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, 2001

[ ]  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 $.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) 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.  [X]

         State issuer's revenues for its most recent fiscal year: $3,233,559

         As of March 1, 2002, there were a total of 34,300,000 shares of the
issuer's common stock outstanding, all of which are owned by two of its
affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      NONE

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


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                               eACCELERATION CORP.

                              INDEX TO FORM 10-KSB

                                                                            Page

                                     PART I

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

Item 2.   Description of Property..........................................   13

Item 3.   Legal Proceedings................................................   14

Item 4.   Submission of Matters to a Vote of Security Holders..............   14

                                     PART II

Item 5.   Market for Common Equity and Related Stockholder Matters.........   14

Item 6.   Management's Discussion and Analysis.............................   14

Item 7.   Financial Statements.............................................   19

Item 8.   Changes In and Disagreements with Accountants on Accounting
            and Financial Disclosure.......................................   43

                                    PART III

Item 9.   Directors, Executive Officers, Promoters and Control Persons;
            Compliance with Section 16(a) of the Exchange Act..............   43

Item 10.  Executive Compensation...........................................   44

Item 11.  Security Ownership of Certain Beneficial Owners and Management...   46

Item 12.  Certain Relationships and Related Transactions...................   46

Item 13.  Exhibits List and Reports on Form 8-K............................   47


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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. 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.
While we continue to operate this marketing and advertising business in a
reduced manner, we are not actively pursuing this business in 2002 due to a
continuing decline in the online advertising industry. Currently, we are
developing a subscriber base for our "eAnthology" online subscription service as
an additional means of distributing some or all of our internally-produced
software.

         eAnthology is a one-stop online subscription service that provides a
myriad of computer applications to consumers. It is 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. eAnthology is not defined by any one
application, and its nature and content are expected to expand and evolve over
time as the needs of our users change. We are constantly responding to the needs
of the consumer market, and eAnthology is designed to meet that demand.

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

HISTORY

         We were initially incorporated in February 1987 as Ballard Synergy
Corporation, a Nevada corporation,

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merged with a Washington corporation in June 1995, and changed our name to
Acceleration Software International Corporation 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 with only a few users 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 to compensate for declining advertising revenues. The
service developed into our eAnthology subscription service in late 2001. We are
constantly changing the offerings on eAnthology to meet the changing needs of an
ever-increasing online population in the United States and abroad.


PRODUCTS AND SERVICES

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

         - selling online subscription services;
         - licensing to Sourcenext Corporation for distribution in Japan; and
         - offering free downloads supported by online advertising.

         The 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.

         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.

         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 two patents and one
additional patent with respect to this product has been allowed but not yet
issued.

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         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 transformer 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.

         -    DEFENDER - this transformer blocks the receipt of unwanted email
              before it gets to the user's inbox, including viruses, spam, and
              large undesirable attachments, among other items. It also scans
              for viruses and cures them in order to bring computers that are
              already infected to a virus-free condition.

         -    ENCRYPTOR - this transformer 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 transformer 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 transformers 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.

         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.

DISTRIBUTION METHODS

         ONLINE SUBSCRIPTION SERVICE: We are currently devoting substantial
resources towards developing an online subscription service that we are selling
directly to users over the Internet called "eAnthology." Through this service,
we license certain of our software titles referred to above to users for a
subscription fee that may vary depending on the level of service provided. It 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.

         Since eAnthology is made up of many different types of software, with
each type of software performing a unique function, it can be differentiated
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 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, all the components work together as an integrated
system. Furthermore, as we add more components, the functionality of the service
grows.

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         SOFTWARE LICENSING: Our licensing segment is primarily involved in
providing software products to our Japanese distribution client, Sourcenext
Corporation. Most of the products described above have been licensed to
Sourcenext for distribution exclusively in Japan. The current contract provides
for fixed monthly payments to us for such licensing rights and the ongoing
development by us of new products. 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 Sourcenext, 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 2001, the online advertising industry showed 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 dropped considerably, and we began to
invest our efforts in developing our eAnthology subscription service.

MARKET

         As the Internet continues to expand, the size of the market also
expands. We estimate that the potential market for possible subscribers
currently is approximately 100 million people worldwide. We believe there are
many more people using the Internet worldwide, approximately 500 million
according to research published by Nielsen//Netratings in their Fourth Quarter
2001 Global Internet Trends, which was announced in a recent press release.
However, we feel that 100 million represents people from countries with enough
income 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 one
service 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 market
based on the fast, safe, easy and fun features of eAnthology. As a result, 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 to our benefit, and promoting
our own service and product offerings via our own websites, through "pop-ups",
"pop-unders", and other advertising media purchased from third parties.

         We are attempting to reach 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. We believe that this group of
global Internet users is continually expanding. This view is supported by data
published by Nielsen//Netratings. 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:


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         FAST. In an era of microwave ovens and instant-everything, from food to
entertainment, 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 user's experience online.

         SAFE. The threat of viruses 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 believe that the majority of users we target on the Internet
are not technologically advanced, or 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
even experienced users would find value in enhancements that would 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 online
advertising, both internally-developed as well as purchased from third parties,
and to capture their attention, while we show them the benefits they may obtain
by subscribing to our service. Our approach is to "Underpromise and Overdeliver"
and we believe that this should create a very positive impression during the
free trial period on the user who was interested enough to subscribe to
eAnthology due to a single specific use and later finds out that it has many
other uses.

         The number and quality of product and service offers on our websites
are critical to our ability to attract and retain users of eAnthology, and
thereby increase revenues. We expect to implement offering expansion through a
combination of internal software development, licensing components and software
from third parties and possibly offerings from third parties.

SALES

         Over the next few years, our goal with respect to our eAnthology online
subscription service is to obtain a small percentage of the total active online
population worldwide by promoting the service through online advertising,
although there can be no assurance that we will achieve such amount of
subscribers. We believe that we will be able to keep our expenses relating to
the subscription service relatively low due to our customized business
structure, in which the vast majority of fixed development and distribution
costs for the components of the subscription service are already covered by our
existing expense structure, which enables our projected eAnthology subscription
revenues to yield high gross profit margins.

         Our primary sales strategy with respect to eAnthology is to sell our
services directly to the consumer. We currently sell our services to Internet
users worldwide, and utilize seventeen employees to deliver and maintain our
Internet services and product offerings. Of these, five are dedicated full-time
and one part-time to customer service.

COMPETITION

         We believe that because eAnthology is a "complete product line"
service, it is 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 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 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 have 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 combined components

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will set us apart from the single-component producers. We are pricing the full
eAnthology service 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 standalone basis in each identified consumer submarket. Due to our
technological adeptness and 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.

