U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
     For the fiscal year ended: DECEMBER 31, 2002

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934
     For the transition period from _________ to __________

                        Commission file number: 000-29869

                               EACCELERATION CORP.
                 (Name of small business issuer in its charter)

             DELAWARE                                       91-2006409
  (State or other jurisdiction of                        (I.R.S. Employer
   incorporation or organization)                       Identification No.)

         1050 NE Hostmark St, Suite 100B
              Poulsbo, Washington                                 98370
     (Address of principal executive offices)                   (Zip Code)

                    Issuer's telephone number: (360) 697-9260

Securities registered under Section 12(b) of the Exchange Act:  NONE

Securities registered under Section 12(g) of the Exchange Act: Common Stock,
                                                               Par Value $0.0001

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

     Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [__]

     State issuer's revenues for its most recent fiscal year:  $2,876,241

     State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as of
a specified date within the past 60 days. Not Applicable

     As of March 1, 2003, there was a total of 34,424,500 shares of the
issuer's common stock outstanding.

     Traditional Small Business Disclosure Format (check one)
                                                      Yes              No   X
                                                          ------          -----

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      NONE

<PAGE>

                               eACCELERATION CORP.

                              INDEX TO FORM 10-KSB

                                                                            Page
                                                                            ----
                                     PART I

Item 1.   Description of Business.........................................    3

Item 2.   Description of Property.........................................    14

Item 3.   Legal Proceedings...............................................    15

Item 4.   Submission of Matters to a Vote of Security Holders.............    15

                                     PART II

Item 5.   Market for Common Equity and Related Stockholder Matters........    16

Item 6.   Management's Discussion and Analysis............................    16

Item 7.   Financial Statements............................................    23

Item 8.   Changes In and Disagreements with Accountants on Accounting
             and Financial Disclosure.....................................    24

                                    PART III

Item 9.   Directors, Executive Officers, Promoters and Control Persons;
             Compliance with Section 16(a) of the Exchange Act............    24

Item 10.  Executive Compensation..........................................    26

Item 11.  Security Ownership of Certain Beneficial Owners and Management..    28

Item 12.  Certain Relationships and Related Transactions..................    29

Item 13.  Exhibits List and Reports on Form 8-K...........................    30

Item 14.  Controls and Procedures.........................................    30

Item 15.  Principal Accountant Fees and Services..........................    31

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         Throughout this annual report on Form 10-KSB, the terms "we," "us,"
"our," and "our company" refer to eAcceleration Corp. and, unless the context
indicates otherwise, our wholly-owned subsidiary, Acceleration Software
International Corporation, on a consolidated basis, and the term "ASIC" refers
to Acceleration Software International Corporation.

INTRODUCTORY COMMENT - FORWARD-LOOKING STATEMENTS.

         Statements contained in this annual report include "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Forward-looking statements involve known and unknown
risks, uncertainties and other factors which could cause our actual results,
performance and achievements, whether expressed or implied by such
forward-looking statements, not to occur or be realized. Such forward-looking
statements generally are based upon our best estimates of future results,
performance or achievement, upon current conditions and upon the most recent
results of operations. Forward-looking statements may be identified by the use
of forward-looking terminology such as "may," "will," "expect," "believe,"
"estimate," "anticipate," "continue," or similar terms, variations of those
terms or the negative of those terms. Potential risks and uncertainties include,
among other things, the matters described in the "Risk Factors" section and
other sections of this annual report.

         Readers should carefully consider such risks, uncertainties and other
information, disclosures and discussions which contain cautionary statements
identifying important factors that could cause actual results to differ
materially from those provided in the forward-looking statements. We undertake
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.

ITEM 1.  DESCRIPTION OF BUSINESS.

OVERVIEW

         We are a provider and licensor of proprietary software that is
distributed both through the Internet and via a distributor in Japan. Our
primary focus is developing a subscriber base for our "eAnthology" online
subscription service as the leading means of distributing some or all of our
internally-produced software. In the past, we produced Internet-based direct
marketing and advertising services combined with programs that rewarded
consumers with free internally-produced software when they agreed to view
advertisements bundled with our software. We did not actively pursue this
business in 2002 due to the depressed nature of the online advertising industry.

         eAnthology is an online subscription service that can provide many
different computer applications, including our own software product line, to
consumers. We expect it to be composed of various different applications, and
all components are designed to make the user's computing experience, both on and
off the Internet, a fast, safe, easy, and fun experience. During 2002, we
focused most of our efforts on developing our virus protection system for the
consumer market. Our virus scanner alerts users to the presence of not only
viruses, but also spyware, malware, (i.e., malicious software designed
specifically to damage or disrupt a system, such as a virus) and keyloggers
(i.e., surveillance software that records every keystroke to an encrypted file,
which then can e-mail such file to a remote recipient). It provides cures for
the infected machines as well as ongoing support and protection to safeguard our
customers against future threats. eAnthology is not defined by any one
application, and we expect that its nature and content will expand and evolve
over time as the needs of our users change. We endeavor to constantly respond to
the needs of the consumer market, and eAnthology is designed to meet those
needs.

         We also license localized versions of our software products for
distribution in Japan. Under the terms of our distribution agreement with our
Japanese distributor, Sourcenext Corporation, we have granted our distributor an
unlimited license to sell the software in Japan. This does not materially affect
our operations involved in offering software through our websites or otherwise
over the Internet, either free or as part of a subscription, because the
distributor's license only applies to localized, Japanese versions of the
software, and not the English language versions which are available on our
websites or over the Internet, including with respect to eAnthology.
Additionally, users in Japan generally cannot run the English-language versions
on their operating systems.

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HISTORY

         We were initially incorporated in February 1987 as Ballard Synergy
Corporation, a Nevada corporation, merged with a Washington corporation in June
1995, and changed our name to Acceleration Software International Corporation
("ASIC") in 1996. In November 1999, we formed eAcceleration Corp., a Delaware
corporation, which is the parent company of ASIC.

         We began by providing crisis intervention computer software programming
services in the Silicon Valley region of California. We became a leading
provider of SCSI software services and developed a library of SCSI software
solutions that we sold to the Microelectronics Products Division of NCR
Corporation in 1992. After relocating to Kitsap County, Washington in 1992, we
developed d-Time, a software product that accelerated the performance of CD-ROM
drives, which by 1995 became a top 100 software title in the U.S. according to
PC Data, and a top 20 software title in Japan. As the need for CD-ROM
performance acceleration declined in light of the rapid increase in CD-ROM drive
speed, we developed Superfassst, a hard drive performance acceleration product.
As the Internet developed, we developed Webcelerator, a software product which
accelerates the performance of web browsers, as well as some additional
Internet-related products.

         In 1996, we began developing our Internet advertising and marketing
business model, under which we provided our software and third-party products
for free to users who agreed to utilize one of our websites, homepageware.com,
as their Internet browser's starting page. This generated significant traffic to
our homepageware websites, allowing us to sell pay-for-performance Internet
advertising to our advertising and marketing clients. Towards the end of 2000
this industry began its decline, which we believe was a catalyst in the demise
of many "dot-com" companies, many of which comprised our online advertising
client base.

         We began developing a subscriber base for certain of our products on a
small scale in late 2000. At first, this service was offered as an
advertising-supported service, but over time we began to charge a nominal price
for it, thereby compensating for declining advertising revenues. This service
developed into our eAnthology subscription service during 2002. We seek to
change the offerings on eAnthology to meet the changing needs of an ever-
increasing online population in the United States and abroad. Throughout 2002,
we focused most of our efforts into generating revenues from our eAnthology
service.

PRODUCTS AND SERVICES

         We develop a variety of software titles and license them through three
distribution methods:

         -  selling online subscription services;
         -  licensing to our Japanese distributor; and
         -  offering free downloads supported by online advertising.

         Our software products and distribution methods are described in detail
below:

SOFTWARE PRODUCTS

         We currently produce the following software products, among others:

         D-TIME speeds the performance of CD-ROM drives. First introduced in
1994, it was our first retail computer software application product. It operates
on the Windows 95, Windows 98, Windows 2000 and Windows XP operating systems.

         NET BUTLER is a download manager that can manage multiple downloads at
once, can pause a download mid-stream and can resume a download if the Internet
connection is lost.

         PHANTOM CD allows users to make a virtual copy of CD-ROMs onto their
hard drive, which enables users to eliminate the need for the CD-ROM and
increases performance speed. It operates on the Windows 95, Windows 98, Windows
Millenium Edition, Windows 2000 and Windows XP operating systems.

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         STOP-SIGN is an antivirus protection system for the consumer market. It
scans for viruses, spyware, malware, and keyloggers. If a virus or other
undesirable software is detected, it provides a cure for the infected machine.
In addition, we offer ongoing support and protection to safeguard the customer
against future threats. This product was previously one of the components of the
Veloz transformer system. In 2002 it became a component of the eAnthology online
subscription service.

         SUPERFASSST increases the speed of a computer's performance in several
respects, including starting computer applications and accessing folders. It
operates on the Windows 95, Windows 98, Windows Millenium Edition, Windows 2000
and Windows XP operating systems. We have been issued three patents
with respect to this product.

         THE 4TH COMING is a multiplayer online role-playing game which features
interactive play in a virtual fantasy world pitting the user against hordes of
enemies. Users may choose to play either alone, or in "guilds" formed by other
players, as they follow instructions given in the form of "quests."

         VELOZ is an integrated email transformer system which performs various
useful functions on outbound and inbound emails, such as encryption and
compression. Each "transformer" performs a different function, but works
seamlessly in conjunction with the other transformers. Current transformers
include:

         -    ACCELERATOR - this product speeds up both the sending and
              receiving of large emails. It can also resume downloads of
              interrupted emails and provide notification and choice to the user
              regarding the receipt of large emails.

         -    ENCRYPTOR - this product is designed to encrypt and decrypt email
              utilizing 128-bit encryption, and features automatic key
              management, requiring no system administrator. It allows email to
              be read only by the intended recipient.

         -    TERMINATOR - this product allows the sender of an email to
              determine how the message is used by limiting dissemination
              capabilities and by determining the number of times the message
              may be read, the amount of time it may be read, and the specific
              message expiration date.

We plan to include new Veloz components in the future, and to provide even more
flexibility regarding a user's email. We believe that as new, single-function
email enhancement products are produced by other companies, we will be able to
produce transformers integrated with Veloz that are technologically comparable
or superior to such stand-alone products in the respective submarket, though no
assurance can be given in this regard.

         WEBCELERATOR enhances the speed of users' browsing by both remembering
where users have browsed and anticipating where they will browse. It operates on
the Windows 95, Windows 98, Windows NT, Windows Millenium Edition, Windows 2000
and Windows XP operating systems. A patent with respect to this product has been
issued.

         Z.E.U.S. provides an easy-to-use interface for making and extracting
zip files, and also facilitates the creation of self-extracting archives.  It
operates on the Windows 95, Windows 98, and Windows NT operating systems.

         EANTHOLOGY is an online subscription service that licenses certain of
our software titles to users for a subscription fee that may vary depending on
the level of service provided. The service currently features Stop Sign,
Z.E.U.S., Net Butler, The 4th Coming and several other online games.

DISTRIBUTION METHODS

         ONLINE SUBSCRIPTION SERVICE: We are currently devoting substantial
resources towards continuing to develop the online subscription service that we
sell directly to users over the Internet called "eAnthology." We began offering
the service in December 2001 and by the end of the year 2002 it accounted for
approximately 56% of our total revenues. Through this service, we license
certain of our software titles, described above, to users for a

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subscription fee that varies depending on the level of service provided. This
service is composed of several different computer applications and is designed
to make the user's computing experience, both on and off the Internet, a fast,
safe, easy, and fun experience. We expect that the nature and content of
eAnthology will expand and evolve over time as the needs of our users change.
The primary component of eAnthology during 2002 was our antivirus protection
system for the consumer market. Several additional products were being tested at
year-end, but none were ready for commercial deployment. These anticipated
future products may include other consumer-oriented products, such as games and
utility software.

         We expect that eAnthology will be made up of many different types of
software, with each type of software performing a unique function. We expect
that this will differentiate it from other services in the marketplace which are
designed to perform only one or a few functions. There are dozens of
single-function products on the marketplace that perform similar functions to
those performed by each of the anticipated components of eAnthology. However, we
believe that having more than one of such single-function products on a user's
computer could be problematic or even impossible, due to interoperability
problems between products from multiple vendors. With eAnthology, we expect that
all the components will work together as an integrated system. As we add more
components, the functionality of the service will grow.

         SOFTWARE LICENSING: We license software products to our Japanese
distribution client, Sourcenext Corporation. Most of the products described
above have been licensed to this client for distribution exclusively in Japan,
except for eAnthology. Our contract with the distributor grants it the exclusive
right to reproduce, display, license and sub-license our intellectual and
proprietary rights in our software products to third parties in Japan. We are
required to maintain, support and provide "bug fixes" for these products and to
develop specified upgraded versions of certain of these products in the future,
but we are not required to develop new products for the distributor. This
agreement may be terminated at any time, by either party, upon three months'
notice, with no further obligations on our part. Software products that are
distributed in Japan are "localized", that is, modified to meet the needs of
non-English speaking users, incorporating all of the changes necessary to meet
functionality requirements made by the distributor, while making them more
culturally acceptable to the users.

         ONLINE ADVERTISING: From 1998 until 2001, we derived the majority of
our revenues from selling online advertising to other businesses. Most of our
products described above, as well as some third-party software programs, were
offered as free homepageware, which meant that users were required to adopt our
homepage as their Internet browser's starting page in exchange for using the
software. This free homepageware generated traffic to our websites, which
enabled us to earn advertising revenue by presenting users with a variety of ads
that enticed users to "click here". Revenue was earned by us when users
performed a pre-defined "action", such as a click, sign-up or registration.

         Throughout 2002, the online advertising industry continued to show a
steady, significant decline in terms of both volume and prices, and many online
companies, including many of our clients, did not survive that decline. As a
result, our revenue from this activity has dropped considerably and we have
decreased our emphasis in this area of business.

MARKET

         As the Internet continues to expand, the size of our market also
expands. We estimate that the potential market for possible subscribers
currently is approximately 116 million people worldwide. We believe there are
many more people using the Internet worldwide, approximately 580 million
according to research published by Nielsen/Netratings in their Fourth Quarter
2002 Global Internet Trends. However, we feel that the 116 million represents
people from countries with high enough income levels to afford our minimum
introductory subscription price in U.S. dollars.

         Rather than viewing the eAnthology market as a single monolithic
market, we view it as the sum of many smaller markets. Since eAnthology is a
service that is expected to be composed of multiple products and services that,
we believe, "transform" the end user's experience, it may not be readily
apparent to a non-technical end user how to best utilize eAnthology. We have
identified several target markets based on the various combinations of functions
available within eAnthology, and we have pinpointed what we believe are the
primary benefits for each

                                      - 6 -

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market based on the fast, safe, easy and fun features of eAnthology. Our
advertisements directed at each target market highlight one or several of these
features.

STRATEGY

         Since 1996, we have been developing and refining better and more
efficient ways to utilize the Internet as an advertising and direct marketing
medium. Our strategy for our eAnthology subscription service consists of
utilizing the extensive expertise we gained in the Internet advertising
industry, on behalf of our advertising and marketing clients, for our own
benefit, by promoting our own service and product offerings via our websites
through "pop-ups", "pop-unders", and other advertising media purchased from
third parties, utilizing internally developed advertising content.

         We believe that we have been effective in reaching an audience of
consumers with our eAnthology service. This audience is composed not only of
people in the U.S., but encompasses Internet users all over the globe. Based on
data published by Nielsen/Netratings, we believe that this market is continually
expanding. We also believe that the users' expectations regarding the services
available to them on the Internet are continually increasing as well. We have
determined that users want products that will make their experience online a
positive experience in the following ways:

         FAST. Time is a precious commodity. We believe that the average person
does not want to wait a long time for services or products. We are experienced
at producing products that accelerate the speed of the user's experience online.

         SAFE. The threat of viruses and other harmful software transmitted
online via email or other means is very real, and users desire and expect to be
protected from such threats, as well as any other unwanted invasions of their
online experience.

         EASY. We realize that the majority of users we target on the Internet
may not be technologically advanced, or may have had exposure to Internet
technology on a limited basis, and therefore seek products and services that
will simplify their experience online while giving them their desired results.
We also believe that experienced users find value in enhancements that make
their time online easier and more efficient.

         FUN. We believe that a large number of people seek entertainment on the
Internet, whether it be in the form of interactive play, or in the form of
passive viewer activities.

         We seek to attract potential users to eAnthology with
internally-developed as well as third-party online advertising that shows them
the benefits they may obtain by subscribing to our service. We seek to create a
very positive impression on the users that will make them want to continue using
not only existing, but also future product offerings.

         The number and quality of our product and service offers is critical to
our ability to attract and retain users of eAnthology, and thereby increase
revenues. We expect to expand the available components through a combination of
internal software development, licensing of components and software from third
parties, and possibly offerings of goods and services from third parties.

