative......         1.7            0.8           1.0           0.9
   Stock-based
    compensation........         0.0            0.0           0.0           0.0
                             -------       --------      --------      --------
    Total operating
     expenses...........         3.6            3.5           3.1           3.3
                             -------       --------      --------      --------
   Income (loss) from
    operations..........        (3.3)           1.1          (0.2)          0.3
   Financing charges and
    interest expense,
    net.................        (1.5)          (1.7)         (1.2)         (1.4)
                             -------       --------      --------      --------
    Net loss............        (4.8)%         (0.6)%        (1.4)%        (1.1)%
                             =======       ========      ========      ========
Net Revenues

   Our net revenues increased from $58.2 million for the period from inception
to December 31, 1998 to $137.4 million in the quarter ended March 31, 1999 and
to $213.9 million in the quarter ended June 30, 1999, representing an increase
of 55.6% from the first to second quarters of 1999. These increases were
primarily due to increases in unit shipments at each of the $399, $499 and $599
price points. Net revenue from extended service contracts and technical support
calls during these periods was minimal. In addition, we recognized only

                                       26
immaterial Internet service revenues from America Online and, therefore, we did
not report Internet service revenues separately. We expect to report Internet
service revenues separately in the future.

Cost of Revenues

   Cost of revenues consists of the cost of PCs and monitors, inbound shipping
costs and inventory valuation reserves. Cost of revenues increased from $58.1
million for the period from inception to December 31, 1998 to $131.1 million,
in the quarter ended March 31, 1999, to $207.7 million, in the quarter ended
June 30, 1999. These increases were primarily due to increases in unit
shipments. The increase in gross margin from 0.3% in the period ended December
31, 1998 to 4.6% in the quarter ended March 31, 1999 was primarily due to
reduced component costs in the first quarter. Gross margin decreased to 2.9% in
the quarter ended June 30, 1999 primarily as a result of price protection given
to certain retail customers and higher redemption rates associated with the
offer of a $75 product rebate during the period versus a $50 product rebate in
the prior quarter. Our historical gross margins may not be indicative of our
future results of operations. For example, we are currently launching a number
of new sales incentives in conjunction with our agreement with America Online,
and in the fourth quarter of 1999 we expect to launch e-machines.net and our
associated ISP rebate and "PC rEnewal" programs. We do not expect to incur
significant costs from the services offered through America Online. However, we
will incur significant costs associated with e-machines.net and our associated
ISP rebate programs. These new programs are expected to affect the level of
demand for different product models, the mix of PCs we sell and the gross
margins that we earn.

Operating Expenses

 Sales and Marketing

   Sales and marketing expenses consist primarily of cooperative advertising
incentives paid to retail customers, net of cooperative advertising credits
earned by us from component suppliers. Sales and marketing expenses also
include payroll expenses for sales and marketing personnel. Sales and marketing
expenses have increased from approximately $840,000 for the period from
inception to December 31, 1998 to $2.7 million in the quarter ended March 31,
1999 and $2.8 million in the quarter ended June 30, 1999. These increases were
primarily due to increased commission expenses and cooperative advertising
costs associated with increased sales volumes. As a percentage of net revenues,
sales and marketing costs decreased from 2.0% in the quarter ended March 31,
1999 to 1.3% in the quarter ended June 30, 1999. This decrease is a result of a
one-time increase in cooperative advertising credits earned from component
suppliers which reduced our cooperative advertising costs. We are able to
maintain a small sales and marketing staff by selling product primarily to a
limited number of large retailers. Marketing and advertising programs
undertaken by these retailers also help establish the "eMachines" brand
nationwide without requiring us to spend significant amounts on radio,
television and print advertisements. Our sales and marketing expenses in
absolute dollars will increase as sales increase and to the extent we increase
the number of our sales representatives, a possibility we are currently
evaluating.

 Customer Service and Technical Support

   Customer service and technical support expenses consist primarily of the
cost of technical support provided for us by Sykes. In addition, we anticipate
that when we launch e-machines.net, Sykes will provide technical support to our
subscribers. For either of these services, Sykes charges on a per minute basis
for each support call they receive. We expect customer service and technical
support expenses to increase to the extent our sales volumes increase or we
successfully introduce e-machines.net. Customer service and technical support
expenses were approximately $949,000 in the quarter ended March 31, 1999 and
$1.6 million in the quarter ended June 30, 1999.

 General and Administrative

   General and administrative expenses consist primarily of payroll and related
expenses for management and administrative personnel, outsourced warehousing
activities, facilities expenses, professional service fees, travel

                                       27
and other general corporate expenses. General and administrative expenses were
approximately $988,000 or 1.7% of net revenues for the period from inception to
December 31, 1998, $1.1 million, or 0.8% of net revenues, in the quarter ended
March 31, 1999 and $2.2 million, or 1.0% of net revenues, in the quarter ended
June 30, 1999. We anticipate that general and administrative expenses will
increase in absolute dollars primarily due to increased expenses associated
with the addition of personnel and additional professional fees, including
costs associated with being a public company. We anticipate that general and
administrative expenses may increase in future periods as a result of
litigation costs associated with the recent lawsuits filed against us by Compaq
and Apple. For a discussion of these lawsuits, see "Business--Legal
Proceedings."

 Stock-based Compensation

   Stock based compensation arises when an option to purchase stock, with an
exercise price less than the fair value of the underlying stock, is granted to
an employee. The amount of compensation is measured as the spread between the
exercise price and the fair value of the underlying stock. Stock-based
compensation is considered earned, and we recognize the related expense, as the
options vest. From inception to June 30, 1999, we recognized approximately
$151,000 of stock-based compensation. As of June 30, 1999, $1.7 million was
unearned and will be amortized according to the vesting schedules of the
relevant options.

Financing Charges and Interest Expense, Net

   Financing charges and interest expense, net consists primarily of interest
on trade payables. Finance charges and interest expense, net were approximately
$889,000 or 1.5% of net revenues for the period from inception to December 31,
1998, $2.4 million, or 1.7% of net revenues, in the quarter ended March 31,
1999 and $2.6 million, or 1.2% of net revenues, in the quarter ended June 30,
1999. These increases in absolute dollars were primarily due to increases in
trade payable financing associated with inventory purchases, resulting from
higher sales volumes in each succeeding period, partially offset by a decrease
in the effective annual interest rate from 12% to 10% as of March 31, 1999.

Liquidity and Capital Resources

   Since inception we have financed operations by extended payment terms on
trade payables, issuance of common stock and issuance of subordinated notes
payable to stockholders. As of June 30, 1999, we had $10.9 million in cash.
Trade payable terms with respect to inventory purchases are extended out to 90
days with a discount on PC purchases proportional to the number of days that we
pay early. The effective annual interest rate as of June 30, 1999 was 10%. As
of June 30, 1999 these trade payables were $134.4 million. Issuance of common
stock through June 30, 1999, yielded net cash proceeds of $1.4 million. On
December 18, 1998, we received cash proceeds of $560,000 pursuant to long-term
subordinated notes payable to stockholders, which bear interest at 5.79% and
mature on June 7, 2004.

   The private placement of 18,718,593 shares of our Series A preferred stock
on August 18, 1999 provided us with proceeds of approximately $119.5 million. A
portion of the proceeds from the issuance of our Series A preferred stock was
used to reduce trade payables. Upon regulatory approval, we will issue an
additional 5,560,776 shares of Series A preferred stock to America Online,
which will provide us with additional proceeds of approximately $35.5 million.

   Net cash provided by operating activities was $2.3 million in the period
from inception to December 31, 1998, $1.3 million in the quarter ended March
31, 1999 and $7.3 million in the quarter ended June 30, 1999. Cash provided by
operating activities for these periods consisted primarily of increases in
trade payables. Cash used in operating activities for these periods consisted
primarily of increases in accounts receivable and inventories.

   Net cash used in investing activities was approximately $550,000 in the
period from inception to December 31, 1998, approximately $662,000 in the
quarter ended March 31, 1999 and approximately $863,000

                                       28
in the quarter ended June 30, 1999. Net cash used in investing activities for
these periods consisted primarily of purchases of property and equipment.

   Net cash provided by financing activities was $2.0 million in the period
from inception to December 31, 1998. Net cash provided by financing activities
consisted of proceeds from the issuance of common stock and subordinated notes
payable to stockholders.

   We currently anticipate that the net proceeds of this offering, together
with our available funds as of June 30, 1999, and the proceeds from the
issuance of Series A preferred stock, will be sufficient to meet our
anticipated needs for at least the next 12 months. If additional funds are
required, financing may not be available on acceptable terms, if at all, and
may be dilutive to our stockholders.

Year 2000 Issues

   Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We sell PCs that rely on date information and use software, computer
technology and other services provided by third-party vendors that may fail due
to the year 2000 calendar change.

 Risks

   The failure of any of our third-party suppliers, including TriGem Computer,
Korea Data Systems Co., KDS USA and Jean Company, to be year 2000 compliant
could materially adversely affect our business. The failure of our own PCs to
be year 2000 compliant could damage our brand name and result in warranty
claims, costly litigation or unexpected costs incurred in connection with
correcting errors or defects in our PCs. A failure of the Internet
infrastructure to be year 2000 ready may adversely affect our Internet related
businesses, including our planned e-machines.net service and the service
provided to our consumers by America Online.

 State of Readiness

   We recognize the importance of year 2000 readiness for our PCs. We are
following the guidelines of National Software Testing Laboratories', or NSTL,
Year 2000 Hardware Compliance Program, an open industry standard to verify
proper date handling by PCs during the year 2000 calendar change. We have used
the software provided by NSTL to self-test our currently offered eTower and
eOne models, and have determined that they are year 2000 compliant. Pursuant to
these guidelines, several of our earlier models, including our eTower 333id and
366i models, have been certified year 2000 compliant by NSTL.

   We are currently assessing the year 2000 readiness of our third-party
supplied software and other services, which includes software bundled with our
PCs as well as for use in our accounting, database and other internal systems.
Much of this third-party supplied software and other services, including
Microsoft Windows98, Microsoft Works, AOL, CompuServe, and the services
supplied by Sykes, are certified year 2000 compliant by the companies that make
them. We have not assessed the year 2000 readiness of the internal information
technology systems of any of our manufacturers or suppliers.

   Our ability to assess the reliability of the Internet infrastructure is
limited and we are relying solely on generally available news reports, surveys
and comparable industry data.

 Costs of Compliance

   To date, the amount spent on year 2000 preparations has been immaterial. We
do not expect to make any material expenditures related to year 2000 compliance
issues in the future.

                                       29
Contingency Plan

   We do not currently have a contingency plan to address any unanticipated
occurrence of year 2000 errors in our products or problems with our internal
information technology systems, a failure of our third-party suppliers products
or information systems to be year 2000 compliant or a serious disruption in the
general infrastructure of the Internet, and have no current plan to make one.

Quantitative and Qualitative Discussion of Market Risk

   We currently have no floating rate indebtedness, hold no derivative
instruments and do not earn significant foreign sourced income. Accordingly,
changes in interest rates or currency exchange rates do not generally have a
direct effect on our financial position. In addition, we have operated only in
the United States and Canada and all purchases and sales to date have been made
in U.S. dollars. As a result, we have not had any material exposure to foreign
currency rate fluctuations. Changes in currency exchange rates, however, may
affect the cost of our PCs 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.

   We intend to implement an investment policy, the primary objective of which
would be to preserve principal while at the same time maximizing the 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. In general, money market funds are not subject to
market risk because the interest paid on such funds fluctuates with the
prevailing interest rate. As of June 30, 1999, all of our cash was on deposit
with our bank.

Quarterly Fluctuations

   We have a limited operating history upon which you can base an evaluation of
our business and prospects. Our prospects must be considered in light of the
risks, expenses, and difficulties encountered by companies in their early stage
of development. It is likely that in some future quarter our operating results
may fall below the expectations of securities analysts and investors. In this
event, the trading price of our common stock may fall significantly. See "Risk
Factors" for a more complete description of the risks we face. We believe that
the factors influencing quarterly variability include the following:

  .  the overall growth in the computer industry;

  .  shifts in short-term demand for our products resulting, in part, from
     the introduction of new products or updates of existing products;

  .  the intensity of price competition among us and our competitors as
     influenced by various factors;

  .  the fact that virtually all sales in a given quarter result from orders
     booked in that quarter; and

  .  the popularity of, and seasonal or other fluctuations in demand for,
     Internet services generally and e-machines.net in particular.

   Traditionally, computer sales in the fourth quarter are historically higher
than in the previous three quarters. We believe that this pattern of higher
fourth quarter sales is partially due to customer buying patterns relating to
calendar year-end business and holiday purchases. This pattern could be
adversely affected in 1999 due to consumer concern of the year 2000 issues
shifting demand for PCs into the following year.

                                       30
Effects of Recent Accounting Pronouncements

   In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which requires an enterprise to report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources, and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. We had no
comprehensive income items to report for the period from September 18, 1998
(inception) to December 31, 1998 and the six months ended June 30, 1999. We
currently operate one reportable segment under SFAS No. 131. Adoption of these
statements at our inception did not impact our financial position, results of
operations or cash flows.

   In June 1998, SFAS No 133 "Accounting for Derivative Instruments and Hedging
Activities" was released. The statement requires the recognition of all
derivatives as either assets or liabilities in the balance sheet and the
measurement of those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the planned use of the derivative and
the resulting designation. We are required to implement the statement in the
first quarter of fiscal 2001. We have not used derivative instruments and
believe the impact of adoption of this statement will not have a significant
effect on the financial statements.

                                       31
BUSINESS

Overview

   We are a leading provider of low-price, high-quality branded personal
computers, or PCs. Since our first shipment in November 1998, we have sold over
one million PCs. We sold the third highest number of PCs through retailers in
the United States in June 1999 according to Ziff Davis Market Intelligence. We
also offer an integrated computing and Internet access solution, currently
through our relationship with America Online, and we plan to launch
e-machines.net, our private label Internet access service, in the fourth
quarter of 1999.

   A growing number of consumers are seeking to gain access to the Internet for
the first time. As a result, many of these first-time Internet users are also
purchasing their first PC. In addition, consumers across a range of income
levels are seeking to upgrade their existing PC or add a second or third PC to
their homes. We support these trends by consistently providing high-quality PCs
and monitors at low prices through nationally-recognized retailers including
Best Buy, Circuit City, Costco, Fry's Electronics, MicroCenter, Office Depot,
QVC, Sears and Staples. Our integrated computing and Internet access solution
enables these consumers to purchase a PC with a net effective price of as low
as $0 and gain access to the Internet.

Industry Background

   The explosion in popularity of the Internet has transformed the home PC from
a stand-alone system used to process discrete tasks into the predominant means
of accessing the Internet. International Data Corporation, or IDC, estimates
that there were approximately 159 million worldwide users of the Internet at
the end of 1998 and that the number of users will grow to approximately 510
million by the end of 2003. According to IDC, PCs accounted for approximately
94% of the access devices connected to the Internet in the United States for
1998. We believe that this is because the PC is ideally suited for the
Internet. PCs offer a media-rich Internet experience on an architecture
sufficiently flexible to run most applications and accommodate frequently
changing Internet technologies, such as streaming video, MP3 audio files and
browser technologies. After their initial manufacture, dedicated Internet
appliances cannot easily be adapted to accommodate the evolving technologies
utilized by the Internet. In addition, many of the most popular PC software
applications, such as those used for personal finance, games and education, are
enhanced when combined with access to the Internet. Over the past two decades,
continuous technological advancements in, and improved manufacturing
efficiencies of, key PC components, such as microprocessors and storage
devices, have significantly improved PC functionality while dramatically
lowering PC prices. This in turn has expanded the market for potential PC
buyers and Internet subscribers.

   In recent years, however, the growth rate of PC household penetration had
slowed. According to the U.S. Bureau of the Census, household PC penetration in
1990 was approximately 15%. While the PC penetration level grew to 37% by 1996,
this level only grew to 43% by April 1998, according to a January 1999 report
by Inteco Corporation. In addition, since July 1997 first-time buyers still
spent an average of $1,880, while replacement buyers spent a slightly lower
average of $1,830, according to a May 1998 Inteco Corporation report. We
believe this price point inhibited penetration of households with annual
incomes below $50,000. Based on IDC's U.S. Household Survey, approximately
84.3% of U.S. households that did not own a PC had annual incomes below
$50,000.