CLIENTS

         During 2001, our advertising and marketing clients, together with our
software licensing client, contributed a vast majority of our revenues. Less
than 0.1% of our total revenues came from our eAnthology subscription service,
and no one client contributed 10% or more of our online subscription revenues.

         In 2000, our three largest Internet advertising and marketing clients
accounted for 42% of our Internet advertising and marketing revenues and 33% of
total revenue. In 2001, our two largest Internet advertising and marketing
clients accounted for 41% of our Internet advertising and marketing revenue and
21% of total revenue. Throughout 2001, we provided advertising services to
approximately 60 Internet advertising and marketing clients.

         With respect to software licensing revenues, in 2000, Pointe Control
accounted for 39%, and Sourcenext, the beneficiary of the PointeControl
agreement and the successor to Pointe Control as our licensing client in Japan,
accounted for 61% of our licensing revenue for the year. Pointe Control also
accounted for 11% of our total revenues while Sourcenext accounted for 17% of
our total revenues. In 2001, we did no business with Pointe Control; Sourcenext
accounted for 100% of our licensing revenue throughout the year, and for 49% of
our total revenues.

FOREIGN OPERATIONS

         In 2001, a major portion of our foreign revenues were derived from our
agreement with Sourcenext Corporation. We granted Sourcenext 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 on delivery of the products to Sourcenext. This agreement has been
superceded subsequent to 2001 with a new contract with Sourcenext, with new
payment terms. See Note 15 to the Consolidated Financial Statements contained in
Part II of this Form 10-KSB for details.

         Our revenue from non-U.S. clients other than Sourcenext 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, 2001, revenue
from non-Sourcenext foreign sources still accounted for under 10% of total
revenue. We typically demand payment in advance from non-U.S. clients.

SUPPLIERS

         During 2000 and 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 2000, two
advertising vendors, Engage Media and MusicVision, Inc. accounted for 25% and
15%, respectively, of our total Internet media purchases. In 2001, five
advertising vendors, 24/7 Media, Audiogalaxy, Engage Media, Uproar Inc., and
Music Vision Inc., accounted for 35%, 24%, 14%, 12%, and 12%, of our total
Internet media

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purchases, respectively. With the downturn in the online advertising industry,
many of these suppliers have reported significant financial losses and may not
continue operations in the long term. Therefore, we have lessened our degree of
dependence on these suppliers and have turned our focus toward the development
of the eAnthology online subscription.

         Several of the components of the eAnthology subscription utilize
programs or code sections that are licensed under contracts from third parties.
Some of the licenses require payment of royalty fees for the use of the program
or code. We do not believe that any individual license from these suppliers is
material to us, or to the operation of the eAnthology subscription service, and
we believe that all these licenses are substitutable.

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 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, Oracle
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 Oracle databases and other information on a regular
basis.

         Our network servers are housed at three separate geographic locations.
We believe that each data center 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
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 the 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

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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,
a number of initiatives pending in Congress and state legislatures 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 operation.

         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 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 operating results.

INTELLECTUAL PROPERTY

         We regard our 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 fifteen United States patents and 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 servicemarks. However, effective trademark, servicemark, copyright and
trade secret protection may not be available in every country in which our
products and services are made available online. We generally

                                     - 10 -

<PAGE>


rely on common law copyright protection, and do not generally register our
copyrights.

         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, we cannot assure you 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
regulations governing domain names and laws protecting trademarks, servicemarks,
and similar intellectual property rights is unclear. Therefore, we could be
unable to prevent third parties from acquiring domain names that infringe on or
otherwise decrease the value of our trademarks, servicemarks, and other
proprietary rights. Additionally, there may be online companies in other
countries using domain names that potentially infringe on our trademarks or
servicemarks. We may be unable to prevent them from using these domain names,
and this use may decrease the value of our trademarks or servicemarks and our
brand names.

         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 online subscription service. The
reputation of our brand names will 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. Negative experiences of users or
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 March 1, 2002, we had a total of 48 employees, three of which
work for us part time. Nineteen employees work in online services, one of which
is part-time; 22 in software development, two of which work part time; and seven
in operations and administration. None of our employees are represented by
unions, and we consider relations with our employees to be good.


                                     - 11 -

<PAGE>


RISK FACTORS

         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 Sourcenext Corporation for a significant portion of the cash flow required
for our daily operations. Either party can terminate this contract after May 31,
2002 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. Furthermore, 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 an additional 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 such a 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.

         The eAnthology subscription 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 significant 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.

         We currently owe the principal amount of $275,000 plus accrued interest
to a local bank under a promissory note which is payable upon maturity in June
2002. Although the promissory note provides for renewals of the loan at the
discretion of the bank, there is no assurance that the bank will renew this
loan. Additionally, under the promissory note, if the bank believes that the
prospect of payment under the note is impaired, they can declare a default and
demand immediate repayment. Furthermore, we borrowed money from, and made
repayments to, our two stockholders without the bank's written consent as
required by our agreements with the bank. In spite of this violation of the loan
provisions and our liquidity deficiencies, the bank has chosen not to exercise
its rights,

                                     - 12 -

<PAGE>



including making a demand for payment on the entire balance of our loans;
however, we cannot guarantee that the bank will not demand payment in full of
our loans or deny extension of the loan, particularly if we continue to
experience negative cash flow from operations. Finally, the bank has informed us
verbally that it will not renew this loan unless we repay at least $10,000 of
the principal amount by the June 2002 renewal date. There can be no assurance
that we will be able to make this payment by June 2002. We do not believe that
we will have sufficient cash to repay the loan if it comes due in or prior to
June 2002.

         WE MAY BE UNSUCCESSFUL IN OBTAINING ADDITIONAL CAPITAL.

         As of December 31, 2001, we had a working capital deficit of
$(752,895). Since November 2001, our two stockholders have loaned us $404,000 to
meet current operating expenses under several long-term notes and made a capital
contribution of $40,000. If we require additional funds for operations, we
believe that our stockholders will provide additional funding, if we are unable
to obtain financing independently. However, there is no assurance that such
additional funding from our stockholders will be available when needed,
particularly as a result of our covenants with our bank that restrict our
ability to incur additional debt. 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 Sourcenext, will continue to be
acceptable to Japanese users.

         WE HAVE INCURRED LOSSES IN 2000 AND 2001, AND THERE IS NO ASSURANCE
THAT WE WILL BECOME PROFITABLE AGAIN.