SALES

              Over the next few years, our goal with respect to our eAnthology
online subscription service is to obtain as customers a small percentage of the
total active online population worldwide by promoting the service through online
advertising. However, there can be no assurance that we will achieve the desired
subscriber base. We believe that we will be able to keep our expenses relating
to the subscription service relatively low due to our lean business structure
and our ability to obtain online advertising at a reasonable cost. Our primary
strategy with eAnthology is to sell our services directly to the consumer.

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COMPETITION

         We believe that because eAnthology is expected to be a "complete
product line" service, it would be improper to classify single-function online
subscription services in the same market segment as eAnthology. We believe that,
just as a component manufacturer (such as an automobile transmission supplier)
competes in a different market than the manufacturer of a complete system (such
as an automobile manufacturer), in the same manner, these single-function
subscription services will compete in a different market segment than our
eAnthology service.

         Currently, we know of no other company that offers an online software
subscription service similar in scope or substance to the services that we offer
and plan to offer with eAnthology. While there may be dozens of products or
companies on the marketplace that may compete with each of the individual
components of eAnthology, including RealNetworks, Adobe, Macromedia, Symantec,
McAfee, Zixit, and Sony, to name a few, we believe that eAnthology should
develop a significant marketing advantage against the single-function products
or services because of all the other components that are part of the eAnthology
integrated system. We believe that the synergy and savings afforded by all of
our anticipated combined components will set us apart from the single-component
producers. We expect to price the full eAnthology service, consisting of many
components, in the same general price range as typical single-function component
products.

         In the event a competitor introduces a comprehensive system of software
offerings similar to ours in the future, we hope that by such time, we will have
a competitive advantage because eAnthology will have an established brand and
user base. With our technical expertise, we hope to provide a technologically
comparable or superior product in each submarket addressed by a specific
component of eAnthology.

         We plan to create an eAnthology component that can effectively compete
on a stand-alone basis in each identified consumer submarket. Due to our
technological adaptability, we are confident that even if another company is
able to implement a single-function software component similar to any one of our
service offerings, it would only be a matter of time before we had our own
version built into our integrated system. In addition, we currently have U.S.
patents either pending or issued on most of the initial components and on the
proprietary system aspects of combining components within the eAnthology
service. No assurance can be given that our pending patent applications will be
granted.

CLIENTS

         During 2002, our Japanese distributor accounted for $1,100,000 or 38%
of our total revenues. No other customer accounted for 10% or more of our
revenues in 2002. Our revenues recognized for eAnthology in 2002 totaled 56% of
our total revenues. No single customer contributed more than 10% of our online
software subscription revenue in 2002.

         During 2001, our advertising and marketing clients, together with our
software licensing client, contributed a vast majority of our revenues. Our
Japanese distributor accounted for $1,575,000 or 49% of our 2001 total revenues.
No other customer accounted for 10% or more of our revenues in 2001. Less than
0.1% of our total revenues came from our eAnthology subscription service, which
was combined with Internet revenue for presentation purposes in 2001.

         Software development costs incurred for the years ended December 31,
2002 and 2001 were $2,474,316 and $1,932,387, respectively. None of such costs
were borne directly by our clients.

FOREIGN OPERATIONS

         In 2002 and 2001, a significant portion of our foreign revenues were
derived from our agreement with Sourcenext Corporation, our Japanese
distributor. We granted it exclusive rights to reproduce and distribute
localized versions of our products in Japan, in exchange for certain specified
monthly payments, as well as additional payments due upon delivery of the
products. This agreement has been superceded in 2002 with a new contract with
this distributor with new payment terms. See "Managements' Discussion and
Analysis - Liquidity and Capital Resources".

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         Our revenue from non-U.S. clients other than our Japanese distributor
has historically been a very small percentage of our total revenues. Although it
has been growing slowly and steadily, for the year ended December 31, 2002,
revenue from other foreign sources only accounted for slightly over 11% of our
total revenue. We typically demand payment in advance from non-U.S. clients.

SUPPLIERS

         We depend on several suppliers with respect to our eAnthology service.
Licensors of components that we have included or intend to include as part of
eAnthology require licensing fees for the use of their software. We employ
outside contractors who test the software we produce for adequate performance.
We purchase internet advertising from third party suppliers in order to
advertise eAnthology on the Internet. We purchase bandwidth from several
Internet connectivity providers to handle the large volume of activity within
our web pages. We also utilize contractors who furnish credit card processing
services. In 2002, none of these suppliers comprised 10% or more of our total
expenses.

         During 2001, we were dependent on products and services provided by a
variety of Internet suppliers, most of which had month-to-month agreements with
us, and which were cancellable at short notice. In 2001, five advertising
vendors accounted for 97% of our total Internet media purchases. However, no
single supplier in 2001 made up 10% or more of our total expenses.

CREDIT CARD PROCESSING

         We depend on a small number of credit card processing firms to
effectuate our receipt of approximately 90% of the revenues from our eAnthology
service. For the first three quarters of 2002, we utilized only one merchant
bank and one payment gateway provider to facilitate all of our credit card
transactions. In the fourth quarter of 2002, we contracted with two additional
credit card processors. We have in several instances had our credit card
processing capacity severely limited by banking and other financial institutions
who perform these credit card processing services. Currently, we are attempting
to establish relationships with additional credit card processing firms to
minimize any restriction on our ability to generate revenues from our eAnthology
service.

TECHNOLOGY AND INFRASTRUCTURE

         We have developed an expandable, reliable and secure technology
infrastructure to support our online services.

EXPANDABILITY

         Our technology is designed to support up to approximately 50 million
users per month. Although we believe our systems can currently easily
accommodate this number of monthly visitors, our websites could encounter a
variety of systems problems, especially if the number of our users-per-month
expands significantly. These systems problems could include failure of one or
more of our three current Internet service providers, hardware failures or
failure of software applications. If these problems occurred during a weekend,
detection and correction could be delayed. Such problems could have a material
adverse effect on our cash flows, financial position and operating results.

RELIABILITY

         Our software system architecture uses industry standard technologies to
maximize reliability. We use Secure Socket Layer for secure transactions, MySQL
and PostgreSQL databases, the UNIX operating system and the Apache web server
within our infrastructure. All of these platforms have demonstrated a high
degree of reliability. We back up our databases and other information on a
regular basis.

         Our network servers are housed at three separate geographic locations.
We believe that each of these data centers provides redundant network
connections, redundant connections to power grids, diesel generators for
emergency power, air conditioning and engineering support 24 hours per day,
seven days per week.  Our

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infrastructure is built to maximize reliability through the use of multiple
central processor units and redundant power supplies, networking and
input/output controllers.

SECURITY

         We incorporate a variety of encryption techniques meant to protect the
privacy of consumer information. We also employ a variety of automated fraud
detection procedures to identify patterns of abuse and potential fraudulent use
of our system. Our fraud detection systems can disable accounts in which fraud
is suspected. The data center where our system is located provides security
management 24 hours per day, seven days per week.

         We currently accept credit card information from eAnthology users at
our website. We could be subject to litigation and liability if third parties
penetrated our network security or otherwise misappropriated our users' personal
or credit card information. This liability could include claims for unauthorized
purchases with credit card information, impersonation or other similar fraud
claims. It could also include claims for other misuses of personal information,
such as for unauthorized marketing purposes. The Federal Trade Commission and
other federal and state agencies have performed investigations of various
Internet companies in connection with their use of personal information. We
could be subject to investigations and enforcement actions by these or other
agencies.

         The need to transmit confidential information securely has been a
significant barrier to electronic commerce and communications over the Internet.
Any compromise of security could deter people from using the Internet in general
or, specifically, from using the Internet to conduct transactions that involve
transmitting confidential information, such as purchases of goods or services.
Our relationships with users may be adversely affected if the measures we use to
protect their personal information prove to be ineffective. We cannot predict
whether events or developments will result in a compromise or breach of the
technology we use to protect users' personal information. We have no insurance
coverage for these types of claims.

         Our computer servers may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions. We may need to expend significant
additional capital and other resources to protect against a security breach or
to alleviate problems caused by any such breaches. We may be unable to prevent
or remedy all security breaches. If any of these breaches occur, we could
temporarily lose the ability to effectively maintain our web sites and services
and as a result lose visitors to our websites and revenue from our eAnthology
subscription service.

INSURANCE

         Although we carry general liability, product liability and commercial
insurance, there can be no assurance that this insurance will be adequate to
protect us against any general, commercial and/or service liability claims. Any
general, commercial and/or service liability claim which is not covered by such
policy, or is in excess of the limits of liability of such policy, could have a
material adverse effect on our financial condition. There can be no assurance
that we will be able to maintain this insurance on reasonable terms.

GOVERNMENT REGULATION

         The United States Congress and the Federal courts have adopted laws
that require regulation of certain aspects of the Internet, including online
content, user privacy, taxation, liability for third-party activities, and
jurisdiction. We believe we are fully compliant with all such laws. In addition,
there have been a number of initiatives pending in Congress and state
legislatures that would prohibit or restrict advertising or sale of certain
products and services on the Internet, which may have the effect of raising the
cost of doing business generally on the Internet. The European Union has also
enacted several directives relating to the Internet, one of which addresses
online commerce and privacy. In addition, federal, state, local and foreign
governmental organizations are considering other legislative and regulatory
proposals that would regulate the Internet. Increased regulation of the Internet
may decrease growth, which may negatively impact the cost of doing business via
the Internet or otherwise materially adversely affect our business, financial
condition, and results of operations.

         Several states have also proposed legislation that would specifically
limit the uses of personal user information gathered online or require online
services to establish privacy policies. Changes to existing laws or the

                                     - 10 -

<PAGE>

passage of new laws intended to address these issues could reduce demand for our
services or increase the cost of doing business. In addition, because our
services are accessible worldwide, and we facilitate the sale of our services
and products to users worldwide, other jurisdictions may claim that we are
required to comply with their laws. The failure by us to qualify as a foreign
corporation in a jurisdiction where we are required to do so could subject us to
taxes and penalties for the failure to qualify and could result in our inability
to enforce contracts in such jurisdictions. Any such new legislation or
regulation, or the application of laws or regulations from jurisdictions whose
laws do not currently apply to our business, could have a material adverse
effect on our business, financial condition and results of operations.

INTELLECTUAL PROPERTY

         We regard our patents, copyrights, servicemarks, trademarks, trade
secrets, proprietary technology and similar intellectual property as critical to
our success, and we rely on trademark and copyright law, trade secret protection
and confidentiality and license agreements with our employees, customers,
independent contractors, partners and others to protect our intellectual
property rights. We own nineteen issued patents, including one foreign patent,
on our software products, and have several patent applications pending on our
software products. We have registered several trademarks in the United States
already and may apply for registration in the United States for other trademarks
and service marks. However, effective trademark, service mark, copyright and
trade secret protection may not be available in every country in which our
products and services are made available online. We generally rely on common law
copyright protection, and do not generally register our copyrights.

         The following table discloses which of our U.S. patents expire in which
years.

         Number of Patents                           Year of Expiration
         -----------------                           ------------------

                  1                                          2009
                  1                                          2014
                  4                                          2016
                  5                                          2017
                  4                                          2018
                  3                                          2019

         There can be no assurance that the steps we have taken to protect our
proprietary rights will be adequate to prevent third parties from infringing or
misappropriating our patents, copyrights, trademarks, trade dress and similar
proprietary rights without incurring significant costs.

         Additionally, no assurance can be given that the steps we have taken to
protect our patents, copyrights, servicemarks, trademarks, trade dress, trade
secrets and similar intellectual property have been sufficient for us to
successfully defend against any infringement claims, including patent
infringement claims, by any third party. The loss of our ability to use any such
intellectual property right could have a material adverse effect on us.
Additionally, any such defense, whether successful or not, may cause us to incur
significant expenses.

         We have registered a number of domain names, including
eAcceleration.com, eAnthology.net, Veloz.com, homepageware.com, clicksales.com,
downloadsales.com and signupsales.com. Domain names generally are regulated by
Internet regulatory bodies. The regulation of domain names in the United States
and in foreign countries is evolving. Regulatory bodies could establish
additional top-level domains, appoint additional domain name registrars or
modify the requirements for holding domain names. The relationship between
domain names and trademarks, service marks, and other intellectual property is
still being defined. In 1999, the Uniform Domain Name Dispute Resolution Policy
(UDRP) was adopted by the Internet Corporation for Assigned Names and Numbers
(ICANN) to assist trademark owners in recovering domain names from alleged
"cybersquatters," persons who register a domain name in which they have no
rights and which is similar or identical to an existing trademark owned by the
complainant. The UDRP outlines an arbitration process which can be resolved
without a court appearance within a few months. The fee required for such
arbitration generally is considerably less expensive than for a court
proceeding. Another regulation which has emerged is the Anticybersquatting
Consumer Protection Act (ACPA), a 1999 law that regulates "cyberpiracy."
Cyberpiracy is defined as a "bad-faith intent to register, traffic in or use a

                                     - 11 -

<PAGE>

domain name that is identical, similar to or dilutive of a registered trademark
or other protected name or mark." The ACPA awards damages to plaintiffs for up
to $100,000 per domain name violation if the defendant is found guilty of
cyberpiracy. Some trademark owners have been successful at prosecuting
cybersquatters under this act. A report on GigaLaw.com in May 2002 seemed to
indicate that a trend may be forming in that intellectual property owners are
utilizing the arbitration process under UDRP as an inexpensive lower court
determination, to be followed by a lengthy appeal under the ACPA in court.

         We may be required to obtain licenses from others to refine, develop,
market and deliver new services. We may be unable to obtain any such license on
commercially reasonable terms, if at all, or guarantee that rights granted by
any licenses will be valid and enforceable.

         Although we have not historically emphasized our brand names,
particularly with respect to our Internet advertising and marketing services or
our software licensing in Japan, we expect that brand name strength may become
increasingly important with respect to our eAnthology online subscription
service. The reputation of our brand names is expected to depend on our ability
to produce high quality innovative software and services, and to provide a
high-quality online experience for users visiting our websites or using our
products. Negative experiences of users with our services, websites or software
might result in publicity that could damage our reputation and diminish the
strength of our brand names.

ENVIRONMENTAL ISSUES

         We are not aware of any environmental issues that might affect the
business relating to the sale of eAnthology subscriptions, online advertising or
software licensing. We are committed to abiding with all environmental
regulations, including any regulations that may be promulgated by our community,
by the State of Washington and by the federal government.

EMPLOYEES

         As of December 31, 2002, we had a total of 79 employees of which 16
work part time. Thirty employees work in online services, 11 of which are
part-time; 38 in software development, 3 of which work part time; ten in
operations and administration, of which 2 work part time; and one in internet
advertising. None of our employees are represented by unions, and we consider
relations with our employees to be good.

RISK FACTORS

         WE ARE DEPENDENT ON THE PROCESSING OF CREDIT CARD TRANSACTIONS IN
CONNECTION WITH OUR EANTHOLOGY SUBSCRIPTION SERVICE. ANY SIGNIFICANT
INTERRUPTION IN THE PROCESSING OF OUR CREDIT CARD TRANSACTIONS COULD HAVE
SERIOUS ADVERSE EFFECTS ON OUR COMPANY.

         The success of our eAnthology online subscription service, and our
business as a whole, is dependent on our ability to sell subscriptions over the
Internet to consumers. Over 90% of our sales of our eAnthology subscriptions,
which constituted 56% of our revenues for 2002, are effectuated through credit
card sales. For the first three quarters of 2002, we utilized only one merchant
bank and one payment gateway provider to facilitate all of our credit card
transactions. In the fourth quarter of 2002, we contracted with two additional
credit card processors, one of which was terminated subsequent to year-end.
Although we have contracted with additional providers of these services, any
failure on the part of these providers to successfully process our credit card
transactions in sufficient volume could restrict our ability to sell our
services, which would have a material adverse effect on our financial position,
cash flows and results of operations.

         WE RELY ON A DISTRIBUTION AGREEMENT WITH OUR JAPANESE DISTRIBUTOR WHICH
MAY BE TERMINATED BY EITHER PARTY UPON THREE MONTHS' NOTICE.

         We currently rely on payments made under our distribution agreement
with our Japanese distributor for a portion of the cash flow required for our
operations. In May 2002, we entered into a new distribution agreement with the
distributor, pursuant to which our revenues were reduced from $150,000 to
$50,000 per month beginning in

                                     - 12 -

<PAGE>

September 2002. This reduction has had, and is expected to continue to have, an
adverse impact on our cash flows and results of operations. This agreement can
be terminated by either party upon three months' notice. There is no assurance
that we will be able to continue to produce software to the satisfaction of our
Japanese distributor under this contract, and if the contract is terminated,
there would be a material adverse effect on our financial position, results of
operations and cash flows. Additionally, we do not hold collateral to secure the
payments under this agreement. Therefore, a significant default in payment would
also adversely affect us.

         WE MAY BE UNSUCCESSFUL IN THE DEVELOPMENT OF OUR EANTHOLOGY ONLINE
SUBSCRIBER BASE.

         We are developing a subscriber base for our eAnthology subscription
service as the primary means of distributing some or all of our
internally-produced software for a fee. There is no assurance that we will be
successful in marketing or distributing this service, nor that user acceptance
of the service will rise to expected levels, nor that the revenue stream from
such a service will generate positive cash flow.