   We believe that the introduction of the sub-$600 PC started a change in PC
buyers' behavior. According to Ziff Davis Market Intelligence, sales of sub-
$600 PCs increased as a percentage of the total retail market from 0.7% in
September 1998 to 28.2% in June 1999. At the sub-$600 price point, we believe
that consumers increasingly view the PC as a household appliance, like a VCR or
television set, which is renewing growth in household PC penetration. Moreover,
we believe the introduction of the sub-$600 PC has attracted consumers seeking
to add a second or third PC in their home. According to IDC, the number of U.S.
households with more than one PC will increase from approximately 15.6 million
in 1998 to approximately 22.9 million in 2002. We believe that computer buying
decisions are increasingly based on price, brand identity and ease of use and
that this will continue to increase the market share of sub-$600 PCs.

                                       32
Despite the slowing growth rate of household PC penetration, the demand for
Internet access continues to increase. According to IDC, net revenues generated
by providing consumer Internet access in the United States will grow from $4.7
billion in 1998 to $7.6 billion in 2000. However, Internet users increasingly
view Internet access as a commodity product, resulting in frequent changes in
providers. According to IDC, the industry average churn rate experienced by
consumer Internet service providers in the United States is approximately 4%
per month. In response to these trends, Internet service providers have
invested significantly in advertising and marketing programs to differentiate
their services and establish brand loyalty which has led to higher operating
costs.

   To address these trends, both traditional PC vendors and Internet service
providers are exploring new solutions. Some vendors of high-price PCs have
started to offer free Internet access for limited periods to increase the
volume of PCs they sell. Internet service providers have recently initiated
programs that combine Internet access services with the purchase of a PC, which
allow PC buyers to minimize the effective purchase price of a PC.

   Traditional PC vendors and Internet service providers seeking to provide
these new solutions face significant challenges. We believe that traditional PC
vendors may have limited revenue opportunities from bundling Internet access
services with their PCs. Typically, these high-price PCs are sold to
experienced consumers with existing Internet relationships. We believe these
consumers are less likely to make purchasing decisions based on the bundling of
Internet access services. In addition, traditional PC vendors are limited by
high fixed costs, high distribution and marketing costs and shrinking gross
margins resulting from rapidly declining prices and obsolete inventory.
Moreover, a change in their traditional sales model to very low-price PCs would
reduce sales of their existing product lines and further accelerate the decline
in average selling prices. In addition, traditional Internet access service
providers are not able to offer independently a combined computing and Internet
access solution. Therefore, they are dependent upon the PC manufacturers for
the supply of PCs and the growth in PC sales. Further, Internet service
providers cannot partner with retailers to tailor content and pre-install
features on PCs.

The eMachines Solution

   We provide an integrated computing and Internet access solution that enables
consumers to cost effectively purchase a PC and gain access to the Internet. We
sell low-price, high-quality PCs through leading retailers and currently offer
Internet access through our strategic relationship with America Online. To
expand our integrated solution, we intend to launch e-machines.net, our private
label Internet access service, in the fourth quarter of 1999.

   Our widely-available, integrated computing and Internet access solution is
designed to attract first-time PC buyers that do not have an existing
relationship with an Internet service provider. Our solution is also designed
to appeal to buyers seeking to upgrade their existing PC or add an additional
PC to their household. As a result of our ISP rebate programs, we believe that
many first-time buyers may be willing to enter into a long-term Internet access
service contract in order to purchase a PC at a net effective price as low as
$0. We intend to launch two associated programs concurrently with our planned
e-machines.net service. Our PC buyers may elect to receive an ISP rebate from
us at the time of the purchase of their PC if they enter into a long-term
Internet access service contract. Alternatively, our PC buyers may elect to
subscribe to our e-machines.net service on a month-to-month basis. Month-to-
month subscribers to e-machines.net who remain enrolled for 24 consecutive
months will qualify for our planned "PC rEnewal" program. This program will be
designed to enable these subscribers to upgrade the configuration of their
eTower PC for a low fee.

   We believe the following elements of our operating model allow us to cost
effectively offer our PCs and integrated computing and Internet access
solution:

  . Low PC Manufacturing and Operating Costs. We maintain fixed costs,
    capital expenditures and manufacturing and operating costs significantly
    below the industry average by outsourcing most of our major operating and
    manufacturing functions. This includes outsourcing system assembly,
    warehouse labor, distribution, research and development, product design,
    warranty and customer support to leading suppliers such as TriGem
    Computer, Korea Data Systems Co. and Sykes.

                                       33
. Low Distribution, Marketing and Administration Costs. We also maintain
    low distribution, marketing and administration costs by distributing and
    advertising our products and services primarily through a limited number
    of large retailers. For the six months ended June 30, 1999, approximately
    70% of our gross revenues were from sales to our four largest retail
    customers. This enables us to significantly lower sales, marketing and
    administration expenses, and eliminate costs associated with the
    logistical support of a large customer base. Our retail strategy also
    allows us to increase awareness of the "eMachines" brand by leveraging
    our retail customers' marketing programs. In addition, we plan to offer
    our e-machines.net service to our PC buyers, thereby providing a cost-
    effective means of promoting our Internet access service.

  . High Inventory Turns. We believe that we have been successful in
    achieving higher inventory turnover than the industry average through
    product management and outsourcing manufacturing. Higher inventory
    turnover helps mitigate the risk of having to reduce product prices
    because of product obsolescence and generally lowers inventory costs and
    associated working capital needs.

The eMachines Strategy

   We intend to continue to increase PC sales while developing significant
Internet related recurring revenue streams by leveraging our strong position in
the consumer market and key retail relationships. Our strategy includes the
following core elements:

 Increase Penetration of the Consumer Market by Providing a Low-Price, High-
 Quality Integrated Computing and Internet Access Solution

   We intend to increase our market share and our penetration into non-PC
households by continuing to offer a low-price, high-quality integrated
computing and Internet access solution. Our ISP rebate programs are designed to
reduce the net effective price of our PCs to the consumer to as low as $0 when
a PC buyer subscribes to a long-term Internet service contract. Currently, we
offer this ISP rebate through our relationship with America Online, and, in the
future, we plan to directly offer our own ISP rebate in combination with our
e-machines.net Internet access service. Through our "PC rEnewal" program we
will offer subscribers to e-machines.net who did not receive an ISP rebate the
opportunity to upgrade the configuration of their eTower for a low fee after 24
continuous months of e-machines.net service. We believe that these programs
will increase consumer purchases of our PCs, increase Internet-related
recurring revenue opportunities through our relationship with America Online,
expand our e-machines.net subscriber base and improve the retention of both e-
machines.net and America Online's CompuServe subscribers.

 Establish Brand Recognition by Leveraging the Retail Channel

   We believe that by distributing our products through retailers, we can
rapidly increase awareness of our brand, thereby cost-effectively reaching
millions of potential PC buyers and Internet access subscribers. We will
continue to sell our products through leading retailers to benefit from their
marketing campaigns that feature our products nationwide in television, radio,
newspaper, magazine and catalog advertisements. The retail channel also enables
us to effectively target first-time PC buyers that do not typically have
established relationships with Internet service providers.

 Strengthen Strategic Relationships with Leading Retailers

   We intend to continue to strengthen our strategic relationships with leading
retailers, including Best Buy, Circuit City, Office Depot and Staples, to
capture and retain prime shelf space. We believe we are an attractive partner
to leading retailers because our low-price, high-quality PCs and integrated
computing and Internet access solution drive high sales volumes which provide
significant profit opportunities to retailers. We believe our relationships
with these retailers enable us to quickly introduce updated systems
configurations, new products and merchandising programs on a national basis.
For example, we were one of the first to establish a widely-available rebate-
based pricing format for an integrated sale of PCs and Internet access services
through the retail channel. In addition, we believe our low-price, high-quality
PCs and integrated computing and Internet access solution draws large numbers
of potential consumers of software, PC peripherals and other products into
retail stores.

                                       34
Leverage Outsourced, Low-Cost Business Model

   We intend to utilize our low-cost infrastructure to profitably sell
increasingly powerful PC models at low prices, thus meeting the needs of the
evolving PC market. We maintain low manufacturing and operating costs by
outsourcing most of our major operating and manufacturing functions including
system assembly, warehouse labor, distribution, research and development,
product design, warranty and customer support to established industry
providers. We intend to leverage the experience of established third parties,
such as UUNET for the provision of Internet access and Sykes for customer
service and technical support. By outsourcing directly to these third parties,
we reduce the cost of providing these services. Further, we intend to maintain
low distribution, sales, marketing and administrative costs by continuing to
distribute and advertise our products and services primarily through a limited
number of large retailers.

 Enhance Internet-Related Recurring Revenue Generating Opportunities

   We intend to aggressively pursue recurring revenue generating opportunities,
including Internet service payments, e-commerce, web-based advertising and
other related revenues. For example, as part of our marketing agreement with
America Online, we have structured a number of revenue sharing arrangements.
America Online will pay us recurring revenue or a one-time fee depending on
which service or plan a PC buyer elects. In addition, the agreement calls for
us to work together with America Online to design an e-commerce package that
will consist of a specially designed keyboard, desktop icons and America Online
services links. Any revenue generated by the marketing and sale of this package
will be shared by America Online and us. Also under this marketing agreement,
Netscape's Netcenter web page will be the default home page for subscribers to
e-machines.net. In return for the deployment of the Netcenter home page to our
e-machines.net subscriber base, America Online has agreed to share a portion of
e-commerce and advertising revenues derived from traffic driven to the
Netcenter portal by subscribers to e-machines.net.

                                       35
PC and Monitor Products

   Our retail customers offer our eTower PCs at static prices of $399, $499 and
$599 to consumers, which prices reflect redemption by the consumer of our
regularly offered product rebate. Each PC comes with software including Windows
98, Microsoft Works, Netscape Navigator and other utilities, and is Internet
ready. We update our configurations of eTower models when appropriate to
accommodate the introduction of new components and sub-systems that we believe
our PC buyers will find attractive. In August 1999, we introduced the eOne PC,
an integrated single piece PC and monitor based on Windows-Intel architecture.
We also offer monitors ranging in size from 14 to 17 inches. The following
table sets forth our most recently released product configurations and the
manufacturers' suggested retail prices after product and ISP rebates.

                              [CHART APPEARS HERE]

                                       36
Internet Access Services

 America Online

   In June 1999, we entered into a marketing agreement with America Online
under which it will provide rebates to our PC buyers to significantly reduce
the net effective price of our PCs. To obtain an ISP rebate, our PC buyers must
enter into an agreement with America Online to subscribe to America Online's
CompuServe Internet access service over a predetermined period of time at a
stated monthly fee. In addition to the rebate provisions, the marketing
agreement also provides that we will include America Online's software on our
PCs. America Online will pay us recurring revenue or a one-time fee depending
on which service or plan a PC buyer elects.

   In addition, the agreement calls for us to work together with America Online
to design an e-commerce package that will consist of a specially designed
keyboard, desktop icons and America Online services links. Any revenue
generated by the marketing and sale of this package will be shared by America
Online and us. Finally, the agreement provides for the joint development of a
portal on a custom Netscape Netcenter homepage. The Netcenter portal will
include a dedicated area for placement of advertising and links that we can
sell to third parties and an area allowing access to third party content areas
by subscribers to e-machines.net.

 e-machines.net

   We intend to become a leading Internet access provider by offering e-
machines.net, our planned private label Internet access service, to our PC
buyers. We believe that we will be able to successfully market our services to
first-time buyers, because they are less likely to have established
relationships with an Internet service provider. In addition, we believe our
ISP rebate on PC purchases and our "PC rEnewal" programs will be attractive to
consumers. These programs will significantly reduce the cost of PC ownership
and PC replacement while providing our PC buyers with Internet access.

   We have also entered into an Internet service provider agreement with UUNET
to cost effectively provide our program on a nationwide basis. UUNET has built
a network infrastructure that we believe will accommodate our e-machines.net
subscribers. Outsourcing this service with UUNET eliminates our need to make
significant up-front capital expenditures to build an independent network.
Under the UUNET agreement, we will offer a basic service package with an option
to upgrade to a premium service package. UUNET will bill subscribers monthly a
predetermined price set by us based on the level of service. UUNET will then
pay us the difference between our cost and the price charged subscribers for
the service.

   We have, as part of our planned e-machines.net service, developed a set of
on-screen instructions to provide our PC buyers with a user-friendly and
intuitive guide to facilitate the process of subscribing to e-machines.net.
These instructions will appear in the first screen to be displayed to our PC
buyers when they first turn the PC on, even before the Windows operating system
has completed its initial boot-up process. We believe that the appearance of
these instructions early in the registration process will help us attract a
significant number of subscribers to our e-machines.net service.

   For those buyers who do become e-machines.net subscribers, our planned
Netscape Netcenter portal will become the primary point of access to the
Internet. This will allow us to not only provide an easy point of subscriber
access to third-party content providers, but also to direct subscribers to
advertising displayed on dedicated advertising space on the portal. We expect
to benefit from e-commerce and advertising net revenues associated with this
program.

 Customer Service and Technical Support

   In order to maintain low costs, we outsource all technical support related
to our PCs and our Internet service to Sykes, a leading supplier of technical
support outsourcing services. We offer technical support services free for 15
days after the first call from our PC buyer seeking assistance. We believe that
buyers of our PCs require the most assistance during the first two weeks after
they begin using their PC. Following that period, PC buyers who require
additional support can choose to enter into an extended service contract or pay
for technical support on a per incident basis until the problem is resolved.

                                       37
Manufacturing

   We currently outsource manufacturing of all of our PCs and monitors. TriGem
Computer manufactures all of our eTower PCs. Korea Data Systems Co.
manufactures our eOne PCs and, together with the Taiwanese manufacturer Jean
Company, all of our monitors. TriGem Computer and Korea Data Systems Co. are
ISO 9001 certified and Jean Company is ISO 9002 certified. We have no
obligation to order, take minimum delivery or purchase at a pre-negotiated
price from TriGem Computer, Korea Data Systems Co. or Jean Company.
Additionally, TriGem Computer, Korea Data Systems Co. and Jean Company have no
contractual obligation to supply us with PCs and monitors. TriGem Computer has
supplied PCs to Epson, Hewlett-Packard Company, Nokia Corp., Olivetti S.p.A.
and Sharp. Korea Data Systems Co. has supplied monitors to original equipment
manufacturers, distributors and retailers including Best Buy, Compaq, CompUSA,
IBM, Ingram Micro Inc. and Tech Data Corporation.

   TriGem Computer recently entered into an outsourcing manufacturing agreement
with a facility in Xiamen, China and intends to open an additional facility in
Shenyang, China during the second half of 1999. The Xiamen facility is expected
to produce 100,000 PC units per month initially, increasing to 200,000 PC units
per month in the fourth quarter of 1999. The Shenyang facility is a final-
assembly plant expected to complete production of 200,000 PC units each month.
This facility may not commence operations when planned, and we may not benefit
from the increased capacity from either of these facilities.

   TriGem America, a wholly-owned subsidiary of TriGem Computer, provides
inspection, repair and repackaging services for PCs returned to us. We are
assessed a per unit service charge for the testing and repackaging of returned
PCs determined to be non-defective. If the PC is defective and repair service
is required, we receive a partial credit of the purchase price that we paid for
the PC. The TriGem Computer warranty is effective for 14 months from the date
the PC is shipped to us. Additionally, Korea Data Systems Co. and Jean Company
have agreed to warranty monitors sold to us for 18 and 36 months respectively.
We offer a 12 month warranty covering defects in materials or workmanship on
every PC and monitor we sell.

Sales and Marketing

   Our sales and marketing strategy is focused on selling our products and
services through leading retailers. In recent years, retailers attracted fewer
PC buyers as a result of the availability of custom configured systems from
direct vendors. We believe that the introduction of sub-$600 PCs has increased
the number of first-time PC buyers, many of whom viewed high prices as a
barrier to PC ownership. Since first-time buyers are less likely to want or
need custom configurations and less likely to already have Internet access, the
introduction of the sub-$600 PC has also enabled retail stores to re-emerge as
a viable method of selling PCs by increasing the number of first-time PC
buyers. Our strategy of selling primarily through leading retailers has enabled
us to leverage their sales and marketing efforts. As a result, we have been
able to establish our brand while maintaining a relatively small sales and
marketing organization. As of June 30, 1999, our sales and marketing
organization consisted of a total of 8 employees. Our sales and marketing staff
is located at our headquarters in Irvine, California.