         We have been unprofitable during 2000 and 2001 and may continue to
incur operating losses for the foreseeable future. During 2001 and 2000, we had
net losses of $(753,176) and $(1,374,564), 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 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 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,
2001, the rent was $8,746 per month.  The remainder of the payments under the
lease are scheduled to increase by $.30 per square foot per 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.


                                     - 13 -

<PAGE>


         We also are leasing a 4,500 square foot facility in Poulsbo,
Washington, pursuant to an agreement that expires in the year 2004. This lease
requires monthly payments of $1,874. In order to reduce our fixed operating
expenses in a declining online advertising market, we vacated the premises and
have been negotiating with the landlord to be released from the remainder of
this lease. The landlord has verbally agreed to release our obligation under the
lease provided a replacement tenant or sub-lessee can be found. To date, we have
not found a replacement tenant nor sub-lessee and are still bound by this lease.

         We believe these presently-leased facilities are adequately covered by
insurance, but there can be no assurance that there will not be any claim or
claims in 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.

         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.

         On November 20, 2001, our two stockholders re-elected all members of
our board of directors, Clint Ballard, Diana T. Ballard, Edward P. Swain, Jr.
and William E. Hoke, by unanimous written consent to hold office until the next
annual meeting of stockholders and until their respective successors are elected
and qualified.


                                     PART II

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

(A)      MARKET INFORMATION

         All of our outstanding shares of common stock are owned by Clint
Ballard and Diana T. Ballard.  There is no public market for these shares.

(B)      RECENT SALES OF UNREGISTERED SECURITIES

         None.

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 via a distributor in Japan. 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.
While we continue to operate the Internet marketing or advertising business in a
reduced manner, we are not actively pursuing this business in 2002 due to a
continuing decline in the online advertising industry. Currently, we are
developing a subscriber base for our "eAnthology" online subscription service as
an additional means of distributing some or all of our internally-produced
software.

                                     - 14 -

<PAGE>


         eAnthology is a one-stop online subscription service that provides a
myriad of computer applications to consumers. It is 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. eAnthology is not defined by any one
application, and its nature and content are expected to expand and evolve over
time as the needs of our users change. We are constantly responding to the needs
of the consumer market, and eAnthology is designed to meet that demand.

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

         Note that certain reclassifications have been made to the year 2000
information to conform to the current year presentation. Such reclassifications
had no effect on net income or stockholders' deficit.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001

REVENUES

         Our revenues decreased $4,441,187, or 58%, from $7,674,746 during 2000,
to $3,233,559 during 2001, primarily due to a decrease of $4,430,734, or 73%, in
our Internet advertising and marketing revenues to $1,658,559 in 2001 from
$6,089,293 in 2000. This decrease is due mainly to the sharp decline in the
online advertising market, which commenced in the fourth quarter of 2000 and
still continues, and which caused many Internet-related businesses, including
many of our former clients, to cease operations. As a result, there are
significantly fewer companies purchasing online advertising in the industry, and
demand for online advertising has fallen significantly below previous levels.
Further, in response to these "dot-com" failures, we have tightened our
credit-granting policies, which has caused some companies to become ineligible
to purchase on credit from us.

         Our Internet advertising and marketing revenues included an immaterial
amount, under 0.1% of total revenues, of eAnthology subscription revenue for the
year 2001. For the year 2000, no such subscription revenue was recognized, as we
did not commence selling the service as such until late in 2001.

         Revenues from software licensing decreased $10,453, or less than 1%,
from $1,585,453 during 2000 to $1,575,000 during 2001. Software license revenues
were derived from a distribution agreement with Pointe Control in Japan during
the first two quarters of 2000. During the remainder of 2000 and throughout
2001, we recognized software license revenues in Japan from our distribution
agreement with Sourcenext Corporation. Under our agreement with Sourcenext, in
addition to 24 consecutive monthly payments of $75,000, we receive during such
24-month period $75,000 for each of the 24 products that we deliver under the
terms of the agreement. As of December 31, 2001, we had delivered 15 products
under this agreement. See the discussion regarding our new Agreement with
Sourcenext under "Liquidity and Capital Resources."

COST OF INTERNET REVENUES

         Our cost of Internet revenues decreased by $3,717,535, or 66%, from
$5,618,173 during 2000 to $1,900,638 during 2001, primarily due to lower demand
for online advertising industry-wide. Due to this slowdown in the online
advertising industry, we have reduced our advertising expenditures accordingly,
to compensate for reduced revenues. Nonetheless, our Internet costs were 115%
of Internet revenues in 2001.  Our Internet advertising expenses incurred
in 2000 were $4,490,598 and decreased by $3,707,283, or 83%, to $783,315 in
2001.


                                     - 15 -

<PAGE>


COST OF LICENSING REVENUES

         Our cost of licensing revenues increased by $94,762, or 8%, from
$1,255,246 during 2000 to $1,350,008 in 2001, due to increases in Internet
bandwidth costs and salary expenses, offset by a reduction in the use of outside
software testers.  Our licensing costs were 86% of licensing revenues in 2001.

GENERAL AND ADMINISTRATIVE EXPENSES

         Excluding bad debt expenses and legal and accounting expenses, such as
expenses relating to our cancelled initial public offering, general and
administrative expenses decreased $27,824 or 3%, from $842,269 in 2000 to
$814,445 in 2001. This decrease is due to several factors, including a decrease
in consulting expense due to certain payments made to our former chief financial
officer in 2000 which were not incurred in 2001, a decrease in depreciation
expense due to assets retired in 2000, and a decrease in director and officer
insurance due to cancellation of the policy in 2001, partially offset by
increases in administrative salary and wages expenses.

         Bad debt expense decreased by $656,485 from $546,112 in 2000 to net
recoveries of $(110,373) in 2001, which was attributable to several factors:
declining online advertising prices, which caused receivable balances and their
related reserves to drop; fewer companies remaining in the online advertising
industry, more conservative credit policies and therefore fewer customers
purchasing on credit; and recoveries on accounts receivable that were written
off at the end of 2000.  During 2001, we received recoveries on previously-
written-off accounts totaling $259,790, which amount was recorded as a reduction
to bad debt expense, net of provisions for doubtful accounts of $149,418.

         Legal and accounting expenses, together with expenses relating to our
cancelled IPO, decreased $472,700 or 63% from $747,376 in 2000 to $274,676 in
2001, primarily due to our decision to cancel our initial public offering in
December 2000. A large part of the legal and accounting expenses incurred in
2000 were for the preparation of our registration statement and related offering
documents and were therefore not incurred in 2001.