         OUR EANTHOLOGY SUBSCRIPTION SERVICE RELIES ON USERS PROVIDING THEIR
CREDIT CARD NUMBERS OR OTHER PERSONAL INFORMATION ONLINE IN ORDER TO SUBSCRIBE,
WHICH MANY USERS MAY BE RELUCTANT TO DO, AND THIS MAY SLOW THE GROWTH OF OUR
SUBSCRIPTION SERVICE CONSIDERABLY.

         Our eAnthology subscription service relies largely on users subscribing
to the service using their credit card over the Internet, though other payment
methods are available. Users have been known to be reluctant about providing
personal information over the Internet, for fear that their information may be
electronically "stolen." The unwillingness of users to provide us their personal
information over the Internet may hinder the sales of our eAnthology online
subscription from reaching expected levels, and as a result, we may be unable to
derive sufficient revenue from this activity, which could cause a material
adverse effect on our expected cash flow, results of operations and financial
position.

         THE SECURITY MEASURES WE HAVE IN PLACE TO PROTECT USERS' INFORMATION
MAY FAIL TO OPERATE PROPERLY AND WE MAY BE SUBJECTED TO LAWSUITS FILED BY USERS
FOR MISHANDLING THEIR PERSONAL INFORMATION.

         We collect personal information from users when they subscribe to our
eAnthology online subscription service, including their credit card information.
While we have security measures in place to protect such information when it is
transmitted to us over the Internet, such as Secure-Socket-Layer and other
measures, we cannot guarantee that these security measures will not fail,
allowing experienced computer programmers, or "hackers", access to such personal
information. Such a security breach would present a threat to our users, who may
file lawsuits against us, claiming that we have failed to protect their
information adequately. We have no insurance protection against such claims, and
an unfavorable outcome to such a lawsuit would likely have a material adverse
impact to our financial position, cash flows and results of operations.

         OUR BANK MAY DEMAND THE PAYMENT IN FULL OF THE PRINCIPAL ON THE LOANS
WE HAVE OUTSTANDING WITH THEM, AND WE PRESENTLY DO NOT HAVE THE CASH FLOW TO BE
ABLE TO COMPLY WITH SUCH A DEMAND.

         As of December 31, 2002 we owed the principal amount of $314,097 plus
accrued interest to a local bank, $275,000 of which is pursuant to a promissory
note which is payable upon maturity in April 2003. Under the promissory note, if
the bank believes that the prospect of payment under the note is impaired, it
can declare a default and demand immediate repayment. We cannot guarantee that
the bank will not demand payment in full of our loans or deny extension of the
loan in the future. There can be no assurance that we will have sufficient cash
to repay the loans by April 2003, or if the bank declares a default prior to
such date. If the bank requires payment of these loans and we are unable to do
so, we could be forced to cease operations.

         WE MAY BE UNSUCCESSFUL IN OBTAINING ADDITIONAL CAPITAL.

         As of December 31, 2002, we had a working capital deficit of
$(2,771,485). Since November 2001, one of our principal stockholders has loaned
us $404,000 to meet current operating expenses under several long-term notes and
has made a capital contribution of $40,000. If we require additional funds for
operations, we believe that our principal stockholders will provide additional
funding, if we are unable to obtain financing independently. However,

                                     - 13 -

<PAGE>

there is no assurance that such additional funding from our principal
stockholders will be available when needed, particularly as a result of our
covenants with our bank that restrict our ability to incur additional debt,
including borrowings obtained from our two principal stockholders. We are also
considering seeking additional financing through one or more equity or
convertible securities offerings, or, to the extent permissible by the bank,
debt offerings. If we are unsuccessful at raising additional capital or
financing through these offerings at acceptable terms, this will likely have an
adverse effect on our cash flow, financial position, and results of operations.

         WE MAY INCUR SIGNIFICANT EXPENSES WITH RESPECT TO THE LOCALIZATION OF
OUR SOFTWARE TO EACH LOCAL LANGUAGE OR CULTURE WHERE WE SEEK TO DISTRIBUTE OUR
SOFTWARE.

         We seek to distribute our subscription service worldwide over the
Internet. As we develop new software or distribute existing software to foreign
regions, we could incur significant costs associated with localization if the
software in its present form does not gain acceptance among users. Additionally,
with respect to our Japanese distribution client, we cannot guarantee that the
current localization efforts we perform on our software, which are currently
effectuated for Japanese users by us and our Japanese distributor, will continue
to be acceptable to Japanese users.

         WE HAVE INCURRED LOSSES IN 2002 AND 2001, AND THERE IS NO ASSURANCE
THAT WE WILL BECOME PROFITABLE AGAIN.

         We have been unprofitable during 2002 and 2001 and may continue to
incur operating losses for the foreseeable future. During 2002 and 2001, we had
net losses of $(2,520,683) and $(753,176), respectively. No assurance can be
given that we will ever become profitable again nor, if we obtain profitability,
that we would thereafter maintain profitability.

         WE MAY BE SUBJECT TO POTENTIAL LITIGATION.

         We may be subjected to claims for defamation, negligence, copyright or
trademark infringement and various other claims relating to the nature and
content of materials we publish on the Internet, on our websites and in our
newsletters. These types of claims have been brought, sometimes successfully,
against online services in the past. We could also face claims based on the
content that is accessible from our websites through links to other websites.
Any litigation arising from these claims would likely result in substantial
costs and diversion of resources and management attention, and an unsuccessful
defense to one or more such claims, such as the class action lawsuit described
in Item 3 below, could result in material damages. We have no insurance coverage
for these types of claims.


ITEM 2.  DESCRIPTION OF PROPERTY.

         We currently occupy an approximately 10,000 square foot facility in
Poulsbo, Washington under a four-year lease with a term that began in February
2000. The lease required monthly payments of $7,643 for months one through four
and $8,492 for months five through twelve of the first year. As of December 31,
2002 the rent was $9,001 per month. The remainder of the payments under the
lease increase by $0.30 per square foot in February of each year. We have the
option to terminate the lease during the last two years of the lease term, by
providing a six-month written notice to the landlord of the facility.

         As of August 6, 2002, the Company terminated its lease with respect to
a 4,500 square foot facility in Poulsbo, Washington, that the Company vacated in
October 2001. This property was leased by the Company pursuant to an agreement
that would have otherwise expired in 2004, that required monthly payments of
$1,874. In accordance with the Company's termination arrangement with the
landlord, in exchange for the release of all of the Company's obligations to the
landlord, which included unpaid rent for previous months totaling $9,371, the
Company paid $1,874 to the landlord for rent for the month of August, and $2,880
to a real estate agent in connection with finding a replacement tenant.

         We believe the presently-leased facility is adequate for our current
and reasonably foreseeable future needs and is adequately covered by insurance,
but there can be no assurance that there will not be any claim or claims in

                                     - 14 -

<PAGE>

the future that will be in excess of our coverage.

         Poulsbo, Washington, where our facilities are presently located, is a
rural area outside of Seattle and Tacoma, Washington. In the past we have
experienced temporary outages in our telephone service and electric power. While
such outages have never materially affected systems that are critical to our
operations, there is no assurance that such outages will not occur in the future
more frequently or with greater magnitude or duration. Such outages could
materially and adversely affect our business, financial condition and results of
operations.


ITEM 3.  LEGAL PROCEEDINGS.

         On January 27, 2003, a class action lawsuit entitled BRENT BRIGGS,
DANNY BAIN AND RANDALL DALEY, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY
SITUATED V. EACCELERATION CORP., ACCELERATION SOFTWARE INTERNATIONAL
CORPORATION, CLINTON L. BALLARD, DIANA BALLARD AND JOHN DOES A-L was commenced
in the Superior Court, State of Washington, County of Kitsap. The complaint
alleges that through the practice of using advertising banners for our products
on the Internet, we have engaged in deceptive business practices and fraud and
are liable for public and private nuisance. The complaint seeks damages of $500
per class member, which may include all users of the Internet, or such other
amount as the court deems appropriate, as well as attorney's fees and costs. We
believe that this lawsuit is frivolous and without merit and we intend to
vigorously defend against the allegations in the complaint. Accordingly, we
believe that this lawsuit will not have a material adverse effect on our
financial condition, results of operations or cash flows; however, because the
litigation process is inherently uncertain, it is possible that resolution of
this, or any future litigation, may adversely affect us.

         On March 24, 2003, the Company paid $9,500 to settle a lawsuit brought
against it by Engage, Inc., an advertising vendor, for the payment of
outstanding invoices. The complaint filed by Engage had alleged that the Company
owed Engage $34,955.

         We are periodically subject to various legal proceedings and claims
arising in the ordinary course of business. We do not expect that the results in
any of these legal proceedings will have a material adverse effect on our
financial condition, results of operations or cash flows.


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

         None.

                                     - 15 -

<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         MARKET INFORMATION

         As of March 31, 2003, we have 34,424,500 outstanding shares of common
stock owned of record by 69 stockholders. There is no public market for our
common stock.

         RECENT SALES OF UNREGISTERED SECURITIES

         During the period from 2000 through 2002, we did not sell any of our
securities without registration under the Securities Act.

         From January through August 2002 we made dividend payments to Clinton
L. Ballard and Diana T. Ballard in the amount of $12,276 in connection with S
Corporation distributions.

                      EQUITY COMPENSATION PLAN INFORMATION
                      ------------------------------------

         The following table sets forth certain information as of the end of our
most recently completed fiscal year.
<TABLE>
<CAPTION>

                                 Number of securities     Weighted average     Number of securities
                                  to be issued upon        exercise price      remaining available
                               exercise of outstanding     of outstanding      for issuance under
                                  options, warrants            options            equity plan
                               -----------------------    -----------------    --------------------
<S>                                    <C>                      <C>                  <C>
Equity compensation
plan approved by
securityholders                        765,000                  $0.41                9,110,500
</TABLE>


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS.

GENERAL

         We are a provider and licensor of proprietary software that is
distributed both through the Internet and a distributor in Japan. Our primary
focus is developing a subscriber base for our "eAnthology" online subscription
service as the leading means of distributing some or all of our
internally-produced software. In the past, we produced Internet-based direct
marketing and advertising services combined with programs that rewarded
consumers with free internally-produced software when they agreed to view
advertisements bundled with our software. We are not actively pursuing this
business in 2003 due to the depressed nature of the online advertising industry.

         eAnthology is a one-stop online subscription service that is expected
to provide a myriad of computer applications to consumers. It is expected to be
composed of many different applications, including our software product line,
and all components are designed to make the user's computing experience, both on
and off the Internet, a fast, safe, easy, and fun experience. During 2002, we
focused most of our efforts on developing our virus protection system for the
consumer market. Our virus scanner alerts users to the presence of not only
viruses, but also spyware, malware, (i.e., malicious software designed
specifically to damage or disrupt a system, such as a virus) and keyloggers
(i.e., surveillance software that records every keystroke to an encrypted file,
which can then e-mail such file to a remote recipient). We provide cures for the
infected machines as well as ongoing support and protection to safeguard our
customers against future threats. eAnthology is not defined by any one
application, and we expect that its nature and content will expand and evolve
over time as the needs of our users change. We endeavor to constantly respond to
the needs of the consumer market, and eAnthology is designed to meet those
needs.

         We also license localized versions of our individual software products
for distribution in Japan.  Under the

                                     - 16 -

<PAGE>

terms of our distribution agreement with our Japanese distributor, we have
granted our distributor an unlimited license to sell our software titles (except
eAnthology) in Japan. This does not materially affect our operations involved in
offering software through our websites or otherwise over the Internet as part of
a subscription, because the distributor's license only applies to localized,
Japanese versions of the software, and not the English language versions which
are available on our websites or over the Internet, including with respect to
eAnthology. Additionally, users in Japan generally cannot run the
English-language versions on their operating systems.

CRITICAL ACCOUNTING POLICIES

         Management's discussion and analysis of its financial position and
results of operations are based upon our audited consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
audited financial statements requires management to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses
and related disclosure of contingent assets and liabilities. Actual results
could differ from those estimates. Management believes that the critical
accounting policies and areas that require the most significant judgments and
estimates to be used in the preparation of the audited financial statements
relate to revenue recognition and returns and allowances relating to online
subscriptions and revenue recognition relating to the distribution of our
software products in Japan.

REVENUE RECOGNITION AND RETURNS AND ALLOWANCES RELATING TO ONLINE SUBSCRIPTIONS

         We began selling our eAnthology online subscription service in late
December 2001. We initially offered a quarterly subscription-based service
which, in the first quarter of 2002, was subject to an unconditional right of
refund over the life of the subscription, 90 days, in accordance with our refund
policy in effect at the time. Because of our limited historical experience with
this service, and the fact that the sales were subject to refund at any time
during the quarterly subscriptions, we deferred all revenue on eAnthology
subscriptions in the first quarter of 2002.

         Beginning in April 2002, we changed our refund policy to a 7-day right
of refund on quarterly subscriptions and a 14-day right of refund on annual
subscriptions. Accordingly, we now recognize revenue on our online subscriptions
on a straight-line basis monthly over the life of the user's subscription after
the right of refund lapses, provided all other revenue recognition criteria have
been met. Revenue recognition criteria as outlined in Statement of Financial
Accounting Standards ("SFAS") No. 48, "Revenue Recognition when Right of Return
Exists," require that: (1) price of the product is fixed or determinable at time
of sale; (2) payment has been made, or buyer is obligated to pay; (3) buyer is
obligated to pay regardless of theft or damage to the product; (4) buyer
acquiring the product for resale has economic substance apart from the seller;
(5) seller does not have significant performance obligations after the sale; and
(6) the amount of future returns can be reasonably estimated.

         Management currently reviews refunds granted to customers during the
refund period, as well as other refunds made as a result of, or in order to
prevent, credit card chargebacks. We provide for refunds actually incurred at
the time of sale within the allowed refund period, as we do not have sufficient
historical data to develop refund estimates as outlined in SFAS No. 48. All
revenue not yet recognized from sales is deferred until future periods. We
believe our revenue recognition practices for subscription revenues are in
accordance with SFAS No. 48, and Statement of Position ("SOP") 97-2, "Software
Revenue Recognition."

REVENUE RECOGNITION RELATING TO THE DISTRIBUTION OF OUR SOFTWARE PRODUCTS IN
JAPAN

         In January 2002, the Company entered into a new agreement (the "January
2002 contract") with its Japanese distributor. The January 2002 contract granted
the distributor the exclusive right to reproduce, display, license, and
sub-license our intellectual property rights in software produced under the
contract to third parties in Japan. The January 2002 contract called for fixed
payments of $150,000 per month, subject to a 10% Japanese withholding tax. The
Company received five such payments under the January 2002 contract and revenues
of $150,000 were recorded monthly.

         In May 2002, the Company terminated this contract with its Japanese
distributor and entered into another

                                     - 17 -

<PAGE>

agreement with that company. Under this agreement, we granted to the distributor
the exclusive right to reproduce, display, license and sub-license to third
parties in Japan, our intellectual and proprietary rights in our software
products (except eAnthology) produced under the agreement. We are required to
maintain, support and provide "bug fixes" for products that we license to the
distributor. These provisions are considered post-contract customer support
("PCS") and unspecified upgrades, and are accounted for ratably in accordance
with SOP 97-2, "Software Revenue Recognition". The agreement also requires us to
develop upgraded versions (specified upgrades) of certain of these products in
the future, but we are not required to develop new products for the distributor.
Accordingly, this agreement is considered to be a multi-element contract
requiring vendor-specific objective evidence ("VSOE") for all elements. SOP
98-9, which modified SOP 97-2, allows us to use the residual value method if
VSOE or its equivalent is known for PCS.

         Under this agreement, we received monthly payments of $150,000 for each
of June, July and August 2002, and have received $50,000 per month thereafter.
The payments under the agreement are made net of a 10% Japanese withholding tax.
SOP 97-2 requires revenue on this contract to be allocated to the PCS and the
upgrades based on the VSOE of fair value estimated by management, as the Company
does not sell PCS services or upgraded products separately. However, management
estimated the value of PCS services to be equal to the amount of the $50,000
fixed monthly payments, which are recognized ratably over the life of the
contract. The difference between the amount of fixed payments and the larger
initial payments has been deferred until delivery of the specified upgrades,
which is expected to occur in 2003. Total amounts deferred under this contract
to date are $300,000.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2002

REVENUES

         Our revenues decreased $357,318, or 11%, from $3,233,559 during 2001,
to $2,876,241 during 2002, primarily due to a decrease of $1,489,477, or 90%, in
our Internet advertising and marketing revenues to $169,082 in 2002 from
$1,658,559 in 2001. This decrease is due mainly to the decline in the online
advertising market, which has caused many Internet-related businesses, including
many of our former clients, to cease operations. To compensate for that decline
in demand, we focused most of our resources on developing our eAnthology
subscription service during 2002. This facet of our business grew dramatically
in 2002, to $1,607,159 of revenues for the year, or 56% of our total revenue,
compared to an immaterial amount (under 0.1%) of revenue in the prior year.
eAnthology revenue was combined with Internet revenue for presentation purposes
in 2001.