Competition

   The markets for our PCs and Internet services are highly competitive and
rapidly evolving. For sales of PCs to consumers, we compete principally against
traditional PC vendors, including Compaq, Dell, Gateway, Hewlett-Packard, IBM
and others. In addition, we compete or may compete with low-price PC vendors,
such as Free-PC, Future Power, Gobi and Microworkz. For the provision of
Internet access and services, we will compete with a variety of entities
including online services, traditional Internet service providers, cable
companies and telecommunications providers. In addition, we compete or may
compete with a limited number of PC vendors that have begun offering Internet
access services in combination with their PCs.

   The PC industry is highly competitive and we expect this competition to
increase significantly. We expect pricing pressures in the PC market to
continue, particularly as a result of the introduction of a variety of

                                       38
product rebate programs that include Internet access with the purchase of a PC.
Additionally, traditional PC vendors may reduce their prices to compete with us
at our price points or offer additional services. There are relatively few
barriers preventing our competitors from capitalizing on the convergence of the
PC and Internet markets. As a result, new integrated computing and Internet
services offerings pose a threat to our business.

   The Internet access services market is also highly competitive and we expect
competition in this market to intensify in the future. This market is new and
subject to rapid change, including the introduction of new technologies, price
declines and well-funded promotional campaigns. As we begin providing our
e-machines.net Internet service, we will compete with many large companies that
have substantially greater market presence, financial, technical, marketing and
other resources than we have. Potential competitors include the following:

  .  established online services, such as America Online, Microsoft Network
     and Prodigy;

  .  local, regional and national Internet service providers, including
     EarthLink and MindSpring;

  .  nonprofit or educational institutions providing Internet service;

  .  national telecommunications companies, including AT&T, MCI WorldCom and
     GTE;

  .  regional Bell operating companies, including BellSouth and SBC
     Communications;

  .  competitive local exchange carriers, including Covad Communications and
     Rhythms NetConnections;

  .  online cable services, including Excite@Home, Time Warner and Road
     Runner;

  .  alternative e-commerce Internet advertising vendors, including Free-PC
     and NetZero; and

  .  potential new entrants to the Internet services market such as computer
     hardware vendors, including Compaq, Dell, Gateway and Micron Electronics
     or computer retailers, such as Best Buy.

   The consolidation of existing competitors, new entrants to the PC and
Internet service markets or alliances between PC vendors and Internet service
providers may result in greater competition for us. In addition to America
Online, some of our current or future strategic partners may become our
competitors. Our entry into the Internet services market may have a negative
effect on our relationship with America Online or our relationships with other
partners. Competition is likely to remain intense as large, diversified
telecommunications and media companies acquire Internet service providers, as
Internet service providers and PC vendors merge and as Internet service
providers consolidate.

Customers

   We currently sell our products to leading retailers, catalog and on-line
merchandisers in the United States and Canada. Our customer list includes the
following:

   America Online             Future Shop                Office Depot
   Best Buy                   Insight                    Outpost.com
   BrandsMart                 Nexcom                     QVC
   Circuit City               J&R Computer World         Sears
   Costco                     MicroCenter                Staples
   Creative Computers         MicroWarehouse             TigerDirect
   Fry's Electronics          Nationwide                 Value America
                           Electronics

   For the six months ended June 30, 1999, approximately 70% of our gross
revenues were from sales to our four largest retail customers. Sales to Office
Depot represented 25% of our gross revenues for the six month period ended
June 30, 1999. Further, sales to Best Buy, Circuit City and MicroCenter each
represented more than 10% of our gross revenues for the six month period ended
June 30, 1999. Since our first shipment in November 1998 through December 31,
1998, sales to Best Buy, MicroCenter and Office Depot each represented more
than 10% of our gross revenues. This concentration of sales allows us to
maintain a low-cost infrastructure while establishing preferred vendor status
with large leading retailers. We intend to continue to sell the majority of our
products to a limited number of large retailers for the foreseeable future.

                                       39
Facilities

   Our principal administrative, marketing and distribution facilities are
located in Irvine, California. We lease approximately 147,000 square feet at
this facility pursuant to a lease that expires in 2004, unless terminated
earlier or extended as described below. Under the terms of the lease, we make
monthly payments of approximately $84,000, increasing to approximately $97,000
over the term of the lease. We have an option to extend the term of the lease
for an additional 60-month period. Of the total facility, pursuant to a verbal
agreement, we sublease approximately 48,000 square feet to TriGem America for
monthly payments of approximately $27,000, increasing to approximately $32,000
over the term of the sublease. TriGem America uses this space to refurbish our
returned PCs.

Legal Proceedings

   In July 1999, Compaq Computer Corporation filed a complaint against us,
TriGem Computer, TriGem America and Korea Data Systems as defendants in the
U.S. District Court for the Southern District of Texas based on the defendants'
alleged infringement of 13 patents held by Compaq related to improved system
processing speed, enhanced video graphics, peripheral compatability and overall
system architecture. The complaint seeks an accounting, treble damages, a
preliminary and permanent injunction from further alleged infringement,
attorneys' fees and other unspecified damages. We are currently in the process
of assessing the complaint. As a result, we are currently unable to estimate
the total expenses, possible loss or range of loss that may be ultimately
connected with these allegations. We cannot assure you that Compaq will not
succeed in obtaining monetary damages or an injunction against the production
of our PC products. Our defense of the claims could result in significant
expenses and diversion of management's attention and other resources. In
addition, we cannot assure you that the results of this litigation would not
result in our business being significantly harmed.

   In August 1999, Apple Computer, Inc. filed a complaint against us as a
defendant in the U.S. District Court for the Northern District of California
based on our alleged unfair and unauthorized use of the design and trade dress
of the iMac computer. The complaint seeks a constructive trust of profits from
sales of our eOne PC, treble damages, a preliminary and permanent injunction
from further distribution of our eOne PC, attorneys' fees and punitive damages.
We are currently in the process of assessing the complaint. As a result, we are
currently unable to estimate the total expenses, possible loss or range of loss
that may be ultimately connected with these allegations. We cannot assure you
that Apple will not succeed in obtaining monetary damages or an injunction
against the production of eOne PC products. Our defense of the claims could
result in significant expenses and diversion of management's attention and
other resources. In addition, we cannot assure you that the results of this
litigation would not result in our business being significantly harmed.

   It is common in the PC manufacturing industry for patent, trademark and
other intellectual property claims to be asserted against companies. We receive
notices from time to time that our technology allegedly infringes on
intellectual property rights held by others. As a result, we may be required to
defend legal actions relating to allegedly protected technology. Various other
lawsuits, claims and proceedings have been or may be asserted against us,
including those related to product liability, intellectual property,
environmental, safety and health and employment matters. Litigation is
expensive and time consuming regardless of the merit of the claim and could
divert management's attention from our business. Moreover, the outcome of
litigation cannot be predicted with certainty. Some lawsuits, claims or
proceedings may be disposed of unfavorably to us.

Employees

   We operate with a minimal number of employees, significantly reducing our
fixed cost base. As of June 30, 1999, we employed 49 people, including 8 in
sales and marketing, 21 in operations and 20 in finance and accounting. None of
our employees are represented by a labor union, and we have no collective
bargaining agreements. We consider our relations with our employees to be good.

                                       40
MANAGEMENT

Executive Officers and Directors

   The following table sets forth information with respect to our executive
officers and directors as of August 18, 1999.
Name                  Age                       Position
   ----                  ---                       --------
Stephen A. Dukker.......  46 President, Chief Executive Officer and Director

Steven H. Miller........  43 Vice President, Chief Financial Officer and Secretary

James L. Mertz..........  36 Vice President, Operations

Hong Soon Lee...........  39 Chairman of the Board

Chul Chung..............  39 Director

Lap Shun Hui............  43 Director

Jung Koh................  46 Director

Nathan Morton (1)(2)....  50 Director

C. Toms Newby, III           Director
 (1)(2).................  32
---------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.

   Stephen A. Dukker has served as our President, Chief Executive Officer and a
member of our board of directors since founding us in September 1998. From
October 1997 through August 1998, Mr. Dukker was Senior Vice President of
Merchandising and Operations of Computer City. Prior to that, Mr. Dukker was
President of OPTi, a manufacturer of PC multimedia and core logic
semiconductors, from January 1995 through September 1997. From May 1994 through
October 1994, Mr. Dukker was President of Videologic, Inc. Mr. Dukker currently
serves on the board of directors of OPTi and Digital Persona. Mr. Dukker
attended the University of Chicago.

   Steven H. Miller has served as our Vice President, Chief Financial Officer
and Secretary since June 1999. Mr. Miller was employed by Ingram Micro, Inc.
from May 1992 through May 1999, most recently as Vice President and Controller.
Mr. Miller is a CPA and received a B.A. in Economics from the University of
California, Santa Barbara.

   James L. Mertz has served as our Vice President of Operations since
September 1998. From August 1997 through September 1998, Mr. Mertz was Director
of Build-to-Order and Private Label programs for Computer City. Previously, Mr.
Mertz had served in various positions, including as a regional manager and a
general manager, at Comp USA from October 1989 through August 1997.

   Hong Soon Lee has been Chairman of our board of directors since September
1998. Mr. Lee is currently President, Chief Executive Officer and a member of
the board of directors of TriGem Computer and has served in various positions
at TriGem Computer since June 1994. In addition, Mr. Lee has been a director of
TriGem Corporation since July 1997. Mr. Lee received a B.S. from Korea
University and a M.S. in Engineering from the Florida Institute of Technology.

   Chul Chung has been a member of our board of directors since September 1998.
Mr. Chung also serves as Executive Vice President of Worldwide Operations for
TriGem Computer, a position he has held since August 1997. From March 1989
through September 1997, Mr. Chung was President and Chief Executive Officer of
Human Computer, a subsidiary of TriGem Computer. Mr. Chung received a B.S. from
Seoul National University, and both a M.S. and Ph.D. from the Korea Advanced
Institute of Science & Technology.

                                       41
Lap Shun Hui has been a member of our board of directors since September
1998. Mr. Hui is currently President and a member of the board of directors of
KDS USA, a position he has held since June 1995. From January 1993 through June
1995, Mr. Hui was Chief Executive Officer of Orchestra Multisystems, a company
that was acquired by KDS USA. Mr. Hui received a B.S. in Business from the
State University of New York at Buffalo and a M.B.A. from McMaster University,
Ontario, Canada.

   Jung Koh has been a member of our board of directors since our formation in
September 1998. Mr. Koh also serves as Vice Chairman of Korea Data Systems Co.,
a position he has held since 1983. In addition, Mr. Koh has been a member of
the board of directors of Du Go since 1983. Mr. Koh received a B.A. from Rhode
Island College.

   Nathan Morton has been a member of our board of directors since August 1999.
Mr. Morton is currently Chairman of both Buildnet, Inc. and Handtech.com,
positions he has held since November 1998. In addition, Mr. Morton currently
serves as Chairman of Starpower and as Senior Partner of Channel Marketing.
From July 1997 through September 1998, Mr. Morton was Co-Chairman and Chief
Executive Officer of Computer City. Prior to that, Mr. Morton served as
President and Chief Executive Officer of Open Environment from March 1994
through February 1996. Mr. Morton has a B.A. from State University of New York
at Buffalo.

   C. Toms Newby, III has been a member of our board of directors since August
1999. Mr. Newby is currently a General Partner at Technology Crossover
Ventures, a position he has held since April 1996, and a member of the board of
directors of Emerald Solutions, Inc. From 1994 through April 1996, Mr. Newby
was an associate at Montgomery Securities in the Corporate Finance Technology
Group. Mr. Newby received a B.S. from the University of North Carolina and a
M.B.A. from Stanford University.

Board of Directors

   We currently have authorized seven directors. Our amended and restated
certificate of incorporation filed in connection with this offering provides
that the terms of office of the members of the board of directors will be
divided into three classes: Class I, whose term will expire at the annual
meeting of stockholders to be held in 2000, Class II, whose term will expire at
the annual meeting of stockholders to be held in 2001, and Class III, whose
term will expire at the annual meeting of stockholders to be held in 2002. At
each annual meeting of stockholders after the initial classification, the
successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. Any additional directorships resulting from an increase in
the number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of the total number of
directors. This classification of our board of directors may have the effect of
delaying or preventing changes in our control or management.

 Committees

   Our board of directors has an audit committee and a compensation committee.
The audit committee consists of Messrs. Morton and Newby. The audit committee
reviews our internal accounting procedures and consults with and reviews the
services provided by our independent accountants. The compensation committee
consists of Messrs. Morton and Newby. The compensation committee reviews the
compensation and benefits of our employees and directors and makes
recommendations to our board of directors.

 Compensation

   Directors do not receive cash compensation from us for the services they
provide as directors, although non-employee directors are reimbursed for
expenses incurred in connection with attending board and committee meetings.

                                       42
Compensation Committee Interlocks and Insider Participation

   Prior to August 1999, our board of directors did not maintain a standing
compensation committee, and the entire board participated in all decisions
regarding compensation of our executive officers. In August 1999, the board
formed the compensation committee and appointed Messrs. Morton and Newby as
committee members. None of the members of the compensation committee is
currently or has ever been at any time since our formation, one of our officers
or employees. No member of the compensation committee serves as a member of the
board of directors or compensation committee of any entity that has one or more
officers serving as a member of our board of directors or compensation
committee.

Executive Officers

   Executive officers are appointed by our board of directors and serve until
their successors are qualified and appointed. There are no family relationships
among any of our directors or executive officers.

 Compensation

   The following table sets forth the compensation earned by our Chief
Executive Officer during the year ended December 31, 1998. None of our other
executive officers earned more than $100,000 during the year ended December 31,
1998.
Annual Compensation
                                                           --------------------
      Name and Principal Positions                          Salary     Bonus
      ----------------------------                         --------------------
Stephen A. Dukker................................... $  96,923 $  126,000
       President and Chief Executive Officer
Option Grants in Last Fiscal Year

   Our Chief Executive Officer, the only one of our executive officers named in
the compensation table above, received no option grants in the year ended
December 31, 1998.

Employment Agreements

   In June 1999, we entered into an employment agreement with Stephen A.
Dukker, our President and Chief Executive Officer, which agreement was amended
and restated in August 1999. The agreement provides for an annual base salary
of $300,000 with a variable bonus. For the period from September 18, 1998
through June 30, 1999, the bonus was equal to $1 for each central processor
unit shipped during the period. For the period July 1, 1999 through November
30, 1999, Mr. Dukker's bonus is a fully vested option to purchase 227,897
shares of our common stock at an exercise price of $1.61 per share. The
agreement provides that if we terminate Mr. Dukker's employment without cause,
if Mr. Dukker voluntarily terminates his employment after he is relocated, if
his duties or benefits are materially reduced, or if his employment terminates
because of death or disability, we must continue to pay his base salary and
bonus through the term of the agreement which ends in September 2001.

Limitations on Directors' and Officers' Liability and Indemnification

   Our certificate of incorporation limits the liability of our directors to
the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability associated
with any of the following:

  .  any breach of their duty of loyalty to the corporation or its
     stockholders;

  .  acts or omissions not in good faith or which involve intentional
     misconduct or a knowing violation of law;

                                       43
.  unlawful payments of dividends or unlawful stock repurchases or
     redemption; or

  .  any transaction from which the director derived an improper personal
     benefit.

   The limitation of a director's liability does not apply to liabilities
arising under the federal securities laws and does not affect the availability
of equitable remedies such as injunctive relief or rescission.

   Our certificate of incorporation and bylaws also provide that we shall
indemnify our directors and executive officers and may indemnify our other
officers and employees and other agents to the fullest extent permitted by law.
We believe that indemnification under our bylaws covers at least negligence and
gross negligence on the part of indemnified parties. Our bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether our bylaws would permit indemnification.

   We have entered into indemnification agreements with each of our directors
and intend to enter into indemnification agreements with each of our officers.
The indemnification agreements contain or will contain, as applicable,
provisions that require us to, among other things, indemnify our officers and
directors against liabilities that may arise by reason of their status or
service as directors or officers (other than liabilities arising from willful
misconduct of a culpable nature), to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified,
and to cover our directors and officers under any of our liability insurance
policies applicable to our directors and officers. We believe that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and executive officers.

Stock Plans

 1998 Stock Plan

   Our 1998 stock plan was approved by our board of directors in September
1998. We have reserved a total of 3,200,000 shares of our common stock for
issuance under the plan. The plan provides for the granting to our employees of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and for the granting to employees, including
officers and directors, nonemployee directors and consultants of nonstatutory
stock options and stock purchase rights. Unless terminated sooner, this plan
will terminate automatically in 2008.