         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 2000 or 2001. Options issued to non-employees are valued based on
the "Black-Scholes" valuation model that considers volatility and other factors.
Accordingly, we recorded $145,868 and $85,486 of compensation expense during
2000 and 2001, respectively, as a result of compensatory stock options issued to
non-employees.  This reduction is primarily due to cancellations of options
during the first and second quarter of 2001.

LIQUIDITY AND CAPITAL RESOURCES

GOING CONCERN

         We experienced net losses during the years ended December 31, 2000 and
2001 in the amounts of $(1,374,564) and $(753,176) respectively. As of December
31, 2001, we had cash of $121,031, a stockholders' deficit of $(821,339), and
a working capital deficit of $(752,895). Throughout 2001, we did not generate
sufficient cash flows from operations to support our business, but rather relied
on funds provided by our stockholders and bank financings to continue in
business. Our independant auditors have included an explanatory paragraph in its
audit report which raises substantial doubt about the Company's 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. We expect to reduce our losses in the future by
generating revenues from our eAnthology online subscription service. There can
be no assurance, however, that we will recognize significant revenues from such
subscription service or that we will not continue to incur losses in the future.

                                     - 16 -

<PAGE>


         We have taken a number of measures to curb or offset our negative cash
flow from operations. These measures include:

-        SETTLEMENTS WITH OUR LARGEST CUSTOMERS. We have entered into verbal
         agreements with some our largest customers who owe us material balances
         in an attempt to collect a discounted portion of the total amounts owed
         to us. These actions, along with more conservative credit-granting
         policies and aggressive collection efforts, are designed to maximize
         the amount of cash collected on our receivables. We recovered $259,790
         in previously-written-off receivables in 2001. There is no assurance,
         however, that we will collect more of our outstanding receivables with
         these measures in place in the future.

-        SETTLEMENTS WITH OUR LARGEST VENDORS. We have entered into several
         written settlement and release agreements with some of our largest
         vendors in order to significantly reduce the amounts payable to these
         vendors. To date, we have recorded $312,443 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.

-        DEVELOPMENT OF THE EANTHOLOGY ONLINE SUBSCRIBER BASE. We are developing
         a subscriber base for our eAnthology subscription service as an
         additional 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 such a 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.

-        NEGOTIATION OF A NEW CONTRACT WITH OUR JAPANESE DISTRIBUTOR.  In
         January 2001, we entered into a new distribution contract with
         Sourcenext, our Japanese distributor, in which payments are made
         monthly for a fixed amount of $150,000, rather than a significant
         portion of the payments being dependent on the completion of products.
         If we are successful in producing products to the satisfaction of
         Sourcenext under this contract, it could provide a significant portion
         of the cash flows required for daily operations on a more
         consistent basis; however, there is no assurance that we will be able
         to produce software for our Japanese distributor as required by this
         contract.  If either party terminates this contract, there would be a
         material adverse effect on our financial positions, results of
         operations and cash flows.

-        STOCKHOLDER FINANCING. To date, our two stockholders have loaned us an
         aggregate of $404,000 to meet current operating expenses under several
         promissory notes, and have made a capital contribution of $40,000. If
         we require additional funds for operations, we believe that our
         stockholders will provide additional funding, if we are unable to
         obtain financing independently. However, there is no assurance that
         such additional funding from our 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 at 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. Under the related short-term promissory note, the outstanding
principal accrues interest at an annual rate of 8.5%. On December 13, 2001, the
bank renewed this note payable, extended the maturity date to June 15, 2002, and
removed the demand payment provision. The note requires monthly payments of
interest accrued, 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. Upon an event of default, including the failure to pay the loan at
maturity, the bank may, at its option, increase the interest rate on the loan by
five percentage points. The note requires us to comply with various 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.
The note is

                                     - 17 -

<PAGE>


secured by the assets of ASIC and our assets, and is personally guaranteed by
our two stockholders. We utilized the amount borrowed under this note for
working capital.

         During November and December 2001, and January 2002, we borrowed an
aggregate of $404,000 from our two stockholders under various promissory notes
to provide us with additional working capital. 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. In order to remedy this covenant violation, our
stockholders were required to sign a subordination letter with respect to these
notes, which specified that the stockholders' notes would hold secondary
priority in the event of the liquidation or dissolution of our company. The
subordination letter also specified that the bank reserves the right to restrict
repayments of interest and principal on debts owed to our stockholders, if, in
the opinion of the bank, such repayments to our stockholders would jeopardize
our ability to service our debt to the bank, and may require us to obtain the
bank's written consent in order to make repayments on such debts to our
stockholders.

         As of December 31, 2001, we were in default under the bank loan as we
borrowed from, and made payments to, our two stockholders without the consent of
the bank; however, the bank has chosen not to make demand for payment on the
balance of our loans at this time and has not increased the interest rate on the
loan, and following the execution of the subordination letter, we were no longer
in default under the bank loan. The bank has, however, verbally required that
we pay down $10,000 of principal at the next renewal date of our short-term note
payable with the bank referred to above, which date is June 15, 2002. The entire
balance of the short-term note payable has been classified in the current
liabilities section of the balance sheet. The notes payable to stockholders have
been classified in the long-term liabilities section of the balance sheet, as it
is the intention of our stockholders to not seek repayment on these notes within
the current period.

         In February 2002, we borrowed $52,500 from the local bank referred to
above to fund the purchase of certain computer equipment in connection with the
development of our eAnthology online subscription service. 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 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. The loan is secured by substantially all our assets and
is personally guaranteed by our two stockholders.

         In March 2002, our two stockholders contributed $40,000 of additional
paid-in capital in the form of cash. This capital contribution was utilized for
working capital.

INCOME TAXES AND S-CORPORATION STATUS

         During the periods presented, 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. At present, the
State of Washington does not impose income taxes on corporations but does impose
a business and occupation tax on corporations conducting business in the State
of Washington.  If our number of stockholders grows to 75 or greater, our
S-corporation status will cease.  Additionally, our stockholders may elect to
change our tax status at an earlier date.

         In connection with our distribution agreement with Sourcenext
Corporation, our Japanese client, 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 from Sourcenext. Currently, under our
S-corporation status, these payments are not considered deductible expenses for
income tax purposes, as we are not subject to income tax; rather, the expenses
flow through to our stockholders' personal income tax returns. We report these
amounts as "general and administrative" expenses.