         Revenues from software licensing decreased $475,000, or 30%, from
$1,575,000 during 2001 to $1,100,000 during 2002. Software license revenues were
derived from a distribution agreement with Sourcenext Corporation, our Japanese
distributor, throughout 2001 and 2002. See the discussion regarding our current
Agreement with our Japanese distributor, under "Liquidity and Capital
Resources."

COST OF INTERNET REVENUES

         Our cost of Internet revenues decreased by $1,480,402, or 87%, from
$1,702,400 during 2001 to $221,998 during 2002, primarily due to lower demand
for online advertising industry-wide, and our lack of emphasis on this business
segment in 2002.

COST OF LICENSING REVENUES

         Our cost of licensing revenues increased by $243,205, or 18%, from
$1,331,928 during 2001 to $1,575,133 in 2002, due primarily to increases in
salary and wages and increased use of third-party software testers.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative expenses increased $1,018,707 or
115%, from $882,623 in 2001 to $1,901,330 in 2002. This increase is due
primarily to increases in advertising costs to promote eAnthology on the
Internet.
                                     - 18 -

<PAGE>

         We record compensation expense for options granted to employees if the
exercise price is less than the fair market value of the underlying common
stock. Because options issued to employees were granted at the estimated fair
market value, no compensation expense relating to these options was charged to
operations in 2001 or 2002. Options issued to non-employees are valued based on
the "Black-Scholes" valuation model that considers volatility and other factors.
Accordingly, we recorded $51,808 and $85,486 of compensation expense during 2002
and 2001, respectively, as a result of compensatory stock options issued to
non-employees. The reduction is primarily due to cancellations of higher-priced
stock options that occurred in 2001.

LIQUIDITY AND CAPITAL RESOURCES

GOING CONCERN

         We experienced net losses during the years ended December 31, 2002 and
2001 in the amounts of $(2,520,683) and $(753,176) respectively. As of December
31, 2002, we had cash of $364,512, a stockholders' deficit of $(4,043,287), and
a working capital deficit of $(2,771,485). In 2002, we generated $160,775 of
positive cash flow from operations, which was an improvement of $532,609 from
$(371,834) in negative cash flow from operations in 2001. However, this was
still not sufficient positive cash flow to sustain the development of our
business, and we continued to rely on cash contributed from financing activities
in order to continue and expand our operations. Our independent auditors have
included an explanatory paragraph in their audit report which raises substantial
doubt about our ability to continue as a going concern.

MANAGEMENT'S PLANS

         We believe that the losses referred to above are principally
attributable to the significant decline in our advertising revenues consistent
with the overall decline in online advertising prices and demand for such
services industry-wide, which has caused us to reduce our activity significantly
in that segment of our business. We have focused most of our efforts into
generating revenues from our eAnthology online subscription service. While our
operating cash flow, as well as overall cash flow, has improved primarily due to
sales of our online subscription service, there can be no assurance that we will
recognize sufficient revenues from such subscription service to compensate for
previous losses or that we will not continue to incur additional losses in the
future. Losses may, and probably will, continue to occur, as we are required by
accounting standards to recognize revenues pro-rata over the term of the
subscriptions sold, while we are also required to recognize all expenses related
to the online subscriptions in the period such expenses are incurred. This
situation may be alleviated in the future as we change our business model to a
monthly service fee, which is expected to cause us to recognize all revenue
received in future periods for eAnthology subscriptions currently.

         We have taken a number of measures to improve our cash flow from
operations. These measures include:

-        DEVELOPMENT OF THE EANTHOLOGY ONLINE SUBSCRIBER BASE. We concentrated
         most of our efforts during 2002 on generating revenues from our
         eAnthology online subscription service. This segment of our business
         generated 56% of our revenue in 2002; however, there is no assurance
         that we will continue to be successful in marketing or distributing
         such a service, nor that the revenue stream from such service will
         continue to generate positive cash flow.

-        SETTLEMENTS WITH CUSTOMERS. We entered into verbal agreements with some
         of our customers who owed us balances in an attempt to collect a
         discounted portion of the total amounts owed to us. We recovered $835
         in previously-written-off receivables in 2002. There is no assurance,
         however, that we will collect more of our outstanding receivables with
         these measures in place in the future.

-        SETTLEMENTS WITH VENDORS. We entered into several written settlement
         and release agreements with some of our vendors in order to
         significantly reduce the amounts payable to these vendors. In 2002, we
         recorded $24,527 in gains associated with these settlements. We may
         seek to settle more of our accounts payable with vendors to whom we owe
         material balances; however, there is no assurance that we will be
         successful in negotiating any such settlements nor that the terms of
         such settlements will be favorable to us.

                                     - 19 -

<PAGE>

-        NEGOTIATION OF A NEW CONTRACT WITH OUR JAPANESE DISTRIBUTOR.  In
         January 2002, we entered into a new agreement with Sourcenext
         Corporation, our Japanese distributor, which superceded a previous
         agreement with this company.  This new agreement granted Sourcenext the
         exclusive right to reproduce, display, license, and sub-license our
         intellectual property rights on software produced under the contract to
         third parties in Japan.  The agreement called for fixed payments of
         $150,000 per month, from which a 10% tax was withheld by Sourcenext.
         We received five such payments under this agreement.  In May 2002, we
         terminated this contract with Sourcenext and entered into the current
         agreement with Sourcenext.  Under this agreement, we granted to
         Sourcenext similar intellectual property rights as in the January
         agreement, except as to our eAnthology product.  We also are required
         to maintain, support and provide "bug fixes" for certain products and
         to develop specified upgraded versions of certain products for which a
         scheduled February 2003 delivery has been delayed, but we are not
         required to develop new products for the distributor.  Additionally,
         the distributor may request additional specified upgrades in the
         future, which are currently not contemplated in the contract. Under
         this agreement, we received monthly payments of $150,000 for each of
         June, July and August 2002, and $50,000 per month thereafter.  The
         payments under the current agreement are made net of a 10% Japanese
         withholding tax.  This agreement has no expiration date but may be
         terminated at any time, by either party, upon three months' notice,
         with no further obligations on our part.

-        STOCKHOLDER FINANCING. To date, one of our principal stockholders has
         loaned us an aggregate of $394,016, net of repayments, under several
         promissory notes to meet current operating expenses and has made a
         capital contribution of $40,000. If we require additional funds for
         operations, we believe that our principal stockholders will provide
         additional funding, if we are unable to obtain financing independently.
         However, there is no assurance that such additional funding from our
         principal stockholders will be available when needed, especially in
         light of restrictions on third-party borrowing imposed by agreements
         with our bank.

-        OUTSIDE FINANCING. Management is considering seeking additional
         financing through one or more debt, equity or convertible securities
         offerings. If we are unsuccessful at raising additional capital or
         financing through these offerings on acceptable terms, this will likely
         have an adverse effect on our cash flows, financial position and
         results of operations.

ADDITIONAL EVENTS AFFECTING LIQUIDITY:

         In June 2001, ASIC, our wholly owned subsidiary, borrowed $275,000 from
a local bank which was originally due to mature on December 15, 2001 under a
promissory note. Such note has been renewed to mature on April 15, 2003, and the
bank previously required us to collateralize the note with a certificate of
deposit, currently valued at $151,658. The note requires monthly payments of
interest accrued at 8.5% per annum, and payment in full of all principal and
remaining unpaid interest in a lump sum at maturity, or upon an event of
default, as defined in the note. The note requires us to comply with financial
and non-financial covenants, including production of quarterly financial
statements, an annual audit, assumption or creation of no other debt to any
party without written consent from the bank, and maintenance of insurance over
the premises of the business. We have not met the financial covenants required
by this loan in 2002; therefore the bank could require immediate repayment of
this note; to date, the bank has not exercised their right. The note is secured
by the assets of ASIC and our assets, and is personally guaranteed by our two
principal stockholders. We utilized the amount borrowed under this note for
working capital. In 2002, due to our mid-year conversion from an S-corporation
to a C-corporation, some of our stockholder distributions during 2002 were
classified as repayment of our existing loan from our principal stockholders.
The bank consented to this repayment. We are currently attempting to obtain a
further extension of this loan.

         During the fourth quarter of 2001 and the first quarter of 2002, we
borrowed an aggregate of $404,000 from our two principal stockholders under
various promissory notes to provide us with additional working capital, $9,984
of which was repaid in 2002. These notes all are payable on demand and interest
is payable monthly on the outstanding balance at 10% per annum. The notes
violated the loan covenant referred to above regarding creation of debt to third
parties without the bank's consent. In order to remedy this covenant violation,
such stockholders were required to sign a subordination letter with respect to
these notes, which specified that the stockholders' notes would

                                     - 20 -

<PAGE>

hold secondary priority in the event of the liquidation or dissolution of our
company; it also specified that the bank reserved the right to restrict
repayments of interest and principal on debts owed to our principal
stockholders, if, in the opinion of the bank, such repayments to these
stockholders would jeopardize our ability to service our debt to the bank.
Further, the bank required us to obtain its written consent in order to make
future principal repayments on such debts to these stockholders.

         In February 2002, we financed $52,500 for the purchase of certain
computer equipment through the local bank referred to above. The principal
balance of this obligation as of December 31, 2002 was $39,097, after giving
effect to our payments of $13,403 in 2002. The loan accrues interest at an
annual rate of 8.0%, matures on February 15, 2005, and is payable in 36 equal
monthly principal and interest payments of $1,645. The loan agreement contains
certain financial and non-financial covenants, which are substantially the same
as the covenants contained in the loan agreement with this bank discussed above,
including the prohibition against assuming debt to any party without written
consent from the bank. We have not met the financial covenants under this note
in 2002 and the bank has not yet exercised its right to demand payment in full.
We have classified this loan as a "long-term note callable by creditor." The
loan is secured by substantially all our assets and is personally guaranteed by
our principal stockholders.

         In March 2002, one of our principal stockholders contributed $40,000 of
additional paid-in capital to us in the form of cash. This capital contribution
was utilized for working capital. Since that date our principal stockholders
have not contributed any additional paid-in capital to us in the form of cash or
otherwise, nor have we borrowed any funds from them.

         The success of our online subscription service is highly dependent on
the ability to sell the service to subscribers via the Internet. Such sales are
predominantly conducted by electronic payment methods, the most popular of which
utilizes the customer's credit card information and processes the sale
electronically. For the first three quarters of 2002, we utilized only one
merchant bank and one payment gateway provider to facilitate all of our credit
card transactions. In the last quarter of 2002, we contracted with two other
merchant banks. One such merchant bank terminated its services to us effective
March 31, 2003 and holds approximately $100,000 of our funds as a reserve for
possible customer chargebacks. Two other merchant banks also hold an aggregate
of approximately $80,000 of our funds in a similar reserve as of March 31, 2003.
We are continuing to negotiate with other merchant banks for further
diversification of the risk associated with being overly dependent on a sole
provider or a small number of providers of these services. Some of these
merchant bank service providers may require a reserve and/or may limit the
dollar amount of transactions that they process for us per month, and the extent
of these reserves and/or processing limits, as well as the number of providers
we are able to contract with, is expected to have a direct effect on our
financial position, results of operations and cash flow.

INCOME TAXES AND S-CORPORATION STATUS

         During the periods presented, through August 7, 2002, we were not
subject to federal and state income taxes as we elected to be taxed as an
S-corporation. Accordingly, we reported income on our stockholders' personal
income tax return. On August 7, 2002, we engaged in a transaction that
terminated our S-corporation status and became a C-corporation, subject to
federal income tax. Thereafter, we began utilizing the liability method of
accounting for income taxes. Under this method, deferred assets and liabilities
are recognized based on anticipated future tax consequences, which are based on
differences occurring between GAAP financials and tax financials. We did not
record any income tax expense in 2002, as we have experienced net operating
losses since the inception of our C-corporation status.

         At present, the State of Washington does not impose income taxes on
corporations, but it does impose a business and occupation tax on corporations
conducting business in the State of Washington.

         In connection with our distribution agreement with our Japanese
distributor, we are subject to a 10% withholding tax in Japan on software
licenses sold in that country. Payments under this agreement are received net of
the withheld tax.

                                     - 21 -

<PAGE>

IMPAIRMENT OF INVESTMENT

         Pursuant to a securities purchase agreement with Contera Corporation
which we entered into in 2000, we purchased 7,000 shares of Contera common stock
in 2001 for $35,000 and received warrants to purchase an additional 70,000
shares exercisable at $5.00 per share. We previously had purchased 10,000 shares
and received 100,000 warrants of Contera for $50,000, which had been impaired
for $45,000 due to financial difficulties of Contera. In 2001, we impaired the
remaining $40,000 of the amount invested in Contera stock due to continuing
financial difficulties experienced by Contera, and the death of a key member of
its management. We do not expect to recover any of our investment in Contera.

INFLATION

         We believe that inflation has generally not had a material impact on
our operations.

OFF BALANCE SHEET ARRANGEMENTS

         We do not have and are not reasonably likely to have any off-balance
sheet arrangements that would have a current or future effect on our financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors.

SEASONALITY

         The computer software and Internet markets are characterized by
significant seasonal swings in demand. We expect our net sales and operating
results from the eAnthology subscription service to continue to be affected by
these fluctuations in Internet usage, which for our products and services is
typically higher in the summer and lower at year-end. Customer concerns about
weakening economic conditions, heightened awareness of cyber terrorism, and
periodic virus outbreaks may contribute negatively to fluctuations in our
business. Our revenues may also experience substantial variations as a result of
a number of other factors, such as consumer and business preferences and
introduction of competing products by competitors, as well as limited time
promotional pricing and other offers. There can be no assurance that we will
achieve consistent growth or profitability on a quarterly or annual basis.

                                     - 22 -

<PAGE>

ITEM 7.  FINANCIAL STATEMENTS.

         We set forth below a list of our financial statements included in this
annual report.


                               EACCELERATION CORP.
                                TABLE OF CONTENTS

                                                                       Page
                                                                       ----

Independent Auditors' Reports...................................... F-1 to F-2

Consolidated Balance Sheet as of December 31, 2002................. F-3

Consolidated Statements of Operations for the fiscal years
   ended December 31, 2002 and 2001................................ F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the
    fiscal years ended December 31, 2002 and 2001.................. F-5

Consolidated Statements of Cash Flows for the fiscal years
   ended December 31, 2002 and 2001................................ F-6

Notes to Consolidated Financial Statements......................... F-7 to F-19

-------
* Page F-1 follows page 31 to this Annual Report on Form 10-KSB.


                                     - 23 -

<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

         (a) On December 4, 2002, we dismissed McKennon, Wilson & Morgan LLP as
our independent auditors. The decision to dismiss this firm and to seek new
independent auditors was recommended by our audit committee and approved by our
board of directors.

         The audit reports of McKennon, Wilson & Morgan LLP on our financial
statements for the years ended December 31, 2001 and 2000 did not contain any
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope, or accounting principles, except that the opinion
issued with our financial statements for the year ended December 31, 2001
included a reference to substantial doubt that existed regarding our ability to
continue as a going concern.

         In connection with the audits for the years ended December 31, 2001 and
2000 and for the subsequent interim period through December 4, 2002, there were
no disagreements with McKennon, Wilson & Morgan LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements, if not resolved to the satisfaction of
McKennon, Wilson & Morgan LLP, would have caused them to make reference thereto
in their reports on the financial statements for such years; and there were no
reportable events or disagreements with McKennon, Wilson & Morgan LLP as
described by the SEC in the relevant provisions of the SEC's Regulation S-B.

         (b) On December 4, 2002, we engaged Peterson Sullivan P.L.L.C. to serve
as our independent auditors. During the years ended December 31, 2001 and 2000
and the interim periods of the year ending December 31, 2002 preceding our
engagement of Peterson Sullivan P.L.L.C., neither we nor anyone acting on our
behalf consulted with Peterson Sullivan regarding (i) either the application of
any accounting principles to a specific transaction undertaken by us, either
completed or proposed, or the type of audit opinion that might be rendered by
Peterson Sullivan P.L.L.C. on our financial statements; or (ii) any matter that
was either the subject of a disagreement with McKennon, Wilson & Morgan LLP or a
reportable event with respect to McKennon, Wilson & Morgan LLP.


                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT.

DIRECTORS AND EXECUTIVE OFFICERS

         The following persons are our current executive officers and directors:

Name                      Age    Position
----                      ---    --------

Clinton L. Ballard        40     president, chief executive officer and director

Diana T. Ballard          46     chairman of the board, secretary and treasurer

E. Edward Ahrens          55     chief financial officer

Edward P. Swain, Jr.      67     director

William E. Hoke           63     director

         Set forth below is a brief description of the background of our
officers and directors based on information provided by them to us.

                                     - 24 -

<PAGE>

         CLINTON L. BALLARD is the president and chief executive officer of
eAcceleration, serving as chief executive officer, president, or in other
executive capacities since inception.  Mr. Ballard received a B.S. in
mathematics from the California Institute of Technology in 1984.

         DIANA T. BALLARD is the chairman of the board, secretary and treasurer
of eAcceleration, serving as chairman of the board as well as in other executive
capacities, including president, since inception.  Mrs. Ballard is the wife of
Clinton L. Ballard.