   Our 1998 stock plan is administered by our board of directors and, thus, the
board determines the terms of the options or stock purchase rights granted,
including the exercise price, the number of shares subject to each option or
stock purchase right, the vesting and the form of consideration payable upon
such exercise. In addition, the board has the authority to amend, suspend or
terminate the plan, provided that no such action may affect any share of common
stock previously issued and sold or any option previously granted and then
outstanding under the plan.

   Options and stock purchase rights granted under our 1998 stock plan are not
generally transferable by the optionee, and each option and stock purchase
right is exercisable during the lifetime of the optionee only by the optionee.
Options granted under the plan must generally be exercised within three months
of the end of optionee's status as our employee or consultant, or within twelve
months after his or her termination by death or disability, but in no event
later than the expiration of the option's ten year term. In the case of stock
purchase rights, unless the board determines otherwise, the agreement
evidencing the grant shall provide that we have a repurchase option exercisable
upon the voluntary or involuntary termination of his or her employment for any
reason (including death or disability). In this event, the purchase price per
share will be equal to the original price and may be paid by cancellation of
his or her outstanding indebtedness to us, if any. Our repurchase option shall
lapse at a rate determined by the board. The exercise price of any incentive
stock options granted under this plan and any nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, must be at least equal to the fair market

                                       44
value of our common stock on the date of grant. With respect to any participant
who owns stock possessing more than 10% of the voting power of all classes of
our outstanding capital stock, the exercise price of any incentive stock option
granted must equal at least 110% of the fair market value on the grant date and
the term of such incentive stock option must not exceed five years. The term of
all other options granted under the plan may not exceed ten years.

   Our 1998 stock plan provides that in the event of our merger with or into
another corporation, a sale of substantially all of our assets, each option or
right shall be assumed or an equivalent option or right substituted by the
successor corporation. If the outstanding options or rights are not assumed or
substituted, our board shall provide for the optionee to have the right to
exercise the option or stock purchase right as to all of the optioned stock,
including shares as to which it would not otherwise be exercisable for a period
of 15 days from the date of such notice, and the option or stock purchase right
will terminate upon the expiration of such period.

                                       45
RELATED PARTY TRANSACTIONS

Relationship with TriGem Computer, TriGem Corporation, TriGem America, Korea
Data Systems Co., Korea Data Systems America and KDS USA

   TriGem Computer, a Korean company, is the parent company of TriGem
Corporation, a California corporation. Prior to this offering TriGem
Corporation owned 28.5% of our outstanding common stock after giving effect to
the conversion of all preferred stock outstanding or issuable upon regulatory
approval. Hong Soon Lee, Chairman of our board of directors and one of our
stockholders, is also the President, Chief Executive Officer and a member of
the board of directors of TriGem Computer and a director of TriGem Corporation.
Chul Chung, a member of our board of directors and one of our stockholders is
also Executive Vice President of Worldwide Operations for TriGem Computer.

   Korea Data Systems Co., a Korean company, is the parent company of Korea
Data Systems America. Prior to this offering Korea Data Systems America owned
28.2% of our outstanding common stock after giving effect to the conversion all
outstanding Series A preferred stock. Jung Koh, a member of our board of
directors and one of our stockholders also serves as Vice Chairman of Korea
Data Systems Co.

   We have entered into a number of agreements, both written and verbal, with
TriGem Computer, TriGem Corporation, TriGem America, Korea Data Systems Co.,
Korea Data Systems America and KDS USA. These agreements are described below.

 Trademark Assignment

   Under an agreement entered into on June 10, 1999 and amended on August 16,
1999, Korea Data Systems America transferred to us the trademark "E-MACHINES"
for 419,538 shares of our common stock, which we issued to it on August 18,
1999. We agreed to license back to Korea Data Systems America use of the
trademark solely in the Republic of Korea.

 Lease

   We lease approximately 147,000 square feet of office and warehouse space
located at 14350 Myford Road, Irvine, California from the Irvine Company under
a written lease entered into on November 30, 1998. Our monthly rent is
approximately $84,000 subject to annual increases that will increase our rent
in the fifth year of the lease to approximately $97,000. The lease terminates
in 2004, subject to our right to extend the term. Our performance under the
lease is guaranteed by Korea Data Systems America. Pursuant to a verbal
agreement, we sublease approximately 48,000 square feet of this space to TriGem
America, a subsidiary of TriGem Computer, for a monthly rental of approximately
$27,000 increasing to approximately $32,000 over the term of the sublease.

 Subordinated Notes

   In connection with our initial capitalization, we issued a subordinate note
payable to TriGem Corporation in the amount of $270,000 and a subordinated note
payable to Korea Data Systems America in the amount of $290,000. See
"Capitalization Agreements" for a description of our initial capitalization.
The subordinated notes bear interest at 5.79% and are due on June 7, 2004. The
subordinated notes may be prepaid without penalty at our option.

 Supply of PCs and Monitors

   We currently source all of our PCs and monitors that we sell from KDS USA, a
company that is wholly-owned by Lap Shun Hui, a member of our board of
directors and one of our stockholders. All of the these eTower PCs in turn are
manufactured by TriGem Computer, the eOne PC is manufactured by Korea Data
Systems Co. and all of our monitors are manufactured by Korea Data Systems Co.
and by Jean Company, Ltd., an unaffiliated third party. KDS USA orders PCs for
us through TriGem America, a wholly-owned subsidiary of TriGem Computer. We
have no obligation to order, take minimum delivery or purchase at pre-
negotiated prices from KDS USA, TriGem Computer or Korea Data Systems Co.
Additionally, TriGem Computer and Korea Data Systems Co. have no contractual
obligation to supply us with PCs and monitors.

                                       46
Inventory Purchases and Extended Payment Terms

   During the period from inception until December 31, 1998, we purchased an
aggregate of approximately $71 million in PCs and monitors from TriGem
Corporation and KDS USA. Pursuant to a verbal agreement with TriGem Corporation
and Korea Data Systems Co., we financed our inventory purchases by extending
payment of our accounts payable up to 90 days. Under a verbal agreement between
us, TriGem Corporation, Korea Data Systems Co. and KDS USA, we transferred
approximately $58 million of our accounts payable obligations as of December
31, 1998 to KDS USA. Pursuant to a verbal agreement with KDS USA, trade
payables are subject to payment terms that allow us 90 days to pay and that
provide a discount on PC payables proportional to the number of days that we
pay early. The effective interest rate as of June 30, 1999 was a 10% annual
rate. During the six month period ended June 30, 1999, we purchased an
aggregate of $352.8 million in PCs and monitors from KDS USA. As of June 30,
1999, approximately $134.4 million in payables were outstanding to KDS USA. In
connection with these inventory purchases, approximately $888,000 of finance
charges was incurred for the period ended December 31, 1998, and $5 million of
finance charges were incurred for the period ended June 30, 1999.

 Warranties and PC Repair Service

   Under a verbal agreement, TriGem Computer provides warranties to us on PCs
sold for 14 months from shipment and provides PC repair services for PCs
returned to us by our retail customers or PC buyers through its wholly-owned
subsidiary TriGem America. We are assessed a $15 per unit service charge for
the testing and repackaging of PC returns determined to be nondefective. If a
PC is defective, we receive a credit of 15% of the purchase price of the PC
from KDS USA.

   Under verbal agreements, Korea Data Systems Co. warrants its monitors for 18
months and Jean Company warrants its monitors for 36 months (parts and labor
included).

 Cooperative Advertising Costs

   For the period from inception until December 31, 1998, TriGem Computer
agreed to credit us $363,000 for cooperative advertising credits from component
suppliers. In July 1999, this amount was offset against amounts due to KDS USA.

 Freight Costs

   For the period from inception until December 31, 1998, TriGem Computer
agreed to credit us $173,000 in freight costs for products shipped to us from
TriGem Computer. In July 1999, this amount was offset against amounts due to
KDS USA.

                                       47
Capitalization Agreements

   On June 10, 1999, pursuant to agreements reached in September 1998, we
issued an aggregate of 77,600,000 shares of our common stock at a price per
share of $0.03. Among the purchasers of our common stock were the following
officers, directors and stockholders of more than 5% of our outstanding shares,
and their immediate family members:
Aggregate
                                                            Number of  Purchase
  Stockholder                                                 Shares     Price
  -----------                                               ---------- ---------
TriGem Corporation......................................... 29,200,000 $730,000

Korea Data Systems America................................. 28,400,000  710,000

Stephen A. Dukker..........................................  8,000,000  200,000

Chul Chung.................................................  2,400,000   60,000

Jung Koh...................................................  2,400,000   60,000

Hong Soon Lee..............................................  2,400,000   60,000

Hong Sun Lee...............................................  1,600,000   40,000

Lap Shun Hui...............................................  1,600,000   40,000

Dae Soo Koh................................................  1,600,000   40,000
Hong Sun Lee is Hong Soon Lee's brother and Dae Soo Koh is Jung Koh's
brother. Both Hong Sun Lee and Dae Soo Koh were members of our board of
directors until August 1999 when they resigned in connection with the Series A
preferred stock financing.

   Messrs. Dukker, Chung, Hui, Jung Koh, Dae Soo Koh, Hong Soon Lee and Hong
Sun Lee paid for their shares with full recourse promissory notes. Each of the
notes matures in June 2004 and bears interest until maturity at 5.79% per year.
Each note is secured with the shares issued to each purchaser.

   On June 10, 1999, we also entered into a Shareholders Agreement with the
above purchasers of our common stock. This agreement superseded an earlier
agreement that had been entered into solely by two of our principal
stockholders, TriGem Corporation and Korea Data Systems America, on April 1,
1999. The Shareholders Agreement terminated upon the closing of the sale of our
Series A preferred stock in August 1999. When it was in effect, this Agreement
provided for board review of significant business decisions, a voting agreement
as to election of directors and a buy-sell agreement among TriGem Corporation
and Korea Data Systems America. When it was in effect, it also provided for
limited preferential supply arrangements with TriGem Computer and Korea Data
Systems Co.

Series A Preferred Stock Financing

   On August 18, 1999, we sold an aggregate of 24,279,369 shares of our Series
A preferred stock (including 5,560,776 shares issuable upon regulatory
approval) at a price per share of $6.38.

   America Online, a stockholder of more than 5% of our outstanding shares
prior to this offering, purchased 7,832,079 shares (including 5,560,776 shares
issuable to America Online upon regulatory approval) for an aggregate price of
$50.0 million. C. Toms Newby, III, one of our directors, is a managing member
of Technology Crossover Management III, L.L.C., the general partner of TCV III
(GP), TCV III, L.P., TCV III (Q), L.P. and TCV III Strategic Partners. Entities
affiliated with Technology Crossover Management III, L.L.C. purchased 3,602,757
shares for an aggregate price of approximately $23.0 million.

   In connection with the sale of our Series A preferred stock, we also entered
into an Amended and Restated Rights and Restrictions Agreement with the
purchasers of our preferred stock and all holders of our common stock. This
agreement superseded a Rights and Restrictions Agreement entered into on June
10, 1999 with

                                       48
certain purchasers of our common stock. The Amended and Restated Rights and
Restrictions Agreement includes the following key terms:

  .  Demand Registration: At any time after six months following this
     offering, the holders of at least 50% of the shares of common stock
     issuable upon conversion of our Series A preferred stock can request
     that we register all or a portion of their shares, so long as the total
     offering price of the shares to the public is at least $15,000,000. We
     will be required to file only one registration statement in response to
     their demand registration rights. We may postpone the filing of a
     registration statement for up to 120 days once in a 12 month period if
     we determine that the filing would not be in the best interests of us
     and our stockholders.

  .  Piggy-back Registration: If we register any securities for public sale,
     the holders of the shares of common stock and common stock issuable upon
     conversion of our Series A preferred stock will have the right to
     include their shares in the registration statement. However, this right
     does not apply to a registration statement relating to any of our
     employee benefit plans or a corporate reorganization. These registration
     rights expire three years after this offering is completed.

  .  Form S-3 Registration: The holders not less than an aggregate of 25% of
     the shares of common stock and the common stock issuable upon conversion
     of our Series A preferred stock can request that we register their
     shares if we are eligible to file a registration statement on Form S-3
     and if the total price of the shares offered to the public is at least
     $2,500,000. These holders may only require us to file two registration
     statements on Form S-3 in any 12 month period and only three
     registration statements in all. We may postpone the filing of a
     registration statement for up to 120 days once in a 12 month period if
     we determine that the filing would be seriously detrimental to us and
     our stockholders.

  .  Standoff: For 180 days after completion of this offering, or 90 days
     after a subsequent offering of our shares, a holder may not transfer
     shares without our consent or our underwriters' consent. This
     restriction is subject to our executive officers agreeing to the same
     restrictions and is to remain in effect for two years from the date of
     this offering.

  .  Right of First Refusal: Before a holder may sell shares of our stock to
     a third party, the holder is required to notify us of the sale and the
     terms. We then have the right to purchase some or all of the shares on
     terms equal to or better than the terms offered to the third party.

  .  Maintenance Right: Before selling additional shares of our stock, we are
     obligated to notify our stockholders of the proposed sale and the terms.
     Each stockholder then has the right to purchase, on the same terms,
     shares sufficient to maintain its existing ownership percentage.

  .  Voting Arrangements: The stockholders agreed regarding how shares are
     voted in electing the board of directors and the terms and conditions
     under which the composition may be altered.

   Holders of Series A preferred stock have the right, subject to applicable
legal or regulatory limitations, to purchase shares in the initial public
offering up to an aggregate amount of $10 million. Each holder has the right to
elect to purchase a pro-rata share of an amount of shares equal to $10,000,000
divided by the per share public offering price of this offering. A holder's
pro-rata share is determined by dividing its shares of Series A preferred stock
by the total amount of outstanding Series A preferred stock. Within five days
after the date of the preliminary prospectus with respect to the initial public
offering, we are required to send to holders a copy of the prospectus and a
notice with respect to their right to purchase their pro-rata share. Holders
that wish to purchase their pro-rata portion of shares will be required to
respond to us within the time period specified in the notice.

   Upon completion of this offering, all outstanding shares of our preferred
stock will be automatically converted into 24,279,369 shares (including the
5,560,776 shares of preferred stock issuable to America Online

                                       49
upon regulatory approval) of our common stock. The holders of our Series A
preferred stock have registration rights with respect to the common stock
issuable upon the conversion of the preferred stock as described above, and
those rights are subject to the standoff provision. The right of first refusal,
maintenance right and voting arrangement provisions of the Amended and Restated
Rights and Restrictions Agreement terminate upon completion of this offering.

Relationship with America Online, Inc.

   In June 1999, we entered into a marketing agreement with America Online
under which America Online will provide rebates to our PC buyers to
significantly reduce the net effective price of our PCs. To obtain a rebate,
our PC buyers must enter into an agreement with America Online to subscribe to
America Online's CompuServe Internet access service over a predetermined period
of time at a stated monthly fee. We will share in the payments made by
subscribers to America Online for internet access. America Online purchased
2,271,303 shares of our Series A preferred stock on August 18, 1999, and has
committed to purchase an additional 5,560,776 shares upon receipt of regulatory
approval. See "Related Party Transactions--Series A Preferred Stock Financing."
Additionally, we granted America Online a warrant to purchase shares of our
common stock at an aggregate exercise price of $3.6 million. This warrant
expires five years after the date of grant. The number of shares that may be
purchased upon exercise of the warrant is equal to the aggregate exercise price
divided by the greater of 1.25 times the initial offering price of our common
stock or $7.98. If there is no successful completion of an initial public
offering, the number of shares issuable upon exercise of the warrant is equal
to the aggregate exercise price of the warrant divided by $11.82. Upon receipt
of regulatory approval, we will issue America Online an additional warrant to
purchase shares of common stock at an aggregate exercise price of $8.9 million
under the same terms as the earlier warrant. The maximum number of shares that
America Online may receive, subject to anti-dilution adjustments, upon exercise
of its warrants is 1,566,219.

Option Grants to Executive Officers, Directors and Principal Stockholders

   Since inception in September 1998, we have granted to our executive officers
and directors options for shares of common stock in the amounts indicated.

  .  On September 28, 1998, we granted Jim Mertz an option for 80,000 shares
     of our common stock at an exercise price of $0.03 per share.

  .  On June 15, 1999, we granted Steven H. Miller an option for 200,000
     shares of our common stock at an exercise price of $3.75 per share.

  .  On August 18, 1999, we granted Stephen A. Dukker an option for 227,897
     shares of our common stock at an exercise price of $1.61 per share,
     which was issued in connection with our obligations under Mr. Dukker's
     employment agreement.