INFLATION

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

                                     - 18 -

<PAGE>

         In the past 24 months, the Internet advertising industry has undergone
a severe decline in demand for advertising space and in the prices of online
advertisements. Management cannot reasonably estimate precisely how much the
industry has declined, nor how much of the industry's decline is due to
such decrease in volume or to such deflation in prices, nor can management
predict if or when these declines will reverse.

ITEM 7.  FINANCIAL STATEMENTS.

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



Independent Auditors' Report................................................  20

Consolidated Financial Statements:

     Consolidated Balance Sheet at December 31, 2001........................  21

     Consolidated Statements of Operations for the Years Ended
       December 31, 2000 and December 31, 2001 .............................  22

     Consolidated Statements of Stockholders' Equity (Deficit)
       for the Years Ended December 31, 2000 and December 31, 2001..........  23

     Consolidated Statements of Cash Flows for the Years Ended
       December 31, 2000 and December 31, 2001..............................  24

     Notes to Consolidated Financial Statements.............................  26



                                     - 19 -

<PAGE>


                          INDEPENDENT AUDITORS' REPORT


Board of Directors
eAcceleration Corp.

We have audited the accompanying consolidated balance sheet of eAcceleration
Corp., and its subsidiary Acceleration Software International Corporation (the
"Company"), as of December 31, 2001, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the years
in the two-year period 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 audits.

We conducted our audits 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 audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of eAcceleration Corp.,
and subsidiary, as of December 31, 2001, and the results of their operations and
their cash flows for each of the years in the two-year period 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 16 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 16.
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



                                     - 20 -

<PAGE>


                               eACCELERATION CORP.

                           CONSOLIDATED BALANCE SHEET


                                     ASSETS
<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                                      2001
                                                                                  ------------
<S>                                                                               <C>
Current assets:
    Cash                                                                          $   121,031
    Accounts receivable, net of allowance for doubtful
        accounts of $149,035                                                           99,121
                                                                                  ------------
         Total current assets                                                         220,152

Property and equipment, net (Note 3)                                                   75,406
Patents and trademarks, net (Note 4)                                                   72,550
Other assets                                                                            8,600
                                                                                  ------------

                                                                                  $   376,708
                                                                                  ============

                      LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
    Accounts payable                                                              $   526,894
    Accrued liabilities                                                               171,153
    Short-term note payable (Note 6)                                                  275,000
                                                                                  ------------
       Total current liabilities                                                      973,047
                                                                                  ------------

Notes payable to stockholders (Note 7)                                                225,000
                                                                                  ------------

    Total liabilities                                                               1,198,047
                                                                                  ------------

Commitments and contingencies (Note 8)                                                   -

Stockholders' deficit (Note 10 and 11):
    Common stock, par value $.0001; 100,000,000 shares authorized;
         34,300,000 shares issued and outstanding                                       3,430
    Additional paid-in capital                                                        685,559
    Accumulated deficit                                                            (1,510,328)
                                                                                  ------------
       Total stockholders' deficit                                                   (821,339)
                                                                                  ------------

                                                                                  $   376,708
                                                                                  ============
</TABLE>


       See accompanying notes to these consolidated financial statements.

                                     - 21 -

<PAGE>


                               eACCELERATION CORP.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                       ------------------------------
                                                                            2000             2001
                                                                       -------------    -------------
<S>                                                                    <C>             <C>
Revenues:
     Internet                                                          $  6,089,293    $   1,658,559
     Licensing                                                            1,585,453        1,575,000
                                                                       -------------    -------------
                                                                          7,674,746        3,233,559
                                                                       -------------    -------------

Cost of revenues:
     Cost of internet revenues                                            5,618,173        1,900,638
     Cost of licensing revenues                                           1,255,246        1,350,008
                                                                       -------------    -------------
                                                                          6,873,419        3,250,646
                                                                       -------------    -------------

     Gross profit                                                           801,327          (17,087)
                                                                       -------------    -------------

General and administrative expenses                                       2,135,757          978,748
                                                                       -------------    -------------

Loss from operations                                                     (1,334,430)        (995,835)
                                                                       -------------    -------------

Other income (expense):
     Interest income                                                         11,675              675
     Interest expense                                                        (6,809)         (15,465)
     Impairment of investment (Note 14)                                     (45,000)         (40,000)
     Loss on sublease (Note 8)                                                 -             (14,994)
                                                                       -------------    -------------
                                                                            (40,134)         (69,784)
                                                                       -------------    -------------

Loss before extraordinary item                                           (1,374,564)      (1,065,619)

Extraordinary item-gain on settlements of accounts payable (Note 9)            -             312,443
                                                                       -------------    -------------

Net loss                                                               $ (1,374,564)    $   (753,176)
                                                                       =============    =============
Basic and diluted per-share information:

     Loss before extraordinary item                                    $      (0.04)    $      (0.03)
     Extraordinary item                                                        -                0.01
                                                                       -------------    -------------
     Net loss                                                          $      (0.04)    $      (0.02)
                                                                       =============    =============

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




       See accompanying notes to these consolidated financial statements.


                                     - 22 -

<PAGE>


                               eACCELERATION CORP.

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>

                                                                                    Retained
                                         Common Stock              Additional       Earnings       Stockholders'
                               -------------------------------      Paid-in       (Accumulated        Equity
                                  Shares             Amount         Capital          Deficit)        (Deficit)
                               ------------       -----------     ------------    -------------    -------------
<S>                             <C>               <C>             <C>             <C>              <C>
Balances, January 1, 2000       34,300,000        $    3,430      $   350,205     $    630,714     $    984,349

Value of stock options vested         -                 -             145,868             -             145,868

Distributions to stockholders         -                 -                -              (1,362)          (1,362)

Value of officer's services           -                 -             104,000             -             104,000

Net loss                              -                 -                -          (1,374,564)      (1,374,564)
                               ------------       -----------     ------------    -------------    -------------

Balances, December 31, 2000     34,300,000             3,430          600,073         (745,212)        (141,709)

Value of stock options vested         -                 -              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)
                               ============       ===========     ============    =============    =============
</TABLE>









       See accompanying notes to these consolidated financial statements.