         E. EDWARD AHRENS has been our chief financial officer since February
2000.  Mr. Ahrens was self employed as a certified public accountant from
October 1993 through September 30, 2002, and in that capacity was our regular
accountant, providing accounting and controller functions to us since 1995.  Mr.
Ahrens sold his practice on September 30, 2002 and became a full time employee
as of November 1, 2002.  Mr. Ahrens received a Bachelor of Business
Administration -- banking and finance, from the University of North Texas in
1971.

         EDWARD P. SWAIN, JR. has been a director since August 2000 and served
as consultant to us from September 1999 through August 2000. Mr Swain is
currently self-employed as a consultant and served as president and chief
executive officer of P T Holdings Corporation from January 1992 to February
2002. From January 1992 through December 1997, he also served as president,
chief executive officer and director of Port Townsend Paper Corporation, as well
as chairman of the board of that company from December 1997 to December 1998.
Recently, Mr. Swain was appointed chairman of the nominating and governance
committee of Fibermark, Inc., where he is also a director and has served as past
chairman of the audit committee. Mr. Swain is also a member of the board of
trustees, chairman of the finance committee, member of the executive committee
and treasurer of the Museum of Flight in Seattle, Washington. Mr. Swain received
a B.A. from Williams College in 1957 and a LLB from Harvard Law School in 1964.

         WILLIAM E. HOKE has been a director since August 2000. Mr. Hoke has
been self-employed from January 1996 through the present, serving as president
of Hoke Consulting. Mr. Hoke's firm on occasion provides us with advertising and
public relations services. He is the volunteer chair of the Kitsap United Way
marketing committee and served on the board of the Kitsap County Economic
Development Council between 1996 and 1998.

         Our future success depends to a significant extent on the efforts and
abilities of our senior management, particularly Clinton L. Ballard, our
president and chief executive officer, Diana T. Ballard, our chairman of the
board, secretary and treasurer, and other key employees, including our technical
and sales personnel. The loss of the services of any of these individuals could
harm our business. We may be unable to attract, motivate and retain other key
employees in the future. We are the beneficiary of a "key person" term life
insurance policy in the amount of $2,000,000 on the life of Clinton L. Ballard,
our president and chief executive officer.

         Our board of directors is elected annually by our stockholders. Edward
P. Swain, Jr. and William E. Hoke have served as our non-employee directors
since August 2000. Our non-employee directors began receiving payments of $500
per fiscal quarter in March 2001. This was changed to $500 per meeting in 2002,
in addition to reimbursement of expenses related to meeting attendance. Members
of the board of directors are also eligible to participate in our 2002 equity
incentive plan.

         Edward P. Swain, Jr. and William E. Hoke serve as members of our audit
committee. The audit committee is responsible for overseeing our management's
conduct in the financial reporting process, including reviews of our annual,
quarterly and other financial reports and our systems of internal accounting,
bookkeeping, and financial controls. The audit committee is responsible for
reviewing any non-audit services and special engagements to be performed by the
independent auditors and considering the effect of such performance on the
auditors' independence. The audit committee is also responsible for engaging and
dismissing our independent certified public accountants. In discharging its
oversight role, the audit committee is empowered to meet and discuss with our
management and independent auditors the quality and accuracy of our accounting
principles, the completeness and clarity of our financial disclosures and other
significant decisions made by management in the preparation of our financial
reports.

                                     - 25 -

<PAGE>

         We currently have no compensation committee or nominating committee,
the functions of which are performed by our board of directors.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Based solely upon a review of Forms 3, 4 and 5 and amendments to these
forms furnished to us, together with written representations received by us from
applicable parties that no Form 5 was required to be filed by such parties, all
parties subject to the reporting requirements of Section 16(a) of the Exchange
Act filed all such required reports during and with respect to our 2002 fiscal
year, except that, due to a clerical error, each of William E. Hoke, Edward P.
Swain and E. Edward Ahrens failed to fully file Form 4's with respect to our
grant to them of shares of common stock and options to purchase common stock
under our 2002 Equity Incentive Plan and each of Clinton L. Ballard and Diana T.
Ballard failed to timely file Form 4's with respect to their gift of shares to
their children.

ITEM 10.  EXECUTIVE COMPENSATION.

         The following summary compensation table sets forth, for the three
years ended December 31, 2002, the cash and other compensation paid to Clinton
L. Ballard, our president and chief executive officer, and Diana T. Ballard, our
chairman of the board, secretary and treasurer. No other individual served as an
executive officer of our company during 2002 whose total compensation, for
services rendered during 2002, was $100,000 or more.
<TABLE>
<CAPTION>

                                               Summary Compensation Table
                                                    Annual Compensation
                                  ----------------------------------------------
Name and                          Fiscal           Base
principal position                 Year           Salary             Bonus
------------------                ------         --------       ----------------
<S>                                <C>           <C>      <C>    <C>        <C>
Clinton L. Ballard                 2002          $104,000        $  106,138 (2)
  President and chief              2001           104,000           150,000
  executive officer                2000           104,000                 0

Diana T. Ballard                   2002          $104,000        $    6,138 (3)
 Chairman of the board,            2001           104,000                 0
   secretary and treasurer         2000           104,000 (1)             0
------------
<FN>
(1)  In 2000, we paid Mrs. Ballard no salary. The estimated annual value of her
     services is $104,000. Accordingly, Mrs. Ballard is deemed to have earned
     $104,000 in 2000, and we accounted for this amount as contributed capital
     with a corresponding charge to our operations in such year. The amounts
     shown for 2001 and 2002 represent actual salary paid to her.

(2)  Mr. Ballard's bonuses in 2001 represented cash bonuses.  Bonuses listed in
     2002 for Mr. Ballard represent a cash bonus of $100,000 and S-corporation
     distributions of $6,138.

(3)  The bonus listed in 2002 for Mrs. Ballard represented S-corporation
     distributions of $6,138.
</FN>
</TABLE>

     The value of all perquisites provided to either of Mr. or Mrs. Ballard did
not exceed the lesser of $50,000 or 10% of his or her salary and bonus.

STOCK OPTION GRANTS IN 2002

     The following table sets forth:
     -   the number of shares underlying options granted during 2002 to the
         named executive officers and E. Edward Ahrens, our chief financial
         officer,
     -   the percentage that the option grant represents of the total number of
         options granted to all of our employees during 2002,
     -   the per share exercise price of each such option, and
     -   the expiration date of each such option.

                                     - 26 -

<PAGE>
<TABLE>
<CAPTION>
                                         Number of Shares     Percentage of Total
                                        Underlying Options    Options Granted to     Exercise    Expiration
Name                                   Granted During 2002     Employees in 2002      Price         Date
----                                   -------------------    -------------------    --------    ----------
<S>                                         <C>                       <C>              <C>       <C>
Clinton L. Ballard.............                  0                     -                  -           -
Diana T. Ballard...............                  0                     -                  -           -
E. Edward Ahrens...............             40,000                    5%               $0.12      8/7/2012
</TABLE>

AGGREGATE OPTION EXERCISES IN 2002 AND YEAR-END OPTION VALUES

         Set forth in the table below is information, with respect to the named
executive officers and E. Edward Ahrens, our Chief Financial Officer, as to:

         -     the total number of unexercised options held on December 31,
               2002, separately identified between those exercisable and
               those not exercisable as of such date, and
         -     the aggregate value of in-the-money, unexercised options held
               on December 31, 2002, separately identified between those
               exercisable and those not exercisable.
<TABLE>
<CAPTION>
                                             Number of                    Value of Unexercised
                                       Unexercised Options                In-the-Money Options
                                       at December 31, 2002               at December 31, 2002
                                    ----------------------------------------------------------------

Name                                Exercisabe     Unexercisable      Exercisable     Unexercisable
----                                ----------     -------------      -----------     -------------
<S>                                     <C>           <C>                  <C>              <C>
Clinton L. Ballard...............       0                  0               0                0
Diana T. Ballard.................       0                  0               0                0
E. Edward Ahrens.................       0             40,000               0                0
</TABLE>

         Neither of our named executive officers nor E. Edward Ahrens exercised
any options during 2002. The value of unexercised in-the-money options is
calculated by subtracting the aggregate exercise price of the options from the
aggregate fair market value price of the shares underlying the options as of
December 31, 2002, which was determined by the board of directors to be $0.10
per share.

LONG TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR

         Set forth in the table below is information, with respect to the named
executive officers and E. Edward Ahrens, our Chief Financial Officer as to:

         -     the total number of options granted in 2002;
         -     the maturation or payout schedule of those options issued, and
         -     the exercise or target price for those options.
<TABLE>
<CAPTION>
                                                                  Performance or other
                               Number of shares, units           period until maturation
Name                              or other rights                       or payout                Target
----                       ------------------------------     -------------------------------    ------
<S>                                 <C>                          <C>                             <C>
Clinton L. Ballard                      0                                         -                   -
Diana T. Ballard                        0                                         -                   -
E. Edward Ahrens                    40,000                       1/10th per year for 10           $0.12
                                                                 years (4,000 per year)
</TABLE>

         In accordance with the Equity Incentive Plan, these shares are
exercisable in ten equal installments commencing on the first anniversary of the
issuance of the options.

                                     - 27 -

<PAGE>

EMPLOYMENT AGREEMENTS

         We have entered into employment agreements with each of Clinton L.
Ballard and Diana T. Ballard, each for a five-year term commencing January 1,
2003, which extends annually thereafter unless we or such person provides 60
days' notice of termination. The employment agreement with Clinton L. Ballard,
as amended, provides for him to serve as the president, chief executive officer
and a director, and provides for an annual base salary of $104,000 and a bonus
of 2.5% of our cash flow, which is defined as our income before taxes,
depreciation, amortization and extraordinary items, plus deferred revenue, less
deferred expenses, with respect to fiscal years during the term of the
agreement. The employment agreement with Diana T. Ballard, as amended, provides
for her to serve as the chairman of the board, provides for an annual base
salary of $104,000 and provides for a bonus of 2.5% of our cash flow with
respect to fiscal years during the term of the agreement.

         Each of these agreements contains restrictions on the employee engaging
in competition with us for the term of the employment agreement and for one year
after the term, and provisions protecting our proprietary rights and
information. Each agreement also provides for the payment to the employee of a
lump sum equal to three times the average of the employee's annual compensation
for the prior five years, less $1.00, upon his or her termination in the event
of a "change in control" of eAcceleration, which is defined in the agreements to
mean any of the following:

         -   a change in control as defined in Rule 12b-2 under the Securities
             Exchange Act of 1934;

         -   a person, as such term is defined in Sections 13(d) and 14(d)
             of the Exchange Act, other than a current director or officer
             of eAcceleration becoming the beneficial owner, directly or
             indirectly, of 20% of the voting power of our outstanding
             securities; or

         -   the members of our board of directors at the beginning of any
             two-year period ceasing to constitute at least a majority of
             the board of directors unless the election of any new director
             during such period has been approved in advance by two-thirds
             of the directors in office at the beginning of such two-year
             period.

INDEMNIFICATION AGREEMENTS

         We have entered into indemnification agreements with each of our
executive officers and directors. The indemnification agreements provide for
reimbursement for all direct and indirect costs of any type or nature whatsoever
including attorneys' fees and related disbursements, that are actually and
reasonably incurred in connection with either the investigation, defense or
appeal of a "proceeding", as defined in the indemnification agreements,
including amounts paid in settlement by or on behalf of an "indemnitee", as
defined in such agreements.

         Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers, and controlling persons
pursuant to the above provisions, or otherwise, we have been advised that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The following table sets forth the beneficial ownership of our common
stock as of March 31, 2003 of:

         -   each person known by us to beneficially own 5% or more of the
             shares of outstanding common stock;

         -   each of our executive officers and directors; and

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

EXCEPT AS OTHERWISE INDICATED:

         -   all shares are beneficially owned, and investment and voting power
             is held, by the persons named as owners; and

                                     - 28 -

<PAGE>



         -   the address for each beneficial owner listed on the following table
             is eAcceleration Corp., 1050 NE Hostmark Street, Suite 100B,
             Poulsbo, Washington 98370
<TABLE>
<CAPTION>

                                          Amount of
        Name of                         common stock        Percentage ownership
   beneficial owner                  beneficially owned        of common stock
----------------------               -------------------------------------------
<S>                                    <C>                         <C>
Clinton L. Ballard                     34,300,000   (1)            99.6 %
Diana T. Ballard                       34,300,000   (1)            99.6 %
E. Edward Ahrens                            2,000   *
Edward P. Swain, Jr.                       10,000   *
William E. Hoke                            10,000   *
All officers and directors
as a group (5 persons)                 34,322,000                  99.7%
------------------
<FN>
* Less than one percent

     (1)   The shares beneficially owned by Clinton L. Ballard include the
shares owned by his wife, Diana T. Ballard, and the shares beneficially owned
by Diana T. Ballard include the shares owned by Clinton L. Ballard. The shares
beneficially owned by Clinton L. Ballard and Diana T. Ballard include an
aggregate of 880,000 shares owned of record by the minor children of Clint and
Diana Ballard.
</FN>
</TABLE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         In March 2002, one of our principal stockholders, Clinton L. Ballard,
who is also our president, CEO, and a director, made a capital contribution of
an aggregate of $40,000, which was used for working capital.

         During the fourth quarter of 2001 and the first quarter of 2002, we
borrowed an aggregate of $404,000 from Mr. Ballard under various notes payable.
These notes all are payable on demand and interest is payable monthly on the
outstanding balance at 10% per annum. Because these notes violated a covenant in
the loan agreements with our bank, Mr. Ballard entered into a subordination
agreement with the bank with respect to these notes, which specified that such
notes would hold secondary priority in the event of the liquidation or
dissolution of our company. The covenant violation was cured upon the execution
of the subordination agreement; however, the loan covenants restrict further
borrowing from our stockholders, or any other third party, without the express
written consent of the bank.

         In August 2002, we issued shares of common stock to an outside
consultant who is a foreign national, which resulted in the termination of the
Company's S-corporation status. Consequently, certain distributions of $9,984 to
Mr. Ballard made during 2002 were treated as repayment on our existing loan from
Mr. Ballard. Such payment would have constituted an event of default under our
loan covenants with a local bank. The bank waived any default with respect to
the repayment of these amounts to Mr. Ballard.

         In November 1999, we entered into employment agreements with Clinton L.
Ballard, our president and chief executive officer and Diana T. Ballard, our
chairman of the board. These agreements were amended in December 2002 to provide
for the agreements to become effective for a five-year period and to amend the
terms of the bonuses provided for therein. See "Executive Compensation -
Employment Agreements".

         In November 2002, we issued 1,000 shares of our common stock to our
chief financial officer, E. Edward Ahrens.  These shares had a value of $0.10
per share at such time.  In August 2002, we issued 1,000 shares of our common
stock to our chief financial officer, E. Edward Ahrens.  These shares had a
value of $0.10 per share at such time.

         In December 2002, we granted a bonus of $100,000 to Clinton L. Ballard,
our president and chief executive officer, in recognition of his exemplary
performance for us, particularly with respect to the development and
implementation of our eAnthology subscription service.

                                     - 29 -

<PAGE>

         In August 2002, we issued 10,000 shares of our common stock to each of
our current independent directors, Edward P. Swain, Jr. and William E. Hoke.
These shares had a value of $0.10 per share at such time.

         In August 2002, we granted options to purchase 30,000 shares of our
common stock to each of our current independent directors, Edward P. Swain, Jr.
and William E. Hoke.  These options have an exercise price of $0.12 per
share and are scheduled to become exercisable in equal installments over a
five-year period.

         In August 2002, we granted options to purchase 40,000 shares of our
common stock to our chief financial officer, E. Edward Ahrens. These options
have an exercise price of $0.12 per share and are scheduled to become
exercisable in equal installments over a ten-year period.

         All transactions between us and any of our officers, directors or five
percent stockholders have been and will be on terms no less favorable to us than
would be available from unaffiliated third parties.


ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K.

(a)      Exhibits.

         The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this annual report.

(b)      Reports on Form 8-K.

         On December 11, 2002, we filed a Current Report on Form 8-K (Date of
Report: December 4, 2002) with the SEC reporting, as an item 4 disclosure, the
replacement of our previous independent auditors, McKennon Wilson & Morgan, LLP,
with our current independent auditors, Peterson Sullivan P.L.L.C.


ITEM 14.  CONTROLS AND PROCEDURES

         Within the 90 days prior to the date of this report, we carried out an
evaluation under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information relating to the company required to be included in
our periodic SEC Filings. The design of any system of controls is based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions, regardless of how remote. There were no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.

                                     - 30 -

<PAGE>

ITEM 15.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES

         McKennon, Wilson & Morgan LLP provided audit services for us for the
fiscal year ending December 31, 2001 and through the completion of our Quarterly
Report on Form 10-QSB for our third fiscal quarter of 2002. Peterson Sullivan,
P.L.L.C. provided audit services to us for our annual report for the fiscal year
ended December 31, 2002. The aggregate fees billed by McKennon, Wilson & Morgan
LLP for the audit of our annual financial statements and review of financial
statements included in our Form 10-QSBs was $22,200 and $43,875 for 2002 and
2001, respectively.