Employment and Indemnification Agreements

   We have entered into an employment agreement with our President and Chief
Executive Officer, Stephen A. Dukker. See "Management--Employment Agreements."
We have entered into agreements with each of our directors that provide for
indemnification and intend to enter into indemnification agreements with our
executive officers. See "Management--Limitations on Directors' and Officers'
Liability and Indemnification."

                                       50
PRINCIPAL STOCKHOLDERS

   The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of August 18, 1999 and as adjusted
to reflect the sale of common stock offered hereby by the following:

  .  each stockholder known by us to own beneficially more than 5% of our
     common stock;

  .  our President and Chief Executive Officer, the only one of our executive
     officers named in the compensation table;

  .  each member of our board of directors; and

  .  all members of our board of directors and executive officers as a group.

   As of August 18, 1999 there were 78,019,538 shares of our common stock
outstanding. Except as otherwise indicated, we believe that the beneficial
owners of the common stock listed below, on the information furnished by them,
have sole voting power and investment power with respect to such shares.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after
August 18, 1999 are deemed outstanding, while such shares are not deemed
outstanding for purposes of computing percentage ownership of any other person.
For purposes of computing the number of shares of common stock issuable upon
conversion of preferred stock outstanding, as of August 18, 1999, we have
assumed that all 24,279,369 shares of preferred stock are outstanding,
including the 5,560,776 shares of preferred stock issuable to America Online
upon regulatory approval not currently outstanding as of the date of this
prospectus. Unless otherwise indicated below, the persons and entities named in
the table have sole voting and investment power with respect to all shares
beneficially owned, subject to community property laws where applicable. The
address for those individuals for whom an address is not otherwise indicated is
eMachines, Inc., 14350 Myford Road, Suite 100, Irvine, CA 92606.
Percentage of Shares
                                                              Outstanding
                                                        -----------------------
                                             Number of  Prior to
Name or Group of Beneficial Owners             Shares   Offering After Offering
----------------------------------           ---------- -------- --------------
TriGem Corporation.......................... 29,200,000   28.5%          %
 14350 Myford Road
 Irvine, CA 92606

Korea Data Systems America, Inc. ........... 28,819,538   28.2
 12300 Edison Way
 Garden Grove, CA 92841

America Online, Inc.(1).....................  8,889,340    8.7
 22000 AOL Way
 Dulles, VA 20166

Stephen A. Dukker(2)........................  8,227,897    8.0

C. Toms Newby, III(3).......................  3,602,757    3.5

Chul Chung..................................  2,400,000    2.3
 45-2 YOIDO
 Youngdeungpo Seoul, Korea

Jung Koh....................................  2,400,000    2.3
 Korea World Trade Center Bldg., Room #204
 159, Samsung-dong
 Kangnam-gu Seoul, Korea
51
Percentage of Shares
                                                              Outstanding
                                                        -----------------------
                                             Number of  Prior to
Name or Group of Beneficial Owners             Shares   Offering After Offering
----------------------------------           ---------- -------- --------------
Hong Soon Lee...............................  2,400,000    2.3
 45-2 YOIDO
 Youngdeungpo Seoul, Korea

Lap Shun Hui................................  1,600,000    1.6
 12350 Edison Way
 Garden Grove, CA 92841

Nathan Morton...............................        --       *

All directors and officers as a group (8
 persons)................................... 20,630,654   20.2%
---------------------
* Less than 1% of the outstanding shares of common stock.

(1) Includes 1,057,261 shares of common stock issuable (including 750,655
    shares issuable pursuant to a warrant not outstanding as of the date of the
    prospectus, but to be issued upon regulatory approval) pursuant to the
    exercise of warrants at an assumed exercise price of $11.82 per share. See
    "Description of Capital Stock--Options and Warrants" for a discussion of
    the exercise price of these warrants.

(2) Includes 227,897 shares subject to options which are exercisable within 60
    days of August 18, 1999.

(3) Includes 26,161 shares held by TCV III (GP), 124,263 shares held by TCV
    III, L.P., 3,302,768 shares held by TCV III (Q), L.P. and 149,565 shares
    held by TCV III Strategic Partners, L.P. Mr. Newby is a managing member of
    Technology Crossover Management III, L.L.C., the general partner of each of
    these entities and disclaims beneficial ownership of the shares held by
    these entities except with respect to his pecuniary interest.

                                       52
DESCRIPTION OF CAPITAL STOCK

   Upon the completion of this offering, we will be authorized to issue
250,000,000 shares of common stock, $0.0000125 par value per share, and
25,000,000 shares of preferred stock, $0.01 par value per share. The following
description of our capital stock is only a summary. You should refer to our
certificate of incorporation and bylaws as in effect upon the closing of this
offering, which are included as exhibits to the registration statement of which
this prospectus forms a part, and by the provisions of applicable Delaware law.

Common Stock

   As of August 18, 1999, there were 78,019,538 shares of common stock
outstanding, after an eight-for-one stock split that occurred on August 13,
1999. These shares were held of record by approximately nine stockholders.
There will be     shares of common stock outstanding (assuming no exercise of
the underwriters' over-allotment option and no exercise of outstanding options
after August  , 1999) after giving effect to the sale of our common stock in
this offering. There are 757,097 shares issuable upon exercise of outstanding
options, excluding shares of common stock issuable to America Online under
their warrants. See "Description of Capital Stock--Options and Warrants" for a
description of our outstanding grants. See "Management--Stock Plans" for a
description of our stock plan.

   Dividend Rights. Subject to preferences that may apply to shares of our
preferred stock outstanding at the time, the holders of outstanding shares of
our common stock are entitled to receive dividends out of assets legally
available at the times and in the amounts as our board of directors may
determine.

   Voting Rights. Each holder of our common stock is entitled to one vote for
each share of common stock held on all matters submitted to a vote of
stockholders. We do not provide for cumulative voting of directors in our
certificate of incorporation.

   No preemptive or similar rights. Holders of our common stock are not
entitled to preemptive rights and our common stock is not subject to conversion
or redemption.

   Right to receive liquidation distributions. Upon a liquidation, dissolution
or winding-up of our company, the holders of common stock are entitled to share
ratably with holders of any participating preferred stock in all assets
remaining after payment of all liabilities and the liquidation preferences of
any outstanding preferred stock. Each outstanding share of common stock is, and
all shares of common stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.

Preferred Stock

   As of August 18, 1999, there were 24,279,369 shares of convertible Series A
preferred stock outstanding (including 5,560,776 shares issuable to America
Online upon regulatory approval) which were held of record by approximately 35
stockholders. All outstanding shares of Series A preferred stock and those
shares of preferred stock issuable upon receipt of regulatory approval will be
converted into an aggregate of 24,279,369 shares of common stock automatically
upon completion of this offering.

   Upon completion of this offering, our board is authorized, without action by
the stockholders, to issue 25,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions of each
wholly unissued series and any of its qualifications, limitations or
restrictions. These rights, preferences and privileges may include dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any
series or the designation of any series, all or any of which may be greater
than the rights of the common stock. The issuance of preferred stock could
adversely affect the voting power of holders of common stock and the likelihood
that the holders of common stock will receive dividend payments and payments
upon liquidation. The issuance of preferred stock, while providing flexibility
in connection with possible acquisitions and other corporate purposes, could,
among other things, have the effect of delaying, deferring or preventing a
change in control of our company and may adversely affect the market price of
our common stock and the voting and other rights of the holders of our common
stock. We have no current plan to issue any shares of preferred stock.

                                       53
Registration Rights

   Pursuant to an amended and restated rights and restrictions agreement we
entered into with all holders of our common and preferred stock prior to this
offering, the holders of these shares are entitled to rights with respect to
the registration of these shares under the Securities Act as described below.

   Demand Registration Rights. At any time after six months following this
offering, the holders of at least 50% of the shares of common stock issuable
upon conversion of our Series A preferred stock can request that we register
all or a portion of their shares, so long as the total offering price of the
shares to the public is at least $15,000,000. We will be required to file only
one registration statement in response to their demand registration rights. We
may postpone the filing of a registration statement for up to 120 days once in
a 12 month period if we determine that the filing would not be in the best
interests of us and our stockholders.

   Piggyback Registration Rights. If we register any securities for public
sale, the holders of the shares of common stock and common stock issuable upon
conversion of our Series A preferred stock will have the right to include their
shares in the registration statement. However, this right does not apply to a
registration statement relating to any of our employee benefit plans or a
corporate reorganization. These registration rights expire three years after
this offering is completed.

   Form S-3 Registration Rights. The holders of not less than an aggregate of
25% of the shares of common stock and the common stock issuable upon conversion
of our Series A preferred stock can request that we register their shares if we
are eligible to file a registration statement on Form S-3 and if the total
price of the shares offered to the public is at least $2,500,000. These holders
may only require us to file two registration statements on Form S-3 in any 12
month period and only three registration statements in all. We may postpone the
filing of a registration statement for up to 120 days once in a 12 month period
if we determine that the filing would be seriously detrimental to us and our
stockholders.

   We will pay all of the expenses, except underwriters' and brokers' discounts
and commissions, incurred in connection with the demand registrations and
piggyback registrations described above. The participating holders will bear
all expenses incurred in connection with the exercise of their Form S-3
registration rights.

   The registration rights described above will expire with respect to a
particular stockholder if it can sell all of its shares in a three month period
following this offering under Rule 144 of the Securities Act.

Options and Warrants

   As of June 30, 1999, options to purchase 609,200 shares of common stock were
outstanding and subject to our 1998 stock plan. An additional 2,590,800 shares
are authorized to be issued under the plan. See "Management--Stock Plans." As a
bonus for the period from July 1, 1999 through November 30, 1999, Mr. Dukker
was granted a fully vested option to purchase 227,897 shares of our common
stock at an exercise price of $1.61 per share. We have also issued a warrant to
purchase shares of common stock at an aggregate exercise price of $3.6 million
in connection with a marketing agreement with America Online. See "Related
Party Transactions--Relationship with America Online, Inc." for a description
of the marketing agreement. The number of shares that may be purchased upon
exercise of the warrant is equal to the aggregate exercise price divided by the
greater of 1.25 times the initial offering price of our common stock or $7.98.
If there is no successful completion of an initial public offering, the number
of shares issuable upon exercise of the warrant is equal to the aggregate
exercise price of the warrant divided by $11.82. This warrant will remain
outstanding after the completion of the offering until August 18, 2004, unless
sooner exercised. We will issue America Online an additional warrant to
purchase shares of common stock at an aggregate exercise price of $8.9 million
upon receipt of regulatory approval on the same terms as the earlier warrant.
The maximum number of shares that America Online may receive, subject to anti-
dilution adjustments, upon exercise of its warrants is 1,566,219.

                                       54
Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions

 Delaware Law

   We are subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents some
Delaware corporations from engaging, under some circumstances, in a "business
combination," which includes a merger or sale of more than 10% of the
corporation's assets with any "interested stockholder," meaning a stockholder
who owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of the stockholder, for three years following the
date that the stockholder became an "interested stockholder" unless:

  .  the transaction is approved by the board of directors prior to the date
     the interested stockholder attained that status;

  .  upon consummation of the transaction that resulted in the stockholder's
     becoming an interested stockholder, the interested stockholder owned at
     least 85% of the voting stock of the corporation outstanding at the time
     the transaction commenced; or

  .  on or subsequent to such date the business combination is approved by
     the board and authorized at an annual or special meeting of stockholders
     by at least two-thirds of the outstanding voting stock that is not owned
     by the interested stockholder.

   A Delaware corporation may opt out of this provision with an express
provision in its original certificate of incorporation or an express provision
in its certificate or incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
However, we have not opted out of this provision. The statute could prohibit or
delay mergers or other takeover or change-in-control attempts and, accordingly,
may discourage attempts to acquire us.

 Charter and Bylaw Provisions

   Our certificate of incorporation and bylaws will provide, subject to
appropriate corporate action, that:

  .  following the completion of this offering, stockholders may not act by
     written consent without a meeting;

  .  following the completion of this offering, stockholders may not call
     special meetings of the stockholders; and

  .  our board of directors will be divided into three classes, each serving
     staggered three-year terms, which means that only one class of directors
     will be elected at each annual meeting of stockholders, with the other
     classes continuing for the remainder of their respective terms, and
     directors may only be removed for cause.

   In addition, our certificate of incorporation does not provide for
cumulative voting. We also indemnify officers and directors against losses that
they may incur in investigations and legal proceedings resulting from their
services to us, which may include services in connection with the takeover
defense measures.

   These provisions of our certificate of incorporation and bylaws may have the
effect of delaying, deferring or discouraging another person from acquiring
control of us, including takeover attempts that might result in a premium over
the market price for the shares of our common stock.

Transfer Agent and Registrar

   The transfer agent and registrar for the common stock is     .

Nasdaq Stock Market National Market Listing

   We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "EEEE."

                                       55
SHARES ELIGIBLE FOR FUTURE SALE

   Upon completion of this offering, we will have     shares of common stock
outstanding based on shares outstanding as of     , 1999. Of these shares, the
    shares sold in this offering will be freely transferable without
restriction under the Securities Act, unless they are held by "affiliates" as
that term is used under the Securities Act and the Regulations promulgated
thereunder.

   Of these shares, the remaining      shares were sold by us in reliance on
exemptions from the registration requirements of the Securities Act, are
restricted securities within the meaning of Rule 144 under the Securities Act
and become eligible for sale in the public market as follows:

  .  beginning 90 days after the effective date,     shares will become
     eligible for sale, subject to the provisions of Rules 144 and 701;

  .  beginning 180 days after the effective date,     additional shares will
     become eligible for sale, subject to the provisions of Rules 144, 144(k)
     or 701, upon the expiration of agreements not to sell such shares
     entered into between the underwriters and such stockholders;

  .  beginning on     , 1999, the remaining    shares will become eligible
     for sale, subject to the provisions of Rule 144.

   Beginning 180 days after the date of this prospectus, approximately
additional shares subject to vested options as of the date of completion of
this offering will be available for sale subject to compliance with Rule 701
and upon the expiration of agreements not to sell such shares entered into
between the underwriters and such stockholders. Any shares subject to lock up
agreements may be released at any time without notice by the underwriters.

   In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned restricted shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of completion of this
offering, a number of shares that does not exceed the greater of 1% of the then
outstanding shares of common stock (approximately     shares immediately after
this offering), or the average weekly trading volume in the common stock during
the four calendar weeks preceding such sale, subject to the filing of a Form
144 with respect to such sale and certain other limitations and restrictions.
In addition, a person who is not deemed to have been our affiliate at any time
during the 90 days preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years, would be entitled to sell such
shares under Rule 144(k) without regard to the requirements described above.

   Any of our employees, officers or directors of or consultant who purchased
his or her shares prior to the date of completion of this offering or who holds
vested options as of that date pursuant to a written compensatory plan or
contract is entitled to rely on the resale provisions of Rule 701, which
permits nonaffiliates to sell their Rule 701 shares without having to comply
with the public-information, holding- period, volume-limitation or notice
provisions of Rule 144 and permits affiliates to sell their Rule 701 shares
without having to comply with Rule 144's holding-period restrictions, in each
case commencing 90 days after the date of completion of this offering. However,
we and our officers, directors and stockholders have agreed not to sell or
otherwise dispose of any shares of our common stock for the 180-day period
after the date of this prospectus without the prior written consent of the
underwriters. See "Underwriting."

   As soon as practicable after the date of completion of this offering, we
intend to file a registration statement on Form S-8 under the Securities Act to
register shares of common stock reserved for issuance under our 1998 stock
plan, thus permitting the resale of such shares by nonaffiliates in the public
market without restriction under the Securities Act. Such registration
statements will become effective immediately upon filing.

   Prior to this offering, there has been no public market for our common
stock, and any sale of substantial amounts in the open market may adversely
affect the market price of our common stock offered hereby.

                                       56
UNDERWRITING

   Under the terms and subject to the conditions contained in an underwriting
agreement dated      , 1999 we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, BancBoston Robertson
Stephens Inc., Hambrecht & Quist LLC and Salomon Smith Barney Inc. are acting
as representatives, the following respective numbers of shares of common stock:
Number
                               Underwriter                             of Shares
                               -----------                             ---------
Credit Suisse First Boston Corporation.............................
   BancBoston Robertson Stephens Inc..................................
   Hambrecht & Quist LLC..............................................
   Salomon Smith Barney Inc...........................................

                                                                          ---
     Total............................................................
                                                                          ===
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of nondefaulting underwriters may be increased or the
offering of common stock may be terminated.

   We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to     additional shares at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.