                                     - 23 -

<PAGE>


                               eACCELERATION CORP.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                           ------------------------------
                                                                               2000              2001
                                                                           ------------      ------------
<S>                                                                        <C>               <C>
Cash flows from operating activities:
     Net loss                                                              $(1,374,564)      $  (753,176)
     Adjustments to reconcile net loss to net cash
       provided by (used in) operating activities:
         Depreciation and amortization                                          92,995            70,590
         Write-off of deferred offering costs                                  654,417              -
         Bad debt expense, excluding recoveries on written-off accounts        546,112           149,418
         Write-off of long-term account receivable                                -               10,573
         Fair value of officer's services                                      104,000              -
         Value of stock options vested                                         145,868            85,486
         Impairment of investment                                               45,000            40,000
         Extraordinary gain on settlement of accounts payable                     -             (312,443)
         Other                                                                  42,295              -
         Changes in operating assets and liabilities:
              Accounts receivable                                             (704,365)          767,204
              Prepaid Insurance                                                   -               39,446
              Other current assets                                              92,326            11,092
              Accounts payable                                                 715,975          (547,717)
              Accrued liabilities                                              (31,339)           67,693
                                                                           ------------      ------------

Net cash provided by (used in) operating activities                            328,720          (371,834)
                                                                           ------------      ------------

Cash flows from investing activities:
     Purchases of equipment                                                    (93,033)           (3,823)
     Patent and trademark expenditures                                          (7,646)          (29,979)
     Investment in Contera                                                     (50,000)          (35,000)
     Other assets                                                               41,842              -
                                                                           ------------      ------------

Net cash used in investing activities                                         (108,837)          (68,802)
                                                                           ------------      ------------

Cash flows from financing activities:
     Deferred offering costs                                                  (117,826)            -
     Restricted cash (collected from) returned to
        subscribers in connection with initial public offering                (774,985)          774,985
     Increase in (reduction of) liability due to subscribers                   774,985          (774,985)
     Proceeds from short-term note payable                                        -              275,000
     Proceeds from notes payable to stockholder                                   -              225,000
     Payments on note payable - insurance                                      (79,571)             -
     Payments on long-term payable - legal                                        -             (277,000)
     Distributions to stockholders                                              (1,362)          (11,940)
                                                                           ------------      ------------

Net cash (used in) provided by financing activities                           (198,759)          211,060
                                                                           ------------      ------------

Net increase (decrease) in cash                                                 21,124          (229,576)

Cash at beginning of year                                                      329,483           350,607
                                                                           ------------      ------------

Cash at end of year                                                        $   350,607       $   121,031
                                                                           ============      ============
                                           (continued on following page)
</TABLE>

                                     - 24 -

<PAGE>


                               eACCELERATION CORP.

                CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                           ------------------------------
                                                                               2000              2001
                                                                           ------------      ------------
<S>                                                                        <C>               <C>

Supplemental disclosure of cash flow information-
     Cash paid during the period for:
         Interest                                                          $     6,809       $    19,198
                                                                           ============      ============

Non-cash investing activity:

Retirement of fully depreciated assets                                     $   207,897       $      -
                                                                           ============      ============
Non-cash financing activities:

Financing of a prepaid insurance policy                                    $   288,900       $      -
                                                                           ============      ============

Increase in accounts payable for deferred offering costs                   $   203,045       $      -
                                                                           ============      ============

Cancellation of prepaid insurance financed with a note payable             $      -          $   209,329
                                                                           ============      ============
</TABLE>









       See accompanying notes to these consolidated financial statements.


                                     - 25 -

<PAGE>


                               eACCELERATION CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND HISTORY

ORGANIZATION AND NATURE OF OPERATIONS

eAcceleration Corp., a Delaware corporation, (the "Company"), was incorporated
on November 1, 1999. At such time, the Company acquired 100% of the issued and
outstanding common stock of Acceleration Software International Corporation, a
Washington corporation ("ASIC"). ASIC was formed in June 1995 as Ballard Synergy
Corporation and immediately merged with Ballard Synergy Corporation, a Nevada
corporation ("Ballard"), and changed its name in 1996. Ballard was originally
incorporated in the state of Nevada in 1987. In connection with the Company's
acquisition of ASIC, the Company issued to its two stockholders one share for
every two shares of ASIC that was issued and outstanding at such time. This
acquisition of ASIC by the Company was accounted for at historical basis similar
to a pooling of interests since the companies were under common control.

The Company is a provider and licensor of proprietary software that is
distributed both through the Internet and via a distributor in Japan. In the
past, the Company 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. The Company is not actively pursuing this type of business in
2002 due to a continuing decline in the online advertising industry. Currently,
the Company is developing a subscriber base for its "eAnthology" subscription
service as an additional means of distributing some or all of its
internally-produced software.

eAnthology is a one-stop online subscription service that provides a myriad of
computer applications to consumers. It is composed of many different
applications, including the Company's 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. eAnthology is not defined by
any one application, and its nature and content is expected to expand and evolve
over time as the needs of the users change. The Company is constantly responding
to the needs of the consumer market, and eAnthology is designed to meet that
demand.

The Company also licenses localized versions of its software products for
distribution in Japan. Under the terms of the distribution agreements with its
Japanese distributor, Sourcenext Corporation, the Company granted Sourcenext an
unlimited license to sell the software in Japan. This does not materially affect
the Company's operations involved in offering software on its websites, either
free or as part of a subscription, because the Sourcenext license only applies
to localized, Japanese versions of the software, and not the English language
versions which are available on the Company's websites. Additionally, users in
Japan generally cannot run the English-language versions on their operating
systems.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All inter-company accounts have been
eliminated in consolidation.

REVENUE RECOGNITION

Revenues from license fees and from sales of software products to our software
distribution customer are recognized 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. The Company has an agreement with this software
distribution customer (see Note 5) which provides guaranteed fixed

                                     - 26 -

<PAGE>


                               eACCELERATION CORP.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

monthly payments as well as additional payments due upon completion of each
product. The Company records revenues under this contract monthly based on the
guaranteed payments, and the revenues for each software product are recorded
upon delivery. Management believes its revenue recognition policies are in
conformity with the American Institute of Certified Public Accountants'
Statement of Position ("SOP") 97-2, "Software Revenue Recognition." The
subsequent Statements of Position 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition," and 98-9, "Modification of
SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions"
currently do not apply to the Company's operations. See Note 15 for discussion
of a subsequent contract entered into with this customer.

Advertising revenues consist of web banner advertising, text links,
pop-ups/pop-unders, completion pages, dialog boxes and newsletters. A banner,
the most common form of advertisement on the web, directly links a user to the
advertiser's website or promotion through a box on the website which may be
transitory. A text link, consisting of an advertiser's position on the Company's
website, consists of a link to the advertiser's website which remains in a
designated position until the advertising position is removed from the website.
Pop-ups consist of a web page that pops open on top of another web page, keeping
the original page open underneath; a pop-under opens behind the current page,
and appears when the user closes the current page. Completion pages are those
generated by our website after a person completes a web-based signup (for
promotions, information, etc.). Dialog boxes are web pages that request some
type of response from a user, usually at the time a user registers for our
software, and advertising is included in these boxes. Newsletters are written by
members of the Company's staff, and the articles are interspersed with "ads"
containing links to our advertisers' sites. Revenues can be based on
impressions, click-throughs, sign-ups, registrations, commissions, or downloads,
and these revenues are recognized in the period in which users execute these
pre-defined actions.