         The aggregate fees billed or to be billed with respect to the audit for
our financial statements for our fiscal year ended December 31, 2002, by
Peterson Sullivan, P.L.L.C., is $18,500.

AUDIT-RELATED FEES

         The aggregate fees billed in each of 2002 and 2001 for assurance and
related services by McKennon, Wilson & Morgan LLP, that are reasonably related
to the audit or review of our financial statements and that were not covered in
the Audit Fees disclosure above, was $0 and $450, respectively. These services
included advice regarding a proposed private placement transaction.

         There were no fees billed in the fiscal year ended December 31,
2002, for assurance and related services rendered by Peterson Sullivan,
P.L.L.C., that are reasonably related to the audit or review of our financial
statements and that were not covered in the Audit Fees disclosure above.

TAX FEES

         There were no fees billed in each of 2002 and 2001 for any professional
tax advice or tax planning services rendered by McKennon, Wilson & Morgan LLP.

         There were fees of $9,350 billed for the year 2002 for professional
services rendered by Peterson Sullivan P.L.L.C. for tax advice and planning.

ALL OTHER FEES

         There were no fees billed in each of 2002 and 2001 for professional
services rendered by McKennon, Wilson & Morgan LLP or Peterson Sullivan P.L.L.C.
for all other services not disclosed above.

AUDIT COMMITTEE PRE-APPROVAL

         Our Audit Committee pre-approved our engagement of McKennon, Wilson &
Morgan LLP to act as our independent auditor for 2001 and through the completion
of our Quarterly Report on Form 10-QSB for our third fiscal quarter of 2002. Our
Audit Committee pre-approved McKennon Wilson & Morgan LLP to provide the audit
and audit related services described above, which represented 100% of the total
fees we paid McKennon Wilson & Morgan LLP in 2001 and 2002. Our Audit Committee
pre-approved our engagement of Peterson Sullivan, P.L.L.C. to act as our
independent auditor for our fiscal year ended December 31, 2002. Our Audit
Committee also pre-approved Peterson Sullivan, P.L.L.C. to provide the audit,
audit-related, tax services and all other services described above. Our
independent auditors performed all work only with its full time permanent
employees.

                                     - 31 -

<PAGE>


PETERSON SULLIVAN PLLC
601 UNION STREET   SUITE 2300   SEATTLE WA 98101 (206) 382-7777   FAX 382-7700
                          CERTIFIED PUBLIC ACCOUNTANTS


                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------


To the Board of Directors
eAcceleration Corp.
Poulsbo, Washington


We  have   audited   the    accompanying   consolidated    balance    sheet   of
eAcceleration  Corp.  and  Subsidiary  as of December 31, 2002,  and the related
consolidated statements of operations,  stockholders' equity (deficit), and cash
flows for the year then ended. 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  auditing  standards  generally
accepted in the United States.  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,  the  2002  consolidated   financial   statements  referred to
above  present  fairly,  in all material  respects,  the  financial  position of
eAcceleration  Corp.  and Subsidiary as of December 31, 2002, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.

The  accompanying  2002  consolidated   financial  statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1 to
the  consolidated  financial  statements,  the Company has incurred  significant
losses  from  operations  in each of the last two years  and has an  accumulated
deficit of $4,043,287 at December 31, 2002. These  conditions raise  substantial
doubt  about its  ability to continue  as a going  concern.  Management's  plans
regarding  those matters are also described in Note 1. The financial  statements
do not  include  any  adjustments  that might  result  from the  outcome of this
uncertainty.


/s/ Peterson Sullivan PLLC


February 26, 2003


                                       F-1

<PAGE>


                          Independent Auditors' Report
                          ----------------------------

To the Board of Directors and
Stockholders of eAcceleration Corp.


     We have audited the  accompanying  consolidated  statements of  operations,
stockholders'  equity (deficit) and cash flows of eAcceleration Corp. and
Subsidiaries  (the  "Company")  for the year ended  December 31, 2001.  These
consolidated financial  statements are the  responsibility of the Company's
management.  Our responsibility  is to express an opinion on these consolidated
financial statements based on our audit.

     We conducted our audit in accordance  with  auditing  standards  generally
accepted in the United States.  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,  the consolidated  financial  statements  referred to above
present  fairly,  in all material  respects,  the results of operations and cash
flows of eAcceleration  Corp. and  Subsidiaries  for the year ended December 31,
2001, in conformity with accounting principles generally  accepted in the United
States.

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming that the Company will continue as a going concern. As disclosed in Note
1  to  the  consolidated   financial  statements,   the  Company  has  incurred
significant losses from operations, has current liabilities which exceed current
assets and has a stockholders'  deficit at December 31, 2001.  These  conditions
raise  substantial  doubt  about the  Company's  ability to  continue as a going
concern.  Management's  plans in regard to these  matters are also  described in
Note 1. The  consolidated  financial  statements do not include any adjustments
that may result from the outcome of this uncertainty.

/s/ McKennon Wilson & Morgan, LLP
Irvine, California
February 27, 2002

                                       F-2

<PAGE>


                              eACCELERATION CORP.

                           CONSOLIDATED BALANCE SHEET
                               December 31, 2002
<TABLE>
<CAPTION>
         ASSETS
<S>                                                                             <C>
Current Assets
    Cash                                                                        $   364,512
    Accounts receivable, net of allowance for doubtful
      accounts of $8,663                                                              4,120
    Restricted certificate of deposit                                               151,658
    Prepaid expenses                                                                 17,631
                                                                                ------------
       Total current assets                                                         537,921

Property and Equipment, net                                                         134,487
Patents and Trademarks, net                                                          70,667
Other Assets                                                                         74,047
                                                                                ------------
                                                                                $   817,122
                                                                                ============

         LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities
    Accounts payable                                                            $   356,196
    Accrued expenses                                                                205,814
    Short-term note payable                                                         275,000
    Long-term note callable by creditor                                              39,097
    Deferred revenue, current portion                                             2,433,299
                                                                                ------------
        Total current liabilities                                                 3,309,406

Notes Payable to Stockholders                                                       394,016
Deferred Revenue, less current portion                                              363,739
                                                                                ------------
        Total liabilities                                                         4,067,161

Commitments and Contingencies                                                           -

Stockholders' Equity (Deficit)
    Common stock, par value $0.0001; 100,000,000 shares
      authorized; 34,424,500 shares issued and outstanding                            3,443
    Additional paid-in capital                                                      789,805
    Accumulated deficit                                                          (4,043,287)
                                                                                ------------
                                                                                 (3,250,039)
                                                                                ------------
                                                                                $   817,122
                                                                                ============
</TABLE>
                 See Notes to Consolidated Financial Statements

                                      F-3
<PAGE>

                               eACCELERATION CORP.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                     Years Ended December 31, 2002 and 2001
<TABLE>
<CAPTION>

                                                                            2002                2001
                                                                       --------------      --------------
<S>                                                                    <C>                 <C>
Revenues
     Online software subscriptions, net of refunds of $97,979          $   1,607,159       $        -
     Software licensing                                                    1,100,000           1,575,000
     Internet advertising                                                    169,082           1,658,559
                                                                       --------------      --------------
                                                                           2,876,241           3,233,559
Cost of revenues
     Online software subscriptions                                         1,617,142               -
     Software licensing                                                    1,575,133           1,331,928
     Internet advertising                                                    221,998           1,702,400
                                                                       --------------      --------------
                                                                           3,414,273           3,034,328
                                                                       --------------      --------------

Gross profit (loss)                                                         (538,032)            199,231

Selling expenses                                                             925,382               -
General and administrative expenses                                          975,948             882,623
                                                                       --------------      --------------
Loss from operations                                                      (2,439,362)           (683,392)

Other income (expense)
     Interest expense                                                        (64,648)            (14,790)
     Loss on disposal of assets                                              (16,673)              -
     Impairment of investment                                                  -                 (40,000)
     Loss on sublease                                                          -                 (14,994)
                                                                       --------------      --------------
                                                                             (81,321)            (69,784)
                                                                       --------------      --------------
Loss before provision for income tax                                      (2,520,683)           (753,176)

Provision for income tax                                                        -                   -
                                                                       --------------      --------------
     Net loss                                                          $  (2,520,683)      $    (753,176)
                                                                       ==============      ==============

Basic and diluted per-share information
     Net loss                                                          $       (0.07)      $       (0.02)
                                                                       ==============      ==============

Weighted average shares outstanding
     Basic and diluted                                                    34,336,925          34,300,000
                                                                       ==============      ==============
</TABLE>

                See Notes to Consolidated Financial Statements

                                      F-4

<PAGE>
                              eACCELERATION CORP.

           CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
                     Years Ended December 31, 2002 and 2001
<TABLE>
<CAPTION>
                                                                               Additional                        Stockholders'
                                                  Common Stock                   Paid-In         Accumulated       Equity
                                           Shares              Amount            Capital           Deficit        (Deficit)
                                       --------------      --------------    --------------    --------------   --------------
<S>                                    <C>                 <C>               <C>               <C>              <C>
Balances, December 31, 2000               34,300,000       $       3,430     $     600,073     $    (745,212)   $    (141,709)
     Value of stock options                                                         85,486                             85,486
     Distributions to stockholders                                                                   (11,940)         (11,940)
     Net loss                                                                                       (753,176)        (753,176)
                                       --------------      --------------    --------------    --------------   --------------
Balances, December 31, 2001               34,300,000               3,430           685,559        (1,510,328)        (821,339)
     Value of stock options                                                         51,808                             51,808
     Value of stock issued                   124,500                  13            12,438                             12,451
     Contribution by stockholder                                                    40,000                             40,000
     Distributions to stockholders                                                                   (12,276)         (12,276)
     Net loss                                                                                     (2,520,683)      (2,520,683)
                                       --------------      --------------    --------------    --------------   --------------
Balances, December 31, 2002               34,424,500       $       3,443     $     789,805     $  (4,043,287)   $  (3,250,039)
                                       ==============      ==============    ==============    ==============   ==============
</TABLE>

                 See Notes to Consolidated Financial Statements

                                      F-5

<PAGE>

                              eACCELERATION CORP.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     Years Ended December 31, 2002 and 2001
<TABLE>
<CAPTION>
                                                                                     2002                 2001
                                                                                --------------       --------------
<S>                                                                             <C>                  <C>
Cash flows from operating activities
Net loss                                                                        $  (2,520,683)       $    (753,176)
Adjustments to reconcile net loss to net cash provided by
     (used in) operating activities
     Depreciation and amortization                                                     79,260               70,590
     Loss on disposal of assets                                                        16,673                  -
     Write-off of long-term account receivable                                            -                 10,573
     Bad debt expense excluding recoveries on written off accounts                        -                149,418
     Value of stock options                                                            51,808               85,486
     Issuance of common stock under equity incentive plan                              12,451                  -
     Impairment of investment                                                             -                 40,000
     Gain on settlement of accounts payable                                           (24,527)            (312,443)
     Changes in operating assets and liabilities
          Restricted cash                                                            (151,658)                  -
          Accounts receivable                                                          95,001               767,204
          Prepaid expenses                                                            (17,631)               39,446
          Other assets                                                                (65,447)               11,092
          Accounts payable                                                           (146,171)             (547,717)
          Accrued expenses                                                             34,661                67,693
          Deferred revenue                                                          2,797,038                   -
                                                                                --------------       --------------
               Net cash provided by (used in) operating activities                    160,775              (371,834)

Cash flows from investing activities
     Purchases of equipment                                                          (132,559)               (3,823)
     Patent and trademark costs                                                       (20,572)              (29,979)
     Investment in Contera                                                                -                 (35,000)
                                                                                --------------       --------------
               Net cash used in investing activities                                 (153,131)              (68,802)

Cash flows from financing activities
     Proceeds from long-term note callable by creditor                                 52,500                   -
     Proceeds from short-term note payable                                                -                 275,000
     Proceeds from note payable to stockholders                                       179,000               225,000
     Payments on notes payable to stockholders                                         (9,984)                  -
     Payments on long-term note payable                                               (13,403)             (277,000)
     Capital contribution by stockholder                                               40,000                   -
     Distributions to stockholders                                                    (12,276)              (11,940)
     Return of restricted cash to subscribers in
          connection with initial public offering                                         -                (774,985)
     Reduction of liability due to subscribers
                                                                                          -                 774,985
                                                                                --------------       --------------
               Net cash provided by financing activities                              235,837               211,060
                                                                                --------------       --------------
Net increase (decrease) in cash                                                       243,481              (229,576)
Cash, beginning of year                                                               121,031               350,607
                                                                                --------------       --------------
Cash, end of year                                                               $     364,512        $      121,031
                                                                                ==============       ===============
Supplemental disclosure of cash flow information:
     Cash paid during the year for interest                                     $      61,250        $       19,198
                                                                                ==============       ===============
     Cancellation of prepaid insurance financed with a note payable                                  $      209,329
                                                                                                     ===============
</TABLE>

                 See Notes to Consolidated Financial Statements

                                      F-6

<PAGE>

                               eACCELERATION CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.  THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

COMPANY
-------

eAcceleration Corp.,  a  Delaware  corporation  (the "Company"),  is  a provider
and licensor of proprietary software that is distributed directly by the Company
through the Internet and via a distributor in Japan that exclusively distributes
Japanese versions of the software. The Company has also provided  Internet-based
direct marketing and advertising  services.  The Company de-emphasized this line
of  business  in 2002 due to a  continuing  decline  in the  online  advertising
industry.  Currently,  the Company is pursuing  additional means of distributing
other internally-produced software.

PRINCIPLES OF CONSOLIDATION
---------------------------

The  accompanying  consolidated  financial  statements  include  the accounts of
the Company and its wholly-owned subsidiary, Acceleration Software International
Corporation.  All intercompany accounts and transactions have been eliminated in
consolidation.

GOING CONCERN
-------------

The  Company  has incurred  significant  losses  from  operations in each of the
last two years and has an  accumulated  deficit of  $4,043,287  at December  31,
2002.  The Company's  ability to continue as a going  concern is in  substantial
doubt and is dependent upon obtaining  additional  financing  and/or achieving a
sustainable   profitable  level  of  operations.   The  consolidated   financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.

Management  of  the  Company  has  undertaken  steps  as part of a plan with the
goal of  sustaining  Company  operations  for the next twelve months and beyond.
These steps  include:  (a) attempting to raise  additional  capital and/or other
forms  of  financing;   (b)  continuing  to  promote  and  build  the  Company's
"eAnthology"  online  subscription  business;  and (c) controlling  overhead and
expenses.  There  can  be no  assurance  that  any  of  these  efforts  will  be
successful.

REVENUE RECOGNITION
-------------------

The  Company's  subscription-based  revenue  from  "eAnthology"  online software
subscriptions is deferred and recognized on a straight-line basis monthly,  over
the life of the  user's  subscription,  after the right of refund  lapses,  when
persuasive  evidence  of an  agreement  exists,  delivery  of  the  product  has
occurred,  the fee is fixed or determinable,  collectibility is probable, and no
significant Company obligations with regard to implementation remain. Management
continuously reviews refunds granted to customers during the 7- or 14-day refund
period, and provides appropriate  estimates of refunds at the time of sale based
on this  experience.

                                      F-7

<PAGE>

The  Company  had  deferred  for  this product $2,497,038 of  subscription-based
revenue as of December 31, 2002.

Revenues  recognized  under  the  current  contract  with the Company's Japanese
distributor are accounted for in accordance with the provisions of SOPs 97-2 and
98-9. The contract contains multiple elements,  including post-contract customer
support (PCS) and specified upgrades. The Company received three initial monthly
payments of $150,000 and $50,000 monthly thereafter.  Management  estimates that
vendor-specific  objective  evidence  ("VSOE")  of fair  value for PCS  services
exists  in the  amount  of  $50,000  monthly;  accordingly,  revenue  for PCS is
recorded  on a  straight-line  basis  of  $50,000  monthly  over the life of the
agreement.  Management also estimates that VSOE of fair value does not exist for
any of the specified upgrades outlined in the contract; therefore management has
elected to  recognize  revenue on the  specified  upgrades  only upon  delivery.
Therefore,  the Company has deferred  recognition of $300,000,  to be recognized
upon delivery of the upgrades, which is expected to occur in 2003.

The Company employs various web-based advertising methods. Internet advertising
revenues are recognized in the period in which users execute pre-defined actions
related to that advertising.

CASH AND RESTRICTED CASH
------------------------

Cash  includes  a  checking  account  held  at a bank.  Restricted cash consists
of a certificate of deposit that is restricted  for purposes of  collateralizing
the Company's  bank debt discussed in Note 4. At times the Company may have cash
balances  that  exceed  amounts  insured  by  the  Federal   Deposit   Insurance
Corporation.

FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------

Financial   instruments  consist  of  cash,  a  certificate of deposit and notes
payable.  The fair  value  of these  financial  instruments  approximates  their
carrying amounts due to their short-term nature and market rates of interest.

PROPERTY AND EQUIPMENT
----------------------

Property  and  equipment  are  recorded  at cost and are  depreciated  using the
double  declining  balance method over the estimated useful lives of the related
assets,  ranging from three to seven years.  Maintenance and repairs are charged
to expense as incurred. Significant renewals and betterments are capitalized.