   The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $    per share. The
underwriters and selling group members may allow a discount of $    per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.

   The following table summarizes the compensation and estimated expenses we
will pay.
Per Share             Total
                                         ------------------- -------------------
                                          Without    With     Without    With
                                           Over-     Over-     Over-     Over-
                                         allotment allotment allotment allotment
                                         --------- --------- --------- ---------
Underwriting Discounts and
   Commissions paid by us...............  $         $         $         $
   Expenses payable by us...............  $         $         $         $
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.

   We and our executive officers, directors and certain other of our security
holders have agreed not to offer, sell, contract to sell, announce an intention
to sell, pledge or otherwise dispose of, directly or indirectly, or file with
the Securities and Exchange Commission a registration statement under the
Securities Act relating to, any shares of common stock or securities
convertible into or exchangeable or exercisable for any common stock without
the prior written consent of Credit Suisse First Boston Corporation for a
period of 180 days after the date of this prospectus.

                                       57
The underwriters have reserved for sale, at the initial public offering
price (1) up to     shares of the common stock for employees, directors and
certain other persons associated with us who have expressed an interest in
purchasing common stock in this offering and (2) up to an additional     shares
for the holders of our preferred stock in connection with a pre-existing
contractual right between us and those holders. The number of shares available
for sale to the general public in this offering will be reduced to the extent
these persons purchase the reserved shares. Any reserved shares not so
purchased will be offered by the underwriters to the general public on the same
terms as the other shares.

   We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.

   We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "EEEE."

   In August 1999, we issued an aggregate of 24,279,369 shares of our Series A
preferred stock (including 5,560,776 not outstanding as of the date of this
prospectus that are issuable to America Online upon regulatory approval) at a
per share price of $6.83 in a private placement. Credit Suisse First Boston
Corporation acted as the placement agent for this private placement, and it
received a customary fee for its services. In addition, Merchant Capital, Inc.,
an affiliate of Credit Suisse First Boston Corporation, purchased 156,641
shares of Series A preferred stock.

   Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include: the information in this
prospectus and otherwise available to the underwriters; the history and the
prospects for the industry in which we will compete; the ability of our
management; the prospects for our future earnings; the present state of our
development and our current financial condition; the general condition of the
securities markets at the time of this offering; and the recent market prices
of, and the demand for, publicly traded common stock of generally comparable
companies.

   The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids in accordance with Regulation
M under the Exchange Act.

  .  Over-allotment involves syndicate sales in excess of the offering size,
     which creates a syndicate short position.

  .  Stabilizing transactions permit bids to purchase the underlying security
     so long as the stabilizing bids do not exceed a specified maximum.

  .  Syndicate covering transactions involve purchases of the common stock in
     the open market after the distribution has been completed in order to
     cover syndicate short positions.

  .  Penalty bids permit the representatives to reclaim a selling concession
     from a syndicate member when the common stock originally sold by the
     syndicate member are purchased in a syndicate covering transaction to
     cover syndicate short positions.

   These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

                                       58
NOTICE TO CANADIAN RESIDENTS

Resale Restrictions

   The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.

Representations of Purchasers

   Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under the securities laws, (ii) where
required by law, that the purchaser is purchasing as principal and not as
agent, and (iii) the purchaser has reviewed the text above under "Resale
Restrictions."

Rights of Action (Ontario Purchasers)

   The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.

Enforcement of Legal Rights

   All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or these persons. All or a substantial portion of the assets of
the issuer and these persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or these
persons in Canada or to enforce a judgment obtained in Canadian courts against
the issuer or these persons outside of Canada.

Notice to British Columbia Residents

   A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. This report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.

Taxation and Eligibility for Investment

   Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.

                                       59
LEGAL MATTERS

   The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Legal matters will be passed upon for the underwriters by Morrison
& Foerster LLP, Palo Alto, California.

                                    EXPERTS

   The financial statements included in this prospectus and the related
financial statement schedule included elsewhere in the registration statement
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein and elsewhere in this registration statement,
and are included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.

                             ADDITIONAL INFORMATION

   We have filed with the Securities and Exchange Commission, Washington, D.C.,
a registration statement on Form S-1 under the Securities Act with respect to
the shares of common stock offered hereby. This prospectus does not contain all
the information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and our common
stock, reference is made to the registration statement and to the exhibits and
schedules filed therewith. Statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of the contract or
other document filed as an exhibit to the registration statement, each
statement being qualified in all respects by this reference. A copy of the
registration statement may be inspected by anyone without charge at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of all or any portion of the
registration statement may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
prescribed fees. The Commission maintains a web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.

                                       60
eMachines, Inc.

                         INDEX TO FINANCIAL STATEMENTS
Page
                                                                            ----
Independent Auditors' Report .............................................. F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity (Deficiency)............................ F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
F-1
INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders of eMachines, Inc.

   We have audited the accompanying balance sheet of eMachines, Inc. (the
"Company") as of December 31, 1998 and the related statements of operations,
stockholders' equity (deficiency) and cash flows for the period September 18,
1998 (inception) to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

   We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

   In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998 and the
results of its operations and its cash flows for the period September 18, 1998
(inception) to December 31, 1998 in conformity with generally accepted
accounting principles.

Deloitte & Touche LLP
Los Angeles, California

August 23, 1999

                                      F-2
eMachines, Inc.

                                 BALANCE SHEETS

                December 31, 1998 and June 30, 1999 (unaudited)

                             (dollars in thousands)
December 31,  June 30,
                                                           1998        1999
                                                       ------------ -----------
                                                                    (unaudited)
ASSETS
Current assets:
  Cash................................................   $ 3,791     $ 10,911
  Accounts receivable, less allowances ($239 and
   $8,972 at December 31, 1998 and June 30, 1999,
   respectively)......................................    43,303      122,609
  Inventories.........................................    12,270       22,225
  Prepaid and other current assets....................       127        2,626
                                                         -------     --------
    Total current assets..............................    59,491      158,371
Property and equipment, Net (Note 3)..................       268        1,449
Other assets..........................................       252          493
                                                         -------     --------
                                                         $60,011     $160,313
                                                         =======     ========
       LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
  Trade payables-related party (Note 8)...............   $57,785     $134,438
  Accounts payable....................................       327        4,235
  Accrued rebates.....................................     1,838       18,372
  Accrued expenses and other current liabilities......       852        7,828
                                                         -------     --------
    Total current liabilities.........................    60,802      164,873
                                                         -------     --------
Subordinated notes payable to stockholders (Note 4)...       560          560
                                                         -------     --------
Commitments and contingencies (Note 7)................

Stockholders' deficiency (Notes 5 and 9):
  Preferred stock, $.01 par value; 50,000,000 shares
   authorized; no shares outstanding..................       --           --
  Common stock, $.0000125 par value; 250,000,000
   shares authorized; 77,600,000 shares outstanding at
   December 31, 1998 and June 30, 1999................         1            1
  Additional paid-in capital..........................     2,527        3,765
  Unearned stock compensation.........................      (577)      (1,675)
  Notes receivable from stockholders..................      (500)        (500)
  Accumulated deficit.................................    (2,802)      (6,711)
                                                         -------     --------
    Total stockholders' deficiency....................    (1,351)      (5,120)
                                                         -------     --------
                                                         $60,011     $160,313
                                                         =======     ========
See accompanying notes to financial statements.

                                      F-3
eMachines, Inc.

                            STATEMENTS OF OPERATIONS

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)

                (dollars in thousands, except share information)
Period from
                                                     September 18,      Six
                                                          1998        Months
                                                     (inception) to    Ended
                                                      December 31,   June 30,
                                                          1998         1999
                                                     -------------- -----------
                                                                    (unaudited)
Net revenues.......................................    $   58,283   $  351,313
Cost of revenues...................................        58,088      338,790
                                                       ----------   ----------
  Gross profit.....................................           195       12,523
Operating expenses:
  Sales and marketing..............................           840        5,517
  Customer service and technical support...........           269        2,522
  General and administrative.......................           988        3,293
  Stock-based compensation (Note 5)................            11          140
                                                       ----------   ----------
    Total operating expenses.......................         2,108       11,472
                                                       ----------   ----------
Income (loss) from operations......................        (1,913)       1,051
Financing charges and interest expense, net (Notes
 4 and 8)..........................................          (889)      (4,960)
                                                       ----------   ----------
Net loss...........................................    $   (2,802)  $   (3,909)
                                                       ==========   ==========
Basic and diluted net loss per common share........    $    (0.04)  $    (0.05)
                                                       ==========   ==========
Shares used in computing basic and diluted net loss
 per common share..................................    77,600,000   77,600,000
                                                       ==========   ==========
See accompanying notes to financial statements.

                                      F-4
eMachines, Inc.

                STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)

                (dollars in thousands, except share information)
Common Stock    Additional   Unearned
                          -----------------  Paid-in      Stock       Notes    Accumulated
                            Shares   Amount  Capital   Compensation Receivable   Deficit    Total
                          ---------- ------ ---------- ------------ ---------- ----------- -------
Balance, at September
 17, 1998...............         --    --        --          --         --           --        --
 Capital Contributions
  (Note 5)..............  77,600,000  $  1    $1,939         --       $(500)         --    $ 1,440
 Compensatory stock
  options...............         --    --        588     $  (588)       --           --        --
 Amortization of
  unearned stock
  compensation..........         --    --        --           11        --           --         11
 Net loss...............         --    --        --                              $(2,802)   (2,802)
                          ----------  ----    ------     -------      -----      -------   -------
Balance, at December 31,
 1998...................  77,600,000     1     2,527        (577)      (500)      (2,802)   (1,351)
 Compensatory stock
  options*..............         --    --      1,238      (1,238)       --           --        --
 Amortization of
  unearned stock
  compensation*.........         --    --        --          140        --           --        140
 Net loss*..............         --    --        --          --         --        (3,909)   (3,909)
                          ----------  ----    ------     -------      -----      -------   -------
Balance, at June 30,
 1999*..................  77,600,000  $  1    $3,765     $(1,675)     $(500)     $(6,711)  $(5,120)
                          ==========  ====    ======     =======      =====      =======   =======
---------------------
* Unaudited

                See accompanying notes to financial statements.

                                      F-5
eMachines, Inc.

                            STATEMENTS OF CASH FLOWS

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)

                             (dollars in thousands)
Period from
                                                     September 18,      Six
                                                          1998        Months
                                                     (inception) to    Ended
                                                      December 31,   June 30,
                                                          1998         1999
                                                     -------------- -----------
                                                                    (unaudited)
Cash flows from operating activities:
  Net loss..........................................    $ (2,802)    $ (3,909)
  Adjustments to reconcile net loss to net cash
   provided by operating activities:
    Provision for bad debts, sales returns and sales
     incentives.....................................         239        8,733
    Depreciation....................................          30          103
    Stock-based compensation expense................          11          140
    Changes in operating assets and liabilities:
      Accounts receivable...........................     (43,542)     (88,039)
      Inventories...................................     (12,270)      (9,955)
      Prepaid and other current assets..............        (127)      (2,499)
      Trade payables-related party..................      57,785       76,653
      Accounts payable..............................         327        3,908
      Accrued rebates...............................       1,838       16,534
      Accrued expenses and other current
       liabilities..................................         852        6,976
                                                        --------     --------
        Net cash provided by operating activities...       2,341        8,645
                                                        --------     --------
Cash flows from investing activities:
  Acquisition of property and equipment.............        (298)      (1,284)
  Other assets......................................        (252)        (241)
                                                        --------     --------
        Net cash used in investing activities.......        (550)      (1,525)
                                                        --------     --------
Cash flows from financing activities:
  Issuance of common stock..........................       1,440          --
  Issuance of subordinated notes payable to
   stockholders.....................................         560          --
                                                        --------     --------
        Net cash provided by financing activities...       2,000          --
                                                        --------     --------
Net increase in cash................................       3,791        7,120
Cash, beginning of period...........................         --         3,791
                                                        --------     --------
Cash, end of period.................................    $  3,791     $ 10,911
                                                        ========     ========
Supplemental disclosure of cash flow information:
  Issuance of common stock in exchange for notes
   receivable.......................................    $    500          --
                                                        ========     ========
See accompanying notes to financial statements.

                                      F-6
eMachines, Inc.

                         NOTES TO FINANCIAL STATEMENTS

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)

                    (in thousands, except share information)

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

   eMachines, Inc. (the "Company"), a Delaware corporation, was incorporated in
September 1998 to market and distribute low-priced personal computers ("PCs").
The Company is 37.6% and 36.6% owned by TriGem Corporation ("TriGem") and Korea
Data Systems (America) Inc. ("KDS America"), respectively. The Company is
headquartered in Irvine, California.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Unaudited Interim Financial Information--The interim financial information
as of June 30, 1999 and for the six months ended June 30, 1999 is unaudited and
has been prepared on the same basis as the audited financial statements. In the
opinion of management, such unaudited information includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the interim information. Operating results for the six months
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.

   Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of net revenues and expenses during the
reporting period. Actual results could differ from those estimates.

   Concentration of Credit Risk--Financial instruments that potentially subject
the Company to credit risk are principally bank deposits and accounts
receivable. Cash is deposited with high credit quality financial institutions.
Accounts receivable are derived from net revenues earned from retail customers
in the United States and are denominated in U.S. dollars. The Company performs
ongoing credit evaluations of its customers and maintains an allowance for
potential credit losses. The Company's sales are concentrated in the U.S.
retail channel and, as a result, the Company maintains individually significant
receivable balances with certain retailers. While the Company frequently
monitors and manages this risk, financial difficulties on the part of one or
more of the Company's retail customers may have a material adverse effect on
the Company. For the period from September 18, 1998 (inception) to December 31,
1998, Office Depot, Best Buy, Inc., and MicroCenter accounted for 31%, 24% and
15% of gross revenues, respectively. These customers accounted for
approximately 30%, 24% and 10% of total accounts receivable at December 31,
1998, respectively. For the sixth months ended June 30, 1999, Office Depot,
Circuit City, Best Buy, Inc., and MicroCenter accounted for 25%, 17%, 18% and
10%, of gross revenue, respectively. These customers accounted for
approximately 28%, 16%, 26% and 6% of total accounts receivable at June 30,
1999, respectively.

   Financial Instruments--The Company's financial instruments include notes
receivable from stockholders and subordinated notes payable to stockholders. At
December 31, 1998, the fair values of these instruments cannot be determined
due to their related party nature.

   Inventories--Inventories consist principally of personal computers and
monitors and are stated at the lower of cost, determined by the moving average
method, or market.

   Property and Equipment--Property and equipment are stated at cost.
Depreciation is provided for using the straight-line method over the estimated
useful lives of the assets.

                                      F-7
eMachines, Inc.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)
                    (in thousands, except share information)

   Revenue Recognition, Returns and Sales Incentives--Revenue on product sales
is recognized upon shipment. Revenue is recorded net of allowances for rebates
and other sales incentives. The allowances for sales returns, rebates and other
sales incentives are accrued concurrently with the recognition of revenue.
Products are sold to customers under a limited one-year warranty against
material defects, which period is covered by the terms provided to the Company
by the product's manufacturer, a related party (see Note 8).

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

   Income Taxes--The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes," which requires recognition of deferred
income tax liabilities and assets for the expected future income tax
consequences of events that have been included in the financial statements or
income tax returns. Under this method, deferred income tax liabilities and
assets are determined based on the temporary difference between the financial
statement and income tax basis of assets and liabilities using presently
enacted tax rates in effect. Valuation allowances are established when
necessary to reduce deferred income tax assets to the amounts that are more
likely than not to be realized.

   Net Loss Per Share--The Company computes net income (loss) per share in
accordance with SFAS No. 128, "Earnings Per Share" which requires dual
presentation of basic earnings per share ("EPS") and diluted EPS. Basic EPS is
computed using the weighted average number of common shares outstanding during
the period. Diluted EPS is computed using the weighted average number of common
shares and potentially dilutive shares outstanding during the period. Potential
common shares consist of shares issuable upon the exercise of stock options
(using the treasury stock method). Common share equivalents are excluded from
the computation in loss periods as their effect would be antidilutive.

   At December 31, 1998 and June 30, 1999, the Company had 270,000 and 609,200
common stock purchase options outstanding which could potentially dilute basic
earnings per share in the future, but were excluded in the computation of
diluted net loss per share in the periods presented, as their effect would have
been antidilutive.

   Effects of Recent Accounting Pronouncements--In June 1997, the Financial
Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive
Income," which requires an enterprise to report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources, and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. The Company had no
comprehensive income items to report for the period from September 18, 1998
(inception) to December 31, 1998 and the six months ended June 30, 1999. The
Company currently operates one reportable segment under SFAS No. 131. Adoption
of these statements at our inception did not impact the Company's financial
position, results of operations or cash flows.

                                      F-8
eMachines, Inc.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)
                    (in thousands, except share information)

   In June 1998, SFAS No 133 "Accounting for Derivative Instruments and Hedging
Activities" was released. The statement requires the recognition of all
derivatives as either assets or liabilities in the balance sheet and the
measurement of those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the planned use of the derivative and
the resulting designation. The Company is required to implement the statement
in the first quarter of fiscal 2001. The Company has not used derivative
instruments and believes the impact of adoption of this statement will not have
a significant effect on the financial statements.

3. PROPERTY AND EQUIPMENT

   Property and equipment, net consists of:
Useful  December 31, June 30,
                                                    Lives      1998       1999
                                                   ------- ------------ --------
Furniture and office equipment.............. 5 years     $ 27      $  414
      Computers and information systems........... 5 years      271         595
      Machinery and equipment..................... 5 years                  324
      Leasehold improvements...................... 5 years                  249
                                                               ----      ------
                                                                298       1,582
      Accumulated depreciation....................              (30)       (133)
                                                               ----      ------
      Property and equipment, net.................             $268      $1,449
                                                               ====      ======
4. SUBORDINATED NOTES PAYABLE TO STOCKHOLDERS

   On December 18, 1998, the Company issued subordinated notes payable to
TriGem and KDS America, both stockholders of the Company (see Note 8), in the
amount of $270 and $290, respectively, bearing interest at 5.79%. Commencing
November 30, 1999, interest payments are due each May 31 and November 30.
Principal and any unpaid interest are due on June 7, 2004. The notes may be
prepaid at the Company's option without penalty.

5. STOCKHOLDERS' EQUITY

   In June of 1999, the stockholders of the Company formally executed a stock
purchase agreement that defines the terms and conditions of the Company's
initial capitalization. The stock purchase agreement memorializes the binding
verbal agreements under which the stockholders of the Company had been
operating since inception. The Company issued 77,600,000 shares of common stock
for an aggregate purchase price of $1,940. Of the total, $500 is evidenced by
promissory notes, which bear interest at an annual rate of 5.79% and are due on
June 7, 2004. The notes are collateralized by a pledge of the Company's common
stock and are full recourse notes. All shares issued in connection with the
stock purchase agreement have been treated as issued and outstanding since
incorporation.

   Stock Option Plans--The Company has a stock option plan (the "Plan") under
which employees, consultants and directors may be granted options to purchase
common stock up to an aggregate of 3,200,000 shares. Options are generally
granted at not less than the fair market value at grant date, vest over five
years, and expire ten years after the grant date. When the exercise price of
employee stock options issued under the

                                      F-9
eMachines, Inc.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)
                    (in thousands, except share information)

Plan equals the fair value of the underlying stock on the date of grant, no
compensation expense is recorded. Compensation expense is recognized for the
fair value of options granted to nonemployees and to the extent the fair value
of the underlying stock exceeds the exercise price of employee stock options.
The fair value of options granted to nonemployees during the period from
September 18, 1998 (inception) to December 31, 1998 was not significant. There
were no options granted to nonemployees during the six month period ended June
30, 1999. During the period from September 18, 1998 (inception) to December 31,
1998, and the six month period ended June 30, 1999, the Company issued employee
common stock options with exercise prices less than the fair value of its
underlying common stock. The fair value of the common stock, based upon
securities transactions entered into by the Company with certain unrelated
third parties, was $6.38 per share for the respective periods. Accordingly, the
Company recorded $588 and $1,238 as the intrinsic value of such options. Stock-
based compensation of $11 and $140 was amortized to expense during the period
from September 18, 1998 (inception) to December 31, 1998 and the six months
ended June 30, 1999, respectively. At December 31, 1998 and June 30, 1999 the
Company had $577 and $1,675, respectively, in deferred stock compensation
related to these options, which will be amortized to expense through 2004.

   A summary of option transactions under the Plan follows:
Weighted-
                                                          Average    Range of
                                                Number   Exercise    Exercise
                                               of Shares   Price      Prices
                                               --------- --------- -------------
Granted during 1998........................  270,000    $0.06   $0.03 - $0.13
                                                -------
   Outstanding, December 31, 1998.............  270,000    $0.06   $0.03 - $0.13
   Granted....................................  339,200    $2.75   $1.25 - $3.75
                                                -------
   Outstanding, June 30, 1999.................  609,200    $1.56   $0.03 - $3.75
                                                =======
As of June 30, 1999, there were 2,590,800 shares available for future grant.

   Additional information regarding options outstanding as of June 30, 1999 is
as follows:
Outstanding Options as of
                                                       June 30, 1999
                                              --------------------------------
                                                                   Weighted-
                                                        Weighted-   Average
                                                         Average   Remaining
                                               Number   Exercise  Contractual
   Range of Exercise Prices                   of Shares   Price   Life (years)
   ------------------------                   --------- --------- ------------
$0.03.....................................  176,000    $0.03       9.2
   $0.13.....................................  121,600     0.13       9.4
   $1.25.....................................   96,400     1.25       9.8
   $3.75.....................................  215,200     3.75       9.9
                                               -------
                                               609,200    $1.56       9.6
                                               =======
There were no options exercisable at June 30, 1999.

                                      F-10
eMachines, Inc.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)
                    (in thousands, except share information)

   Accounting for Stock-Based Compensation--As permitted under SFAS No. 123,
the Company has elected to follow APB Opinion No. 25 and related
Interpretations in accounting for stock-based awards to employees. Pro forma
information regarding net income and earnings per share is required by SFAS No.
123. This information is required to be determined as if the Company had
accounted for its stock-based awards to employees under the fair value method
of that statement. The fair value of each option grant was estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants during the period from September
18, 1998 (inception) through December 31, 1998 and the six months ended June
30, 1999: risk-free interest rates of 4.4 percent and 5.2 percent, expected
lives of five years for both periods, and volatility and dividend yield of zero
for both periods.

   The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
The weighted-average estimated fair value of employee stock options granted
during period from September 18, 1998 (inception) to December 31, 1998 and the
six months ended June 30, 1999 was $4.41 and $4.27 per share, respectively.

   For purposes of pro forma disclosures, the estimated fair value of the
options is assumed to be amortized to expense over the options' vesting period.
Had the Company accounted for its stock-based awards to employees under the
fair value method prescribed by SFAS No. 123, the net loss reported during the
period from September 18, 1998 (inception) through December 31, 1998 and the
six months ended June 30, 1999 would have been increased by approximately $3
and $26, respectively, and there would have been no impact on reported earnings
per share.

6. INCOME TAXES

   The Company's deferred income tax assets are comprised of the following:
December 31,
                                                                        1998
                                                                    ------------
Reserves not recognized for income tax purposes..............   $   169
      Accrued expenses.............................................       844
      Net operating loss carryforwards.............................       168
      Valuation allowance..........................................    (1,181)
                                                                      -------
      Net deferred income tax assets...............................   $   --
                                                                      =======
The Company established a 100% valuation allowance at December 31, 1998 and
June 30, 1999 due to the uncertainty of realizing future income tax benefits
from its net operating loss carryforwards and other deferred income tax assets.

                                      F-11
eMachines, Inc.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)
                    (in thousands, except share information)

   The provision for income taxes differs from the amount computed by applying
the federal statutory income tax rate to income before taxes as follows:
Period from
                                                              September 18, 1998
                                                                (inception) to
                                                              December 31, 1998
                                                              ------------------
Tax computed at federal statutory rate.................       (35.0)
      State taxes and other..................................         0.8
      Increase in valuation allowance........................        34.2
                                                                    -----
      Total..................................................         -- %
                                                                    =====
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $427 and $214 for federal and state income tax purposes,
respectively. These losses will expire in 2018 for federal income tax purposes
and 2003 for state income tax purposes.

7. COMMITMENTS AND CONTINGENCIES

   Operating Leases--The Company leases its corporate office and warehouse
space under an operating lease expiring in 2004. The lease, which is guaranteed
by KDS America, a stockholder, is renewable at the Company's option for an
additional five-year term. Future minimum rental commitments under the lease
agreement as of December 31, 1998, excluding sublease rentals, are as follows:
1999............................................................... $  891
      2000...............................................................  1,099
      2001...............................................................  1,149
      2002...............................................................  1,187
      2003...............................................................  1,170
      2004...............................................................    194
                                                                          ------
                                                                          $5,690
                                                                          ======
Rental expenses under operating leases during the period from September 18,
1998 (inception) to December 31, 1998 and the six months ended June 30, 1999
amounted to approximately $6 and $285, respectively.

   The Company subleases a portion of its warehouse space to TriGem America
Corporation, a related party (see Note 8). The total minimum rentals to be
received in the future under the sublease, which expires in 2004, amounted to
$1,738 as of June 30, 1999. Sublease rental income during the six-month period
ended June 30, 1999, amounted to approximately $93.

 Legal Proceedings

   In July 1999, Compaq Computer Corporation filed a complaint against the
Company, TriGem Computer Inc., TriGem America Corporation and Korea Data
Systems as defendants in the U.S. District Court for the Southern District of
Texas based on the defendant's alleged infringement of 13 patents held by
Compaq related

                                      F-12
eMachines, Inc.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)
                    (in thousands, except share information)

to improved system processing speed, enhanced video graphics, peripheral
compatibility and overall system architecture. The complaint seeks an
accounting, treble damages, a preliminary and permanent injunction from further
alleged infringement, attorneys' fees and other unspecified damages. The
Company and its legal counsel are currently in the process of assessing the
complaint. As a result, the Company is currently unable to estimate the total
expenses, possible loss or range of loss that may be ultimately connected with
these allegations.

   In August 1999, Apple Computer, Inc. filed a complaint against the Company
as a defendant in the U.S. District Court for the Northern District of
California based on the Company's alleged unfair and unauthorized use of the
design and trade dress of the iMac computer. The complaint seeks a constructive
trust of profits from sales of the Company's eOne PC, treble damages, a
preliminary and permanent injunction from further distribution of the Company's
eOne PC, attorneys' fees and punitive damages. The Company and its legal
counsel are currently in the process of assessing the complaint. As a result,
the Company is currently unable to estimate the total expenses, possible loss
or range of loss that may be ultimately connected with these allegations.

   Employment Agreement--In August 1999, the Company entered into an amended
and restated employment agreement with its President and Chief Executive
Officer, who is also a stockholder. Under the terms of the agreement the
Company is obligated for a three-year term, commencing September 18, 1998, to
pay the executive officer a minimum annual salary of $300 and an annual bonus.
From September 18, 1998 through June 30, 1999, the bonus was equal to $1 for
each CPU unit (dollars not in thousands) shipped. For all services rendered by
the executive from July 1, 1999 through November 30, 1999, the Company is
obligated to grant the executive an option to purchase 227,897 shares of the
Company's common stock at an exercise price of $1.61 per share, which is less
than the fair value of the underlying common stock. The fair value of the
common stock based upon securities transactions entered into by the Company
with certain unrelated third parties, was $6.38 per share at the time the
Company became obligated to grant the option. Accordingly, in August 1999 the
Company recorded $1,100 as the intrinsic value of the options, which will be
expensed in the third quarter of 1999. Approximately $126 and $700 of bonus
expense under the employment agreement is reflected in the accompanying
statements of operations for the period from September 18, 1998 (inception) to
December 31, 1998, and the six months ended June 30, 1999, respectively.

8. RELATED PARTIES

   Related Party Balances and Transactions--Two of the Company's major
stockholders, TriGem and KDS America, are the wholly owned subsidiaries of
Korean companies; TriGem Computer Inc. ("TriGem Computer") and Korea Data
Systems Co. Ltd. ("KDS Ltd."), respectively. During the period from
September 18, 1998 (inception) through June 30, 1999, all of the Company's
eTower PCs were manufactured by TriGem Computer. In August 1999, the Company
introduced the eOne PC which is manufactured by KDS Ltd. All of the monitors
sold by the Company are either manufactured by KDS Ltd., or supplied by KDS
Ltd. through its relationship with Jean Company Ltd. ("Jean"), an unrelated
third party. During the period from September 18, 1998 (inception) to December
31, 1998, the Company purchased its PCs and monitors from TriGem America
Corporation ("TriGem America"), another wholly owned subsidiary of TriGem
Computer, and Korea Data Systems (USA), Inc. ("KDS USA"), respectively. Under
an agreement between the Company, TriGem America, KDS Ltd., Jean, and KDS USA,
$57,785 of the Company's accounts payable obligations as of December 31, 1998
to TriGem America, KDS Ltd., and Jean, collectively, were transferred to KDS
USA. KDS USA is wholly owned by a Board member of the Company.

                                      F-13
eMachines, Inc.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)
                    (in thousands, except share information)

During the six months ended June 30, 1999, the Company purchased its PCs and
monitors directly from KDS USA. The Company has no obligation to order, take
minimum delivery or purchase at pre-negotiated prices from TriGem Computer or
KDS Ltd., including their subsidiaries and affiliates.

   Since its inception in September 1998, through the six months ended June 30,
1999, the Company operated under various arrangements with TriGem Computer,
TriGem America, KDS Ltd., and KDS USA. The following is a summary of these
arrangements:

     Inventory Purchases and Extended Payment Terms--During the period from
  September 18, 1998 (inception) to December 31, 1998 and the six months
  ended June 30, 1999, the Company purchased $70,989 and $352,764,
  respectively, of inventories from TriGem Corporation and KDS USA,
  collectively, under extended payment terms which resulted in an effective
  interest rate of 12% from September 18, 1998 (inception) through March 31,
  1999 and 10% from April 1, 1999 through June 30, 1999. As of December 31,
  1998 and June 30, 1999, payables of approximately $57,785 and $134,438,
  respectively, were outstanding to KDS USA. Approximately $888 and $4,969 of
  finance charges were incurred in connection with the inventory purchases.

     PC Repair Service--The Company has an arrangement with TriGem America to
  provide PC repair services for PCs returned to the Company by its
  customers. Under the terms of the arrangement, the Company is assessed a
  $15 per unit service charge (dollars not in thousands) for the testing and
  repackaging of PC returns determined to be nondefective. For the period
  from September 18, 1998 (inception) to December 31, 1998 and the six months
  ended June 30, 1999, these charges, which are included in cost of revenues,
  amounted to approximately $43 and $634, respectively. Approximately $43 and
  $672 of accrued service charges from TriGem America are included in accrued
  expenses and other current liabilities as of December 31, 1998 and June 30,
  1999.

   Trademark Assignment Agreement--Under an agreement entered into on June 10,
1999, and amended on August 16, 1999, KDS America transferred to the Company
the trademark "E-MACHINES" for 419,538 shares of the Company's common stock,
which the Company issued to KDS America on August 18, 1999. In connection with
the agreement the Company agreed to license KDS America use of the trademark in
the Republic of Korea.

9. SUBSEQUENT EVENTS

   America Online Agreement--In June 1999, a Marketing Agreement with America
Online, Inc. ("AOL") was executed whereby the Company agreed to pre-install and
distribute America Online's AOL and CompuServe services or other AOL products
and services on the Company's PCs. The agreement also provides for an Internet
Service Provider ("ISP") rebate program. Under the terms of this agreement,
consumers who purchase the Company's PCs and enter into a three-year Internet
service contract with AOL's CompuServe service are eligible to receive an ISP
rebate directly from AOL of up to $400. The Marketing Agreement expires in June
2004 and contains an additional five-year renewal option.

   Stock Split -- In July 1999, the Board of Directors authorized an eight-for-
one stock split that became effective on August 13, 1999 and an increase in the
authorized shares of its common stock to 200,000,000 shares. In conjunction
with the stock split, the par value of the common stock was reduced from
$.0001 to $.0000125. All references in the accompanying consolidated financial
statements to number of shares,

                                      F-14
eMachines, Inc.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)
                    (in thousands, except share information)

sales prices and per share amounts of the Company's common stock have been
retroactively restated to reflect the increased number of common shares
outstanding. In addition, stockholders' equity has been restated to give
retroactive recognition to the stock split by reclassifying from additional
paid-in capital to common stock the par value of the additional shares arising
from the split.