Statement  of  Financial  Accounting   Standard  ("SFAS") No.  144,  "Accounting
for  Impairment or Disposal of Long-Lived  Assets,"  became  effective for years
beginning  after  December 15, 2001.  The Company has adopted this  statement in
2002, and the application of this pronouncement has not had a material effect on
the Company's financial position, cash flows or results of operations.

                                      F-8

<PAGE>

PATENTS AND TRADEMARKS
----------------------

Patents  and  trademarks  are  recorded  at  cost.  Patents  are amortized  when
registered using the straight-line method over the estimated useful lives of the
related  assets  ranging from three to five years.  Trademarks are not amortized
but are reviewed  periodically  for  impairment by management  based on expected
future  cash flows.  Prior to the  adoption of SFAS No. 142, on January 1, 2002,
trademarks had been amortized over their useful lives.

OTHER ASSETS
------------

Other  assets  consist  of  security  deposits,  including approximately $60,000
held at December 31, 2002, by one of the Company's credit card processors.

EARNINGS PER SHARE
------------------

Basic  loss  per  share  is  computed by dividing  net income or loss  available
to  common  shareholders  by  the  weighted  average  number  of  common  shares
outstanding in the period.  Diluted earnings per share takes into  consideration
common  shares  outstanding  (computed  under  basic  earnings  per  share)  and
potentially  dilutive  common  shares.  Potentially  dilutive  common  shares at
December 31, 2002,  consist of shares  issuable to holders of outstanding  stock
options (Note 12).  Stock options were not included in the 2002  computation  of
diluted earnings per share, because they were anti-dilutive.

STOCK-BASED COMPENSATION
------------------------

The  Company  has  a  stock-based   equity  incentive  plan,  which is described
more fully in Note 12. The Company  accounts for the plan under the  recognition
and measurement  principles of APB Opinion No. 25,  "Accounting for Stock Issued
to Employees," and related interpretations. No stock-based employee compensation
cost is reflected in net income,  as all options  granted  under the plan had an
exercise  price  equal to or  greater  than the market  value of the  underlying
common stock on the date of grant.  Compensation  cost for stock options granted
to non-employees is measured using the Black-Scholes valuation model at the date
of grant  multiplied  by the  number  of  options  granted,  amortized  over the
estimated life of the option.  This compensation cost is recognized ratably over
the vesting period. In accordance with APB 25, the Company records  compensation
costs  only for stock  options  issued to  non-employees.  The  following  table
illustrates  the effect on net income and  earnings per share if the Company had
applied the fair value recognition  provisions of SFAS No. 123,  "Accounting for
Stock-Based Compensation," to stock-based employee compensation.

                                      F-9

<PAGE>

<TABLE>
<CAPTION>
                                                              2002              2001
                                                         --------------    --------------
<S>                                                      <C>               <C>
Net Loss
--------

    As reported                                          $  (2,520,683)    $    (753,176)
    Deduct:  Total stock-based employee
      compensation expense determined under
      fair value based methods for all
      awards, net of any related tax effects                    (9,937)           (8,610)
                                                         --------------    --------------
    Proforma                                             $  (2,530,620)    $    (761,786)
                                                         ==============    ==============
Basic and Diluted Earnings (Loss) Per Share
-------------------------------------------

    As reported                                          $       (0.07)    $       (0.02)
    Proforma                                             $       (0.07)    $       (0.02)
</TABLE>

SOFTWARE AND WEB DEVELOPMENT COSTS
----------------------------------

SFAS  No. 86,  "Accounting   for  the  Costs  of  Computer  Software to be Sold,
Leased or Otherwise Marketed," states that all costs incurred in connection with
the development of software  subsequent to technological  feasibility  should be
capitalized  until  such  time  that  the  software  is  essentially  completed.
Management  believes the  Company's  software is completed  concurrent  with the
establishment of technological feasibility.  When development of our software is
complete, it is available to customers almost immediately at our websites on the
Internet.  Therefore, no costs have been capitalized in connection with software
development.

Web  development  costs  are  accounted  for  in   accordance   with  EITF 00-2,
"Accounting for Web Site  Development  Costs" with applicable  guidance from SOP
98-1,  "Accounting for the Costs of Computer Software  Developed or Obtained for
Internal  Use."  The  Company's  internal  website  development   processes  are
relatively  short-term in nature,  generally three months. The costs incurred in
the  preliminary  stages  of  development  are  expensed  as  incurred.  Once an
application has reached the development  stage,  internal and external costs, if
direct and  incremental,  will be capitalized  and amortized on a  straight-line
basis if management  believes such costs are  significant.  All  maintenance and
enhancement costs are expensed as incurred.

Software  and  web  development  expenses  for the years ended December 31, 2002
and 2001, were $2,474,316 and  $1,932,387,  respectively.  There were no amounts
capitalized in 2002.

ADVERTISING COSTS
-----------------

Advertising  costs  are  expensed  as  incurred.  Advertising  expenses  for the
years  ended   December  31,  2002  and  2001,   were   $990,024  and  $783,315,
respectively.

COMPREHENSIVE INCOME
--------------------
The Company had no items of other comprehensive income in 2002 or 2001.

                                      F-10

<PAGE>

INCOME TAXES
------------

The  Company  elected  to  be  taxed under  Subchapter S of the Internal Revenue
Code. The S election was terminated effective as of August 7, 2002. As such, the
Company's profits and losses were reflected in the individual income tax returns
of the shareholders until the date the S election was terminated.  Therefore, no
income tax expense is included in these financial statements through the date of
the S Corporation termination.

Subsequent  to  August  7,  2002,  the Company   accounts   for income  taxes in
accordance  with the  liability  method.  Under the liability  method,  deferred
assets  and  liabilities  are  recognized  based  upon  anticipated  future  tax
consequences  attributable to differences  between financial  statement carrying
amounts of assets and liabilities and their  respective tax bases. The provision
for income  taxes is comprised  of the current tax  liability  and the change in
deferred  tax  assets and  liabilities.  The  Company  establishes  a  valuation
allowance to the extent that it is more likely than not that deferred tax assets
will not be recoverable against future taxable income.

COMMITMENTS AND CONTINGENCIES
-----------------------------

The  Company's  operations  are  subject  to  new  innovations in product design
and function.  Significant  technological  changes can have an adverse effect on
product lives.  Design and development of new products are important elements to
achieve profitability in this industry segment.

The  Company  records  receivables  at  their  outstanding  principal  balances.
The  Company  does not  obtain  collateral  with  which to secure  its  accounts
receivable. The Company maintains an allowance for potential credit losses based
upon Management's periodic review of the Company's historical experience related
to credit losses. Receivables written off are charged against the allowance.

A  majority  of  the  online   software  subscription  revenue is  received  via
credit card  processing  firms.  For the first nine months of 2002,  the Company
relied on one merchant bank and one payment  gateway  provider to facilitate all
credit card transactions.  The Company contracted with two additional processing
firms in the fourth quarter of 2002 to minimize this risk.

The  Company  is  subject  to  a limited number of claims and actions that arise
in the  ordinary  course of  business.  Management  is of the  opinion  that the
outcome  of these  matters  will not have a  material  effect  on the  Company's
financial  statements,  however, the litigation process is inherently uncertain,
and it is possible  that the  resolution  of the  Company's  existing and future
litigation may adversely affect the Company.

USE OF ESTIMATES
----------------

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

                                      F-11

<PAGE>


NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------

In  June  2002,   the   FASB   issued   SFAS  No.  146,  "Accounting  for  Costs
Associated  with Exit or Disposal  Activities"  ("SFAS  146"),  which  addresses
financial  accounting and reporting for costs  associated  with exit or disposal
activities,  and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" which previously
governed the accounting treatment for restructuring activities. SFAS 146 applies
to costs  associated with an exit activity that does not involve an entity newly
acquired in a business  combination or with a disposal  activity covered by SFAS
144. Those costs include, but are not limited to, the following: (1) termination
benefits provided to current  employees that are involuntarily  terminated under
the terms of a benefit arrangement that, in substance, is not an ongoing benefit
arrangement  or an  individual  deferred-compensation  contract,  (2)  costs  to
terminate a contract that is not a capital  lease,  and (3) costs to consolidate
facilities or relocate  employees.  SFAS 146 does not apply to costs  associated
with the  retirement of long-lived  assets covered by SFAS 143. SFAS 146 will be
applied prospectively and is effective for exit or disposal activities initiated
after December 31, 2002. The Company believes that the adoption of SFAS 146 will
have no material impact on its financial condition or results of operations.

RECLASSIFICATIONS
-----------------

Certain  reclassifications  of  2001  balances  have been made to conform to the
2002 presentation.



NOTE 2.  PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31, 2002:
<TABLE>
<CAPTION>
         <S>                                          <C>
         Equipment and furniture                      $    261,784
         Vehicles                                           40,935
                                                      -------------
                                                           302,719
         Accumulated depreciation                         (168,232)
                                                      -------------

                                                      $    134,487
                                                      =============
</TABLE>

During the years ended December 31, 2002 and 2001, depreciation  expense totaled
$56,805 and $49,210, respectively.

                                      F-12

<PAGE>


NOTE 3.  PATENTS AND TRADEMARKS

Patents and trademarks consist of the following at December 31, 2002:
<TABLE>
<CAPTION>
         <S>                                          <C>
         Amortized intangible assets:
              Patents                                 $     153,037
              Accumulated amortization                      (97,063)
                                                      --------------
                                                             55,974

         Unamortized intangible assets:
              Trademarks                                     14,693
                                                      --------------

                                                      $      70,667
                                                      ==============
</TABLE>

During the years ended December 31, 2002 and 2001, amortization expense  totaled
$22,455 and $21,380, respectively. Patents are amortized  generally  over  three
years due to  the rapid  rate  of  obsolescence  associated  with  computer  and
software technology.

Amortization expense  for current patents will be as follows for the years ended
December 31:
<TABLE>
<CAPTION>
                  <S>                                 <C>
                  2003                                $     19,290
                  2004                                      11,363
                  2005                                       4,694
                                                      -------------

                                                            35,347
                  Patents pending                           20,627
                                                      -------------

                                                      $     55,974
                                                      =============
</TABLE>

Management tests trademarks for impairment periodically, based on the expected
cash flows. No impairment was determined to have occurred in 2002.



NOTE 4.  SHORT-TERM NOTE PAYABLE

The Company  has  a note payable to a bank that bears interest at 8.5%. The note
requires monthly interest-only payments and is due in full April 15, 2003.

The note requires the  Company  to  comply  with  various  covenants,  including
certain financial ratios regarding working capital and debt coverage  which have
not been met in 2002, and  other  nonfinancial  covenants. Due to these covenant
violations, the bank could demand payment in full  of  this  note  prior  to its
scheduled maturity. The note  is  secured  by  substantially  all  assets of the
Company, and is personally guaranteed by the Company's majority stockholders.

                                      F-13

<PAGE>

NOTE 5.  NOTES PAYABLE TO STOCKHOLDERS
--------------------------------------

The  Company  has  borrowed  an  aggregate of $404,000 from the Company's  chief
executive  officer  who  is one of the  principal  stockholders,  under  various
promissory notes.  These notes bear interest at 10%, are payable on demand,  and
require monthly interest-only  payments. The outstanding balance of the notes at
December 31, 2002,  is $394,016 net of  repayments  of $9,984 in 2002.  The bank
agreed to not  consider  these  repayments  a  violation  of the loan  covenants
related to the Company's bank debt. It is the intention of the  stockholders  to
not seek  repayment  of these  notes  before  December  31,  2003.  This debt is
unsecured and subordinated to all bank debt.



NOTE 6.  LONG-TERM NOTE CALLABLE BY CREDITOR
--------------------------------------------

The  Company  has  a  note  payable to the same bank as described in Note 4. The
note bears  interest at 8.0%,  requires  monthly  payments of $1,645 and matures
February 15, 2005.  The loan is secured by  substantially  all the assets of the
Company, is personally guaranteed by the principal  stockholders of the Company,
and is subject to  substantially  the same covenants as described in Note 4. Due
to these  covenant  violations,  the entire  balance is classified as current in
these financial  statements  since the bank could demand payment in full of this
note prior to its scheduled maturity.

Scheduled principal maturities are as follows for the years ending December 31:
<TABLE>
<CAPTION>
                  <S>                    <C>
                  2003                   $     17,227
                  2004                         18,668
                  2005                          3,202
                                         -------------

                                         $     39,097
                                         =============
</TABLE>

NOTE 7.  LONG-TERM CONTRACTS

The  Company  is  a  party  to  a  distribution  agreement  with  the  exclusive
distributor of the Company's products in Japan. Through August 2002, the Company
received $150,000 per month under this agreement.  Starting  September 2002, the
monthly  payments were reduced to $50,000.  Total  payments  received under this
agreement were $1,100,000 and $1,575,000 in 2002 and 2001,  respectively,  which
constituted  38%  and  49%  of the  Company's  total  revenue  in  those  years,
respectively.

                                      F-14

<PAGE>

In  addition  to  giving  the  distributor  full  license  to   distribute   the
Company's  intellectual  property and  proprietary  rights in Japan,  except for
"eAnthology", the agreement requires the Company to develop and refine specified
products and upgrades to existing  products.  The agreement may be terminated by
either party with three  month's  notice.  If the Company were unable to produce
software  upgrades to the  satisfaction  of the  distributor and the distributor
terminated the agreement, it may have a material adverse effect on the Company's
cash flows and  results of  operations.  This  contract  is  considered  to have
multiple elements under SOP 97-2.

Management  estimates  that   vendor-specific   objective  evidence  ("VSOE") of
fair value does exist for the post-contract  customer support ("PCS") portion of
the contract, in the amount of $50,000 per month; management also estimates that
VSOE of fair value does not exist for any of the specified  products or upgrades
outlined in the agreement,  until actual  delivery.  In accordance with SOP 97-2
and SOP 98-9,  the  revenue  for PCS is  recorded  ratably  over the life of the
contract.  The residual  value from the initial  payments under the contract has
been  deferred and will be recognized  upon delivery of the specified  upgrades.
Management  expects  delivery of these  products to occur in 2003.  Accordingly,
$300,000 of the revenue  received in 2002 has been deferred and is included with
the current portion of deferred revenue in these financial statements.



NOTE 8.  PROVISION FOR INCOME TAXES

The  Company  did  not  provide  any current or deferred  U.S.  federal or state
income tax provision or benefit  subsequent to the termination of its S election
because it has  experienced  an operating  loss. The Company has provided a full
valuation allowance on its deferred tax assets because of uncertainty  regarding
their realizability.

The  difference  between  the  statutory  federal tax  rate  of  34% and the tax
provision of zero recorded by the Company is primarily due to the Company's full
valuation allowance against its deferred tax assets.

At  December  31, 2002, the  Company  had  a net operating loss  carryforward of
approximately  $58,000.  This carryforward will expire in 2020. The Company also
has  a  foreign  tax  credit   carryforward  of  approximately   $35,000.   This
carryforward will expire in 2007.

                                      F-15

<PAGE>

Deferred  income  taxes  reflect  the  net tax effects of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes at December 31, 2002, were as follows:
<TABLE>
<CAPTION>
         <S>                                          <C>
         Deferred revenue                             $     950,993
         Property and equipment                             103,288
         Net operating losses                                19,705
         Foreign tax credits                                 35,000
         Intangible assets                                   22,441
         Other                                               45,538
                                                      --------------

         Total deferred tax assets                        1,176,965
         Valuation allowance for deferred tax assets     (1,176,965)
                                                      --------------

         Net deferred taxes                           $        -
                                                      ==============
</TABLE>


NOTE 9.  BUSINESS SEGMENT INFORMATION

In  2001,  the  Company's  operations   were   classified  into  two  reportable
segments:  software  licensing and Internet  advertising.  In 2002,  the Company
changed  its  primary  focus  to  that  of  online  software  subscriptions  and
de-emphasized  Internet advertising.  Due to the similar  characteristics of the
current software  licensing  operating  segments, all software segments - online
subscription  licensing  and  Japanese  licensing - have been  combined for 2002
reporting.  The Internet  advertising  segment  constitutes less than 10% of the
Company's  business  and is therefore  not  considered  a  significant  business
segment in 2002.

The following table pertains to the Company's 2001 operating segments:
<TABLE>
<CAPTION>

Reported segments                                        Software Licensing          Internet             Consolidated
                                                                                   Advertising                Total
                                                         -------------------    -------------------    -------------------
<S>                                                      <C>                    <C>                    <C>
Revenues                                                 $    1,575,000         $    1,658,559         $    3,233,559
Gross profit (loss)                                             243,072                (43,841)               199,231

A reconciliation of total operating segment gross profit to  total  net loss for
2001 is as follows:

Gross profit for reportable segments                     $     199,231
Corporate selling, general and administrative expenses        (882,623)
Other expense, net                                             (69,784)
                                                         --------------

        Net loss                                         $    (753,176)
                                                         ==============
</TABLE>

                                      F-16

<PAGE>


Since  all  the   Company's  operations   are   located in the United  States of
America, the Company's geographic revenue information is based on the country in
which  the sales  originate.  Following  is a table  that  shows  the  origin of
revenues for the years ended December 31, 2002 and 2001:
<TABLE>
<CAPTION>
Geographic segments                         U.S.                 Asia              All Other           Consolidated
                                                                                    Foreign               Total
                                      -----------------    -----------------    -----------------    -----------------
<S>                                     <C>                   <C>                 <C>                   <C>
Revenues from external customers
    Years ended
      2002                              $ 1,453,631           $ 1,123,609         $    299,001          $ 2,876,241
      2001                                1,457,530             1,690,146               85,883            3,233,559
</TABLE>

No geographic segment data is  shown  for long-lived assets, since the Company's
operations reside entirely in the United States.