   Preferred stock--In August 1999, the Board of Directors amended the
Company's certificate of incorporation to authorize the Company to issue two
classes of stock, to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares which the Company is authorized to issue is
three hundred million (300,000,000) shares. Two hundred fifty million
(250,000,000) shares ("Shares") shall be Common Stock, par value $0.0000125 per
share, and fifty million (50,000,000) shares shall be preferred stock, par
value $0.01 per share. Of the authorized shares of Preferred Stock, a total of
twenty-five million (25,000,000) shares shall be designated Series A Preferred
Stock ("Series A Preferred"). On August 18, 1999 the Company issued 24,279,369
shares of Series A Preferred Stock (including 5,560,776 shares issuable upon
regulatory approval) for proceeds of $146,660 (net of approximately $8,335 in
offering costs). The amended certificate of incorporation and bylaws authorize
the Board of Directors to designate preferred stock with special rights,
including voting and dividend rights, that could make it more difficult for a
third party to acquire the Company, including takeover attempts that might
result in a premium over the market price for shares of the Company's common
stock. The Company's charter documents also eliminate the right of stockholders
to call a special meeting of stockholders, require stockholders to comply with
advance notice requirements before raising a matter at a meeting of
stockholders and eliminate the ability of stockholders to take action by
written consent. The significant terms of the Series A Preferred Stock include:

     Conversion--The Series A Preferred Stock is convertible, at the option
  of the holder, at the conversion rate then in effect, at any time after
  issuance of such share. Each share of Preferred Stock shall automatically
  be converted into shares of Common Stock at the Conversion Price at the
  time in effect for such share of Preferred Stock immediately upon the
  earlier of (i) the closing an underwritten firm commitment public offering
  of the Company's Common Stock yielding gross proceeds to the Company (prior
  to expenses and underwriting commissions) in excess of $30,000 and at a
  price per share greater than 133% of the Series A Preferred Stock original
  issuance price per share (as adjusted for any stock dividends, combinations
  or splits with respect to such shares), and (ii) the election to convert
  all Preferred Stock into Common Stock by holders of at least a majority of
  the then outstanding shares of Preferred Stock. The initial conversion rate
  is one-to-one and is subject to adjustment based upon subdivisions or
  combinations of Common Stock and certain dividends, distributions and
  common stock equivalents.

     Mandatory Redemption--The Company shall offer to redeem the unconverted
  shares of Series A Preferred Stock outstanding on January 1, 2004, reduced
  by the number of shares converted into Common Stock after January 1, 2004
  through the date of redemption, as follows:
Cumulative
              Redemption               Redemption
              Percentage                  Date
              ----------               -----------
33.3%.................. August 2004
               66.7%.................. August 2005
              100.0%.................. August 2006
The redemption price is payable in cash and is equal to the sum of the
  original issue price plus cumulative but unpaid dividends. If any portion
  of the redemption amount is not paid by the Company on

                                      F-15
eMachines, Inc.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

        Period from September 18, 1998 (inception) to December 31, 1998,
               and the six months ended June 30, 1999 (unaudited)
                    (in thousands, except share information)

  the redemption date, dividends will continue to accrue on the shares
  tendered for redemption and late fees will accrue at an annual rate of 15%
  until the entire redemption amount is paid.

     Liquidation Preference--In the event of the liquidation, dissolution or
  winding up of the Company, the holders of Series A Preferred Stock will be
  entitled to receive, in preference to the holders of Common Stock, the
  amount of $6.38 per share, which presently is equal to the aggregate amount
  of $154,995, plus declared and unpaid dividends, if any. After payment has
  been made to the holders of the Series A Preferred Stock, any remaining
  assets are distributable ratably to the holders of Common Stock.

     Voting--Each holder of shares of Series A Preferred Stock is entitled to
  the number of votes equal to the number of shares of Common Stock into
  which each share is then convertible. Series A Preferred Stock holders also
  have the following voting rights:

       Board of Directors--Three of the company's current common
    stockholders are entitled to elect a total of five of the Company's
    seven board members. Holders of Series A Preferred Stock, voting
    together as a class, are entitled to elect one member to the Company's
    Board of Directors. All remaining members of the Board of Directors
    shall be elected by the holders of the then-outstanding shares of
    Common Stock and Series A Preferred Stock, voting together as a single
    class.

       Protective Provisions--As long as 4,000,000 shares of the Series A
    Preferred Stock is outstanding, the Company is required to obtain the
    written consent of at least 50% of the preferred shareholders before
    taking certain corporate actions.

     Dividends--The holders of Series A Preferred Stock are entitled to
  receive noncumulative dividends only when and if declared by the Company's
  Board of Directors, equal to $0.45 per share per year. Dividends shall be
  paid to the holders of Series A Preferred Stock prior to any cash dividends
  paid to the holders of Common Stock. The Company has not declared any
  dividends to date with respect to the Series A Preferred Stock or Common
  Stock.

   AOL Warrants--In connection with the August 1999 Series A Preferred Stock
financing, AOL purchased 2,271,303 shares of the Company's Series A Preferred
Stock and committed to purchase an additional 5,560,776 shares upon receipt of
regulatory approval. On August 18, 1999, the Company granted AOL a warrant to
purchase common stock of an aggregate exercise price of $3,625. This warrant
expires five years after the date of grant. The number of shares that may be
purchased upon exercise of the warrant is equal to the aggregate exercise price
divided by the greater of 1.25 times the initial public offering price of the
Company's common stock and $7.98. If there is no successful completion of an
initial public offering, the number of shares issuable upon exercise of the
warrant is equal to the aggregate exercise price of the warrant divided by
$11.82. Upon receipt of regulatory approval, the Company is obligated to issue
AOL an additional warrant to purchase shares of common stock at an aggregate
exercise price of $8,875 under the same terms as the earlier warrant. The
maximum number of shares that AOL may receive upon exercise of their warrants
is 1,566,219.

                                      F-16
[LOGO]
PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

   The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by eMachines in connection with
the sale of Common Stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fee.
SEC registration fee............................................. $55,600
      NASD filing fee..................................................  20,500
      Nasdaq National Market listing fee...............................       *
      Printing and engraving costs..................................... 300,000
      Legal fees and expenses..........................................       *
      Accounting fees and expenses.....................................       *
      Blue Sky fees and expenses.......................................   5,000
      Transfer Agent and Registrar fees................................   5,000
      Miscellaneous expenses...........................................       *
                                                                        -------
        Total.......................................................... $
                                                                        =======
---------------------
*  To be filed by amendment.

Item 14. Indemnification of Directors and Officers

   Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.

   Article X of the Registrant's Amended and Restated Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.

   Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the Registrant if
such person acted in good faith and in a manner reasonably believed to be in
and not opposed to the best interest of the Registrant, and, with respect to
any criminal action or proceeding, the indemnified party had no reason to
believe his or her conduct was unlawful.

   The Registrant has entered into indemnification agreements with its
directors and intends to enter into indemnification agreements with its
executive officers, in addition to indemnification provided for in the
Registrant's Bylaws.

Item 15. Recent Sales of Unregistered Securities

   During the past three years, the Registrant has issued unregistered
securities as described below.

   (a) On June 10, 1999, the Registrant sold an aggregate of 77,600,000 shares
of its common stock in exchange for cash and notes in an aggregate amount of
approximately $1.9 million pursuant to an initial capitalization agreement.

   (b) As of June 30, 1999, an aggregate of 609,200 shares of common stock are
issuable upon exercise of options under the Registrant's 1998 stock option
plan.

   (c) On August 18, 1999, the Registrant sold an aggregate of 24,279,369
shares of Series A preferred stock (including 5,560,776 shares issuable upon
regulatory approval) in exchange for cash in an aggregate amount of
approximately $155.0 million pursuant to a stock purchase agreement.

                                      II-1
(d) On August 18, 1999, the Registrant issued 419,538 shares of its common
stock to Korea Data Systems America in connection with the transfer of a
trademark to the Registrant.

   (e) On August 18, 1999, the Registrant issued a warrant to purchase shares
of its common stock at an aggregate exercise price of $3.6 million. Upon
receipt of regulatory approval, the Registrant will issue an additional warrant
to purchase shares of its common stock at an aggregate exercise price of $8.9
million. The maximum number of shares issuable, subject to anti-dilution
adjustments, upon exercise of the warrants is 1,566,219.

   (f) On August 18, 1999, the Registrant granted an option to purchase 227,897
shares of its common stock at an exercise price of $1.61 per share to Mr.
Stephen Dukker in connection with an employment agreement between Mr. Dukker
and the Registrant.

   Except as indicated above, none of the foregoing transactions involved any
underwriters, underwriting discounts or commissions, or any public offering,
and the Registrant believes that each transaction was exempt from the
registration requirements of the Securities Act by virtue of Section 4(2)
thereof, Regulation D promulgated thereunder or Rule 701 pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under such Rule 701. The recipients in such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate
legends were affixed to the share certificates and instruments issued in such
transactions. All recipients had adequate access, through their relationships
with the Registrant, to information about the Registrant.

Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits
Exhibit
 Number
 -------
1.1*   Form of Underwriting Agreement

  3.1    Amended and Restated Certificate of Incorporation of the Registrant

  3.2*   Form of Amended and Restated Certificate of Incorporation of the
         Registrant to be filed upon the closing of the offering

  3.3    Amended and Restated Bylaws

  3.4*   Amended and Restated Bylaws of the Registrant to be in effect after
         the closing of the offering

  4.1*   Specimen Common Stock Certificate

  5.1*   Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation

 10.1    Form of Security Agreement entered into between the Registrant and
         each of Chul Chung, Stephen A. Dukker, Lap Shun Hui, Dae Soo Koh, Jung
         Koh, Hong Soon Lee and Hong Sun Lee dated as of June 10, 1999

 10.2    Form of Promissory Note from each of Chul Chung, Stephen A. Dukker,
         Lap Shun Hui, Dae Soo Koh, Jung Koh, Hong Soon Lee and Hong Sun Lee
         dated as of June 10, 1999

 10.3    Amended and Restated Rights and Restrictions Agreement dated as of
         August 18, 1999

 10.4    Subordinated Promissory Note dated as of June 7, 1999 for TriGem
         Corporation

 10.5    Subordinated Promissory Note dated as of June 7, 1999 for Korea Data
         Systems America, Inc.

 10.6    Form of Indemnification Agreement between the Registrant and each of
         its directors and executive officers

 10.7*   1998 Stock Plan and form of agreements thereunder
II-2
Exhibit
 Number
 -------
10.8*+  Marketing Agreement between the Registrant and America Online dated as
         of June 17, 1999

 10.9    Amended and Restated Employment Agreement dated as of August 18, 1999
         for Stephen Dukker

 10.10   Trademark Assignment Agreement dated as of June 10, 1999

 10.11   Agreement (Amending Trademark Assignment) dated as of August 16, 1999

 10.12   Industrial Lease between the Registrant and the Irvine Company dated
         as of November 30, 1998

 10.13   Common Stock Purchase Warrant issued on August 18, 1999 to America
         Online, Inc.

 10.14   Option to Purchase Common Stock issued on August 18, 1999 to Stephen
         Dukker

 23.1    Consent of Deloitte & Touche, LLP, Independent Accountants

 23.2*   Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
         (see Exhibit 5.1)

 24.1    Power of Attorney (see page II-4)

 27.1*   Financial Data Schedules
---------------------
* To be filed by amendment.
+ We intend to seek confidential treatment pursuant to Rule 406 for portions of
  the referenced exhibits.

(b) Financial Statement Schedules
Schedule                         Page
                --------                         ----
II - Valuation and Qualifying Accounts  S-1
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

Item 17. Undertakings

   The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

   Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

   The undersigned Registrant hereby undertakes that:

  . For purposes of determining any liability under the Securities Act, the
    information omitted from the form of Prospectus filed as part of this
    Registration Statement in reliance upon Rule 430A and contained in a form
    of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
    or 497(h) under the Securities Act shall be deemed to be part of this
    Registration Statement as of the time it was declared effective.

  . For the purpose of determining any liability under the Securities Act,
    each post-effective amendment that contains a form of Prospectus shall be
    deemed to be a new registration statement relating to the securities
    offered therein, and the offering of such securities at that time shall
    be deemed to be the initial bona fide offering thereof.

                                      II-3
SIGNATURES

   Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
State of California, on the 31st day of August, 1999.

                                          eMachines, Inc.

                                                   /s/ Stephen A. Dukker
                                          By: _________________________________
                                                     Stephen A. Dukker,
                                               President and Chief Executive
                                                          Officer

                               POWER OF ATTORNEY

   KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen A. Dukker and Steven H. Miller and each
of them, his attorneys-in-fact, each with the power of substitution, for him
and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that such attorneys-in-fact and agents or any of them, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.

   Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature                          Title                   Date
              ---------                          -----                   ----
/s/ Stephen A. Dukker          President, Chief Executive   August 31, 1999
______________________________________  Officer and Director
         (Stephen A. Dukker)            (Principal Executive
                                        Officer)

         /s/ Steven H. Miller          Executive Vice President     August 31, 1999
______________________________________  and Chief Financial
          (Steven H. Miller)            Officer (Principal
                                        Financial Officer)

            /s/ Chul Chung             Director                     August 31, 1999
______________________________________
             (Chul Chung)

           /s/ Lap Shun Hui            Director                     August 31, 1999
______________________________________
            (Lap Shun Hui)

             /s/ Jung Koh              Director                     August 31, 1999
______________________________________
              (Jung Koh)
II-4
Signature                          Title                   Date
              ---------                          -----                   ----
/s/ Hong Soon Lee            Director                     August 31, 1999
______________________________________
           (Hong Soon Lee)

          /s/ Nathan Morton            Director                     August 31, 1999
______________________________________
           (Nathan Morton)

        /s/ C. Toms Newby, III         Director                     August 31, 1999
______________________________________
(C. Toms Newby, III)

                                      II-5
SCHEDULE II

                                eMachines, Inc.

                       VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)
Balance  Additions  Balance
                                                      at    charged to at end
                                                  beginning  cost and    of
                   Description                    of period  expenses  period
                   -----------                    --------- ---------- -------
Allowance for doubtful accounts receivable and
 sales returns:
Period from September 18 (inception), 1998 to
 December 31, 1998...............................    --       $  239   $  239
Six months ended June 30, 1999 (unaudited).......    239       8,733    8,972
S-1
EXHIBIT INDEX
Exhibit
 Number
 -------
1.1*   Form of Underwriting Agreement

  3.1    Amended and Restated Certificate of Incorporation of the Registrant

  3.2*   Form of Amended and Restated Certificate of Incorporation of the
         Registrant to be filed upon the closing of the offering

  3.3    Amended and Restated Bylaws

  3.4*   Amended and Restated Bylaws of the Registrant to be in effect after
         the closing of the offering

  4.1*   Specimen Common Stock Certificate

  5.1*   Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation

 10.1    Form of Security Agreement entered into between the Registrant and
         each of Chul Chung, Stephen A. Dukker, Lap Shun Hui, Dae Soo Koh, Jung
         Koh, Hong Soon Lee and Hong Sun Lee dated as of June 10, 1999

 10.2    Form of Promissory Note from each of Chul Chung, Stephen A. Dukker,
         Lap Shun Hui, Dae Soo Koh, Jung Koh, Hong Soon Lee and Hong Sun Lee
         dated as of June 10, 1999

 10.3    Amended and Restated Rights and Restrictions Agreement dated as of
         August 18, 1999

 10.4    Subordinated Promissory Note dated as of June 7, 1999 for TriGem
         Corporation

 10.5    Subordinated Promissory Note dated as of June 7, 1999 for Korea Data
         Systems America, Inc.

 10.6    Form of Indemnification Agreement between the Registrant and each of
         its directors and executive officers

 10.7*   1998 Stock Plan and form of agreements thereunder

 10.8*+  Marketing Agreement between the Registrant and America Online dated as
         of June 17, 1999

 10.9    Amended and Restated Employment Agreement dated as of August 18, 1999
         for Stephen Dukker

 10.10   Trademark Assignment Agreement dated as of June 10, 1999

 10.11   Agreement (Amending Trademark Assignment) dated as of August 16, 1999

 10.12   Industrial Lease between the Registrant and the Irvine Company dated
         as of November 30, 1998

 10.13   Common Stock Purchase Warrant issued on August 18, 1999 to America
         Online, Inc.

 10.14   Option to Purchase Common Stock issued on August 18, 1999 to Stephen
         Dukker

 23.1    Consent of Deloitte & Touche, LLP, Independent Accountants

 23.2*   Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
         (see Exhibit 5.1)

 24.1    Power of Attorney (see page II-4)

 27.1*   Financial Data Schedules
---------------------
* To be filed by amendment.
+ We intend to seek confidential treatment pursuant to Rule 406 for portions of
  the referenced exhibits.