NOTE 10.  OPERATING LEASES

At  December  31,  2002,  the  Company  is   committed   to an  operating  lease
agreement  that expires on January 31,  2004.  The lease terms  require  monthly
payments of $9,000 with scheduled  increases each year. The Company records rent
expense on a straight-line basis over the life of the lease. The Company has the
option  of  terminating  the  lease  during  the  last two  years  by  providing
six-months written notice to the landlord.

The Company's future annual minimum lease payments at December  31, 2002, are as
follows:
<TABLE>
<CAPTION>
                  <S>                            <C>
                  2003                           $      110,817
                  2004                                    9,256
</TABLE>

Total rent expense for the years ended December 31, 2002  and  2001, amounted to
$112,849 and $129,714, respectively.



NOTE 11.  EMPLOYMENT CONTRACTS

On  December  31,  2002,  the  Company  amended its employment  agreements  with
its two principal stockholders. Each of these agreements is for a period of five
years commencing  January 1, 2003, and is renewable  annually  thereafter unless
either party provides 60 days' notice. Each employment agreement provides for an
annual base salary of $104,000 and a bonus based on the  Company's  cash flow as
defined in the agreement.

                                      F-17

<PAGE>

NOTE 12.  STOCK-BASED COMPENSATION

In  2002,  the Company  issued  an  aggregate  of  124,500  shares of its common
stock to employees,  members of the Board of Directors and  non-employees in the
form of stock  bonuses under its 2002 Equity  Incentive  Plan (the "2002 Plan"),
all of which shares were registered  under the Securities Act of 1933. The total
number of shares  reserved and  available for all types of grants under the 2002
Plan is  5,000,000.  Estimated  compensation  expense in  connection  with these
issuances is an aggregate of $12,450. The Board of Directors determined the fair
value of its common stock,  based on an independent  appraisal,  to be $0.10 per
share at the time of issuance of these shares.

In  2002,  the  Company  granted  time-based options to purchase an aggregate of
880,000  shares of the Company's  common stock at an exercise price of $0.12 per
share under the 2002 Plan.  Of such  amount,  there were (a)  10-year  incentive
stock options to purchase  805,000 shares of the Company's  common stock granted
to employees,  (b) five-year  non-qualified options to purchase 15,000 shares of
the  Company's  common  stock  granted to a consultant  of the Company;  and (c)
five-year  non-qualified  options to  purchase  60,000  shares of the  Company's
common stock granted to  non-employee  directors.  The ten-year  options  become
exercisable  at the rate of one-tenth of the amount granted on each of the first
through  tenth  anniversaries  of the date of grant  and the  five-year  options
become exercisable at the rate of one-fifth of the amount granted on each of the
first through fifth anniversaries of the date of grant. No compensation  expense
will  be  recorded  for  options  granted  to  employees.   Options  granted  to
non-employees are recorded at fair value utilizing the  Black-Scholes  valuation
method and are amortized over five years. Total compensation  expense recognized
in 2002 for options granted to non-employees was $51,808.

Previously, the Company had issued  options under its 1995 and 1999 stock option
plans. None of the options vested under the 1999 Plan are exercisable.
<TABLE>
<CAPTION>

                                                                            Weighted
                                                                             Average
                                                      Stock Options      Exercise Price
                                                      -------------      --------------
<S>                                                   <C>                <C>
Outstanding at December 31, 2000                         616,800         $     5.72
Cancelled or forfeited                                  (512,500)              6.00
                                                      -----------
Outstanding at December 31, 2001                         104,300               4.36
Granted                                                  880,000               0.12
Forfeited                                               (160,000)              0.31
                                                      -----------
Outstanding at December 31, 2002                         824,300               0.62
                                                      -----------
</TABLE>

                                      F-18

<PAGE>


The following table summarizes stock options outstanding at December 31, 2002:
<TABLE>
<CAPTION>

                                     Options Outstanding                                   Options Exercisable
                  -----------------------------------------------------------     --------------------------------------
                                                Average           Weighted                                    Weighted
  Exercise              Number                 Remaining           Average                Number               Average
   Price              Outstanding at          Contractual          Exercise          Exercisable at           Exercise
   Range            December 31, 2002         Life (Years)          Price           December 31, 2002           Price
--------------    ---------------------    -----------------    -------------     --------------------      ------------
   <S>            <C>                            <C>                <C>           <C>                           <C>
   $0.70                   25,000                2.67               $0.70                   25,000              $0.70
    5.31                   61,800                2.75                5.31                        -               5.31
    6.25                   12,500                7.00                6.25                        -               6.25
    0.12                  725,000                9.73                0.12                        -               0.12
                  ---------------------                                           --------------------
                          824,300                                                           25,000
                  =====================                                           ====================
</TABLE>

The fair value of each option granted is estimated at the date  of  grant  using
the Black-Scholes option-pricing model. The assumptions used in calculating  the
fair value of the options granted were as follows:
<TABLE>
<CAPTION>

                                             2002 Plan             1995 and
                                                                  1999 Plans
                                       -------------------    -------------------
<S>                                      <C>                    <C>
Risk-free interest rate                       6.0%                   6.0%
Stock price volatility factor                  99%                    99%
Expected life of the options             5 and 10*years         5 and 10* years
Dividend yield                                0.0%                   0.0%
<FN>
*    Non-qualified options issued to non-employees have an estimated average
     life of 5 years; incentive stock options granted to employees are estimated
     to have an average life of 10 years.
</FN>
</TABLE>

                                      F-19

<PAGE>



                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Dated: April 10, 2003                          eAcceleration Corp.


                                    By:       /s/ Clinton L. Ballard
                                        ---------------------------------------
                                                  Clinton L. Ballard
                                           President and Chief Executive Officer


                                POWER OF ATTORNEY

         Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-KSB has been signed on April 10, 2003 by
the following persons in the capacities indicated. Each person whose signature
appears below constitutes and appoints Clinton L. Ballard, with full power of
substitution, his/her true and lawful attorney-in-fact and agent to do any and
all acts and things in his/her name and on his/her behalf in his/her capacities
indicated below which he may deem necessary or advisable to enable eAcceleration
Corp. to comply with the Securities Exchange Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with this Annual Report on Form 10-KSB, including specifically,
but not limited to, power and authority to sign for him/her in his/her name in
the capacities stated below, any and all amendments thereto, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in such connection, as
fully to all intents and purposes as he/her might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.


     /s/ Clinton L. Ballard      President, Chief Executive Officer and Director
------------------------------   (Principal Executive Officer)
      Clinton L. Ballard


     /s/ E. Edward Ahrens        Chief Financial Officer
------------------------------   (Principal Accounting Officer)
      E. Edward Ahrens


     /s/ Diana T. Ballard        Chairman of the Board, Secretary and Treasurer
------------------------------
       Diana T. Ballard


     /s/ Edward P. Swain, Jr.    Director
------------------------------
       Edward P. Swain, Jr.


     /s/ William E. Hoke         Director
------------------------------
       William E. Hoke


                                     - 32 -

<PAGE>

                   SARBANES-OXLEY SECTION 302(A) CERTIFICATION

I, Clinton L. Ballard, certify that:

1.   I have reviewed this year-end report on Form 10-KSB of eAcceleration Corp.;

2.   Based on my knowledge, this year-end report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this year-end
report;

3.   Based on my knowledge, the financial statements, and other financial
information included in this year-end report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this year-end report;

4.   The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this year-end report is being prepared;

     b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
year-end report (the "Evaluation Date"); and

     c) presented in this year-end report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.   The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):

     a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

     b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6.   The registrant's other certifying officer and I have indicated in this
year-end report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: April 10, 2003                        /s/ Clinton L. Ballard
                                          -------------------------------------
                                          Clinton L. Ballard
                                          President and
                                          Chief Executive Officer

                                     - 33 -

<PAGE>

                  SARBANES-OXLEY SECTION 302(A) CERTIFICATION

I, E. Edward Ahrens, certify that:

1.   I have reviewed this year-end report on Form 10-KSB of eAcceleration Corp.;

2.   Based on my knowledge, this year-end report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this year-end
report;

3.   Based on my knowledge, the financial statements, and other financial
information included in this year-end report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this year-end report;

4.   The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this year-end report is being prepared;

     b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
year-end report (the "Evaluation Date"); and

     c) presented in this year-end report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.   The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):

     a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

     b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6.   The registrant's other certifying officer and I have indicated in this
year-end report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: April 10, 2003                         /s/ E. Edward Ahrens
                                           -----------------------------------
                                           E. Edward Ahrens
                                           Chief Financial Officer

                                     - 34 -

<PAGE>

                                  EXHIBIT INDEX

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

3.1        Certificate of Incorporation of the Company (Incorporated by
           reference to Exhibit 3.1 to the Company's Registration Statement on
           Form SB-2 (Registration Number: 333-90867), filed with the Commission
           on November 12, 1999).
3.2        Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to
           the Company's Registration Statement on Form SB-2 (Registration
           Number 333-90867), filed with the Commission on November 12, 1999).
4.1        Specimen Common Stock Certificate (Incorporated by reference to
           Exhibit 4.1 to the Company's Registration Statement on Form SB-2
           (Registration Number 333-90867), filed with the Commission on
           November 12, 1999).
10.1       Amended and Restated 1999 Stock Incentive Compensation Plan
           (Incorporated by reference to Exhibit 10.1 to the Company's
           Registration Statement on Form SB-2 (Registration Number 333-90867),
           filed with the Commission on November 12, 1999).
10.2       Employment Agreement between the Company and Clinton L. Ballard
           (Incorporated by reference to Exhibit 10.2 to Amendment No. 1 to the
           Company's Registration Statement on Form SB-2 (Registration Number
           333-90867), filed with the Commission on February 16, 2000).
10.3       Amendment No. 1 to Employment Agreement between the Company and
           Clinton L. Ballard. (Incorporated by reference to Exhibit 10.3 to the
           Company's Annual Report on Form 10-KSB for the fiscal year ended
           December 31, 2001).
10.4       Amendment No. 2 to Employment Agreement between the Company and
           Clinton L. Ballard.
10.5       Employment Agreement between the Company and Diana T. Ballard
           (Incorporated by reference to Exhibit 10.3 to Amendment No. 1 to the
           Company's Registration Statement on Form SB-2 (Registration
           Number 333-90867), filed with the Commission on February 16, 2000).
10.6       Amendment No. 1 to Employment Agreement between the Company and Diana
           T. Ballard. (Incorporated by reference to Exhibit 10.6 to the
           Company's Annual Report on Form 10-KSB for the fiscal year ended
           December 31, 2001.)
10.7       Amendment No. 2 to Employment Agreement between the Company and Diana
           T. Ballard.
10.8       Form of Indemnification Agreement between the Company and its
           executive officers and directors (Incorporated by reference to
           Exhibit 10.4 to the Company's Registration Statement on Form SB-2
           (Registration Number 333-90867), filed with the Commission on
           November 12, 1999).
10.9       Lease Agreement between the Company and Olympic Place II, L.L.C
           (Incorporated by reference to Exhibit 10.11 to Amendment No. 1 to the
           Company's Registration Statement on Form SB-2 (Registration Number
           333-90867), filed with the Commission on April 4, 2000).
10.10      Distribution Agreement dated May 20, 2002, between the Company and
           Sourcenext Corporation (Incorporated by reference to Exhibit 10.1 to
           the Company's Quarterly Report on Form 10-QSB for the period ended
           June 30, 2002, filed with the Commission on August 19, 2002).
10.11      Promissory Note, dated June 21, 2001, by Acceleration Software
           International Corporation in favor of Silverdale State Bank
           (Incorporated by reference to Exhibit 10.1 to the Company's quarterly
           report on Form 10-QSB for the quarter ended June 30, 2001).
10.12      Commercial Security Agreement, dated June 21, 2001, by Acceleration
           Software International Corporation and eAcceleration Corp. in favor
           of Silverdale State Bank, relating to the assets of eAcceleration
           Corp. (Incorporated by reference to Exhibit 10.2 to the Company's
           quarterly report on Form 10-QSB for the quarter ended June 30, 2001).
10.13      Commercial Security Agreement, dated June 21, 2001, by Acceleration
           Software International Corporation and eAcceleration Corp. in favor
           of Silverdale State Bank, relating to the assets of Acceleration
           Software International Corporation. (Incorporated by reference to
           Exhibit 10.3 to the Company's quarterly report on Form 10-QSB for the
           quarter ended June 30, 2001).
10.14      Promissory Note of the Company in favor of Clinton L. Ballard, dated
           November 8, 2001 (Incorporated by reference to Exhibit 10.1 to the
           Company's quarterly report on Form 10-QSB for the quarter ended
           September 30, 2001).
10.15      Distribution Agreement between the Company and Sourcenext
           Corporation, dated January 7, 2002. (Incorporated by reference to
           Exhibit 10.26 to the Company's Annual Report on Form 10-KSB for the
           fiscal year ended December 31, 2001).

                                     - 35 -

<PAGE>

                            EXHIBIT INDEX (continued)

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

10.16      Promissory note of the Company in favor of Clinton L. Ballard, dated
           December 20, 2001. (Incorporated by reference to Exhibit 10.27 to the
           Company's Annual Report on Form 10-KSB for the fiscal year ended
           December 31, 2001).
10.17      Promissory note of the Company in favor of Clinton L. Ballard, dated
           January 3, 2002. (Incorporated by reference to Exhibit 10.28 to the
           Company's Annual Report on Form 10-KSB for the fiscal year ended
           December 31, 2001).
10.18      Promissory note of the Company in favor of Clinton L. Ballard, dated
           January 31, 2002. (Incorporated by reference to Exhibit 10.29 to the
           Company's Annual Report on Form 10-KSB for the fiscal year ended
           December 31, 2001).
10.19      Change in Terms Agreement, dated December 13, 2001, by Acceleration
           Software International Corporation in favor of American Marine Bank
           d/b/a Silverdale Bank. (Incorporated by reference to Exhibit 10.30 to
           the Company's Annual Report on Form 10-KSB for the fiscal year ended
           December 31, 2001).
10.20      Promissory Note, dated February 15, 2002, by eAcceleration Corp. in
           favor of American Marine Bank d/b/a Silverdale Bank.  (Incorporated
           by reference to Exhibit 10.31 to the Company's Annual Report on
           Form 10-KSB for the fiscal year ended December 31, 2001).
10.21      Commercial Security Agreement, dated February 15, 2002, by
           eAcceleration Corp. in favor of American Marine Bank d/b/a Silverdale
           Bank.  (Incorporated by reference to Exhibit 10.32 to the Company's
           Annual Report on Form 10-KSB for the fiscal year ended December 31,
           2001).
10.22      Subordination agreement among Silverdale State Bank, eAcceleration
           Corp. and Clinton L. Ballard. (Incorporated by reference to Exhibit
           10.33 to the Company's Annual Report on Form 10-KSB for the fiscal
           year ended December 31, 2001).
10.23      eAcceleration Corp. 2002 Equity Incentive Plan (Incorporated by
           reference to Exhibit 4.1 to the Company's Registration Statement on
           Form S-8, filed with the Commission on April 3, 2002).
10.24      Change in Terms Agreement, dated May 24, 2002, by Acceleration
           Software International Corporation in favor of American Marine Bank
           d/b/a Silverdale Bank (Incorporated by reference to Exhibit 10.2 to
           the Company's quarterly report on Form 10-QSB for the quarter ended
           June 30, 2002).
10.25      Merchant Agreement between eAcceleration Corp. and Merchant
           e-Solutions (Incorporated by reference to Exhibit 10.1 to the
           Company's quarterly report on Form 10-QSB for the quarter ended
           September 30, 2002).
10.26      Letter Agreement dated August 5, 2002 between Finn Hill Partnership
           and Acceleration Software International Corp.
10.27      Change in Terms Agreement, dated March 18, 2003 by Acceleration
           Software International Corporation in favor of American Marine Bank
           d/b/a Silverdale Bank.
10.28      Waiver agreement dated March 20, 2003 among Silverdale Bank,
           eAcceleration Corp. and Clinton L. Ballard.
21.1       List of Subsidiaries
23.1       Consent of Peterson Sullivan, PLLC
23.2       Consent of McKennon, Wilson & Morgan LLP
99.1       Certification of Chief Executive Officer of eAcceleration Corp.
           pursuant to 18 U.S.C.ss.1350.
99.2       Certification of Chief Financial Officer of eAcceleration Corp.
           pursuant to 18 U.S.C.ss.1350.

                                     - 36 -