The Company's subscription-based revenue from eAnthology online subscriptions is
subject to a 90 day, unconditional right of refund. In light of the Company's
limited historical experience with this, revenue from these subscriptions is
deferred and recognized when the refund right lapses, provided that all other
revenue recognition criteria have been met. At December 31, 2001, the Company's
subscription revenue was not significant and amounted to under 0.1% of total
revenue, as the Company did not commence selling the service as such until late
in December 2001. No such subscription revenue was earned in 2000. Management
believes its revenue recognition practices for subscription revenues are in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 48,
"Revenue Recognition when Right of Return Exists".

ADVERTISING COSTS

Advertising costs are expensed as incurred in accordance with the American
Institute of Certified Public Accountants' SOP 93-7, "Reporting on Advertising
Costs."

START UP COSTS

Start-up costs are expensed as incurred.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are expensed as incurred. In accordance with
SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed," all costs incurred prior to establishing technological
feasibility are expensed as research and development costs.


                                     - 27 -

<PAGE>


                               eACCELERATION CORP.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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. At
the time of retirement or other disposition of property and equipment, the cost
and accumulated depreciation are removed from the accounts and any resulting
gain or loss is reflected in operations.

SOFTWARE DEVELOPMENT COSTS

The provisions of SFAS No. 86, "Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed," state 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 available
to customers. The Company believes its current process for developing software
is essentially completed concurrent with the establishment of technological
feasibility and, as such, no costs have been capitalized to date.

WEB DEVELOPMENT COSTS

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." Specifically, web development 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 if management believes such costs are significant. The
Company's internal web-site development processes are relatively short-term in
nature, generally three months. Any capitalized costs are amortized on a
straight-line basis over a one-year period due to rapid changes in internet
technologies and the evolution of the Company's business. All maintenance and
enhancement costs are expensed as incurred.

PATENTS AND TRADEMARKS

Patents and trademarks are recorded at cost and are amortized using the
straight-line method over the estimated useful lives of the related assets
ranging from three to five years.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company currently accounts for impairment of long-lived assets under the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to Be Disposed Of." This statement requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount, or fair value less costs to
sell. At present, the Company reviews for impairment annually.  Beginning
January 1, 2002, the Company must adopt SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121.

                                     - 28 -

<PAGE>


                               eACCELERATION CORP.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company has financial instruments for which the fair value of the financial
instruments could be different than that recorded on a historical basis in the
accompanying balance sheet. The Company's financial instruments consist of
accounts receivable and accounts payable. The carrying amounts of the Company's
financial instruments generally approximate their fair values as of December 31,
2001.

EARNINGS PER SHARE

SFAS No. 128 requires dual presentation of basic EPS and diluted EPS on the face
of all income statements for all entities with complex capital structures. Basic
EPS is computed as net income divided by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur from common shares issuable through stock options, warrants and
other convertible securities. The table set forth below reconciles the
components of the basic net income per share calculation to the components of
the diluted net income per share calculation.
<TABLE>
<CAPTION>
                                                                           December 31,
                                                               --------------------------------
                                                                   2000                2001
                                                               ------------        ------------
        <S>                                                    <C>                 <C>
        Weighted average shares outstanding - basic             34,300,000          34,300,000
        Effect of dilutive stock options                             -                   -
                                                               ------------        ------------
        Weighted average shares outstanding - diluted           34,300,000          34,300,000
                                                               ============        ============
</TABLE>

Since the Company had a net loss for the years ended December 31, 2000 and 2001,
stock options have been excluded from the calculation of the weighted average
shares outstanding, as their effects are anti-dilutive. Had the Company shown
net income for the years ended December 31, 2000 and 2001, the dilutive effect
of the stock options would have been an additional 52,018 and 29,991 shares,
respectively.

INCOME TAXES

The Company elected to be taxed under Subchapter S of the Internal Revenue Code.
Accordingly, profits and losses are reflected in the individual income tax
returns of the stockholders. Income taxes are not material to the consolidated
financial statements. In addition, the net differences between the tax basis and
reported amounts of the Company's assets and liabilities are not significant.
Because of the Company's operating losses, no pro forma disclosure is deemed
applicable assuming the Company is taxed as a separate entity under C-corp
status. In the event the Company gains more than 75 stockholders, the Company
would be taxed as a separate entity. The Company currently has two stockholders.

RISKS, UNCERTAINTIES AND CONCENTRATIONS

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, at times, maintains cash balances at a certain financial
institution in excess of amounts insured by Federal agencies.

                                     - 29 -

<PAGE>


                               eACCELERATION CORP.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company provides credit in the normal course of business to clients
throughout the United States and in countries located in Europe, Asia, Oceania
and the Caribbean. The Company has a policy to perform credit evaluations on all
customers with significant orders. The Company does not obtain collateral with
which to secure its accounts receivable. The Company maintains reserves for
potential credit losses based upon the Company's historical experience related
to credit losses. See Note 12 for specific information about the Company's sales
and receivable concentrations.

RECLASSIFICATIONS

Certain reclassifications have been made to the 2000 condensed consolidated
financial statements and related notes to conform to the current year
presentation. These reclassifications had no effect on net loss or stockholders'
deficit.

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 revenues and expenses during the
reporting period. Actual results could materially differ from those estimates.

STOCK COMPENSATION

The Company accounts for employee stock options using the intrinsic method
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees," as interpreted by Financial Accounting Standards
Board ("FASB") Interpretation No. 44. The Company makes pro forma disclosures of
net income and earnings per share, as if the fair value method of accounting had
been applied. The Company accounts for stock options issued to non-employees
under the fair value method, using the Black-Scholes model to estimate the value
of these options. See Note 10 for disclosures relating to stock-based
compensation.

COMPREHENSIVE INCOME

The Company is required to report components of comprehensive income.
Comprehensive income includes net income, as well as certain non-shareholder
items that are reported directly within a separate component of stockholders'
equity and bypass net income. The Company has no items which give rise to
reporting comprehensive income.

DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

The Company is required to provide disclosures of financial and descriptive
information about its operating segments in annual and interim financial reports
issued to stockholders. An operating segment is defined as a component of an
enterprise that engages in business activities that generate revenue and incur
expense, whose operating results are reviewed by the chief operating
decision-maker in the determination of resource allocation and assessing
performance, and for which discrete financial information is available. See Note
12 for disclosures related to the Company's operating and geographic segments.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the FASB issued SFAS No. 141, "Business Combinations," which
eliminates the pooling method of


                                     - 30 -

<PAGE>


                               eACCELERATION CORP.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


accounting for business combinations initiated after June 30, 2001.  In
addition, SFAS No. 141 addresses the accounting for intangible assets and
goodwill acquired in a business combination.  This portion of SFAS No. 141 is
effective for business combinations completed after June 30, 2001.  The Company
does not expect SFAS No. 141 will have a material impact on the Company's
financial statements.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Intangible Assets,"
which revises the accounting for purchased goodwill and intangible assets. Under
SFAS No. 142, goodwill and intangible assets with indefinite lives will no
longer be amortized and will be tested for impairment at least annually. SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001, with
earlier adoption permitted. The Company does not expect SFAS No. 142 will have a
material impact on the Company's financial position or results of operations.

In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement provides accounting and reporting standards for
costs associated with the retirement of long-lived assets. This accounting
standard does not apply to the Company's current or intended operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement replaces SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." However, it retains the fundamental provisions of SFAS No. 121
for recognition and measurement of the impairment of long-lived assets to be
held and used, and for measurement of long-lived assets to be disposed of by
sale. This statement applies to all long-lived assets, including discontinued
operations, and replaces the provisions of APB Opinion No. 30, "Reporting
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business," for the disposal of segments of a business. This statement requires
that those long-lived assets be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. The Company will be required to adopt this statement no
later than January 1, 2002. The Company is currently assessing the impact of
this statement on its financial statements.

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consist of the following as of December 31, 2001:
<TABLE>
<CAPTION>
<S>                                                  <C>
Equipment                                            $   204,328
Furniture and fixtures                                     1,100
Vehicles                                                  40,935
                                                     ------------
                                                         246,363

Less accumulated depreciation                           (170,957)
                                                     ------------
                                                     $    75,406
                                                     ============
</TABLE>

During the years ended December 31, 2000 and 2001, depreciation expense totaled
$74,381 and $49,210, respectively.


                                     - 31 -

<PAGE>


                               eACCELERATION CORP.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 4 - PATENTS AND TRADEMARKS

Patents and trademarks consist of the following as of December 31, 2001:
<TABLE>
<CAPTION>
<S>                                             <C>
Patents                                         $   142,173
Trademarks                                            5,118
                                                ------------
                                                    147,291

Less accumulated amortization                       (74,741)
                                                ------------
                                                $    72,550
                                                ============
</TABLE>

During the years ended December 31, 2000 and 2001, amortization expense totaled
$18,614 and $21,380, respectively.

NOTE 5 - LONG-TERM CONTRACTS

SOURCENEXT CORPORATION

On May 26, 2000, the Company replaced its Pointe Control agreement with a
distribution agreement with Sourcenext Corporation, the beneficiary of the
Pointe Control agreement. This Sourcenext agreement provided for 24 guaranteed
consecutive monthly payments of $75,000 which began in June 2000. Under this
agreement, the Company received an additional $75,000 per product delivered by
the Company under the terms of the agreement, up to 24 such products, during the
same 24-month period.

The contract was to be renewable for a period of twelve months. Additionally,
the Sourcenext agreement provided for up to five bonus payments of $400,000 each
if sales of certain of the Company's software products were to reach "top
product" status. None of the Company's products achieved "top product" status
during 2001.

The Company recorded revenues based on the guaranteed payments of $75,000
monthly, with the revenues for each software product recorded upon delivery.
Software products are generally completed 90 to 180 days from commencement of
production. Although the Company may experience fluctuations in revenues quarter
to quarter, management believes that its revenue recognition policies are in
conformity with SOP 97-2, "Software Revenue Recognition." The Company delivered
nine titles during the year 2001. See also Note 15, Subsequent Events, for
discussion of a subsequent contract with Sourcenext Corporation.

NOTE 6 - SHORT-TERM NOTE PAYABLE

On June 21, 2001, the Company's subsidiary, ASIC, borrowed $275,000 from a local
bank, which was due to mature on December 15, 2001. On December 13, 2001, the
bank renewed this note payable, extended the maturity date to June 15, 2002, and
removed the demand payment provision. 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. Upon an event of default, including the failure
to pay the loan at maturity, the bank may, at its option, increase the interest
rate on the loan by five percentage points. The note requires the Company to
comply with various covenants, including production of quarterly financial
statements, an annual audit, assumption of no debt to any party without written
consent from the bank, and maintenance of insurance over the premises of the
business. The note is secured by the assets of ASIC and of the Company, and is
personally guaranteed by the Company's stockholders. The Company utilized the
amount borrowed under this note for working capital.


                                     - 32 -

<PAGE>


                               eACCELERATION CORP.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Subsequent to the signing of this note, the Company's two stockholders loaned
money to the Company under various notes payable in violation of a covenant not
to incur indebtedness under this note. In order to remedy the covenant
violation, the bank required the stockholders to sign a subordination letter
(the "Letter") regarding the amounts owed to them by the Company, and has
verbally required the Company to pay down $10,000 of principal on this note on
June 15, 2002, which is the next renewal date of the loan. The Bank has chosen
not to exercise its rights at this time to demand payment in full of the
principal or to increase the interest rate on the loan, as the default was
cured upon signing the Letter. The entire balance of the short-term note payable
has been classified in the current liabilities section of the balance sheet. See
Note 7 for additional information on the Letter.

NOTE 7 - NOTES PAYABLE TO STOCKHOLDERS

In November and December 2001, the Company borrowed an aggregate of $225,000
from the Company's two stockholders, under various promissory notes, to provide
additional liquidity for the Company and to be used for working capital. These
notes are payable on demand, and interest is payable monthly on the outstanding
balance at 10% per annum. The notes payable to stockholders have been classified
in the long-term liabilities section of the balance sheet, as it is the
intention of the stockholders to not seek repayment on these notes before
December 31, 2002. See also Note 15 - Subsequent Events.

The Company's stockholders have executed the Letter with the Company's bank,
which gives these unsecured notes payable second priority in the event of
liquidation or dissolution of the Company. The Letter was entered into in order
to satisfy the covenant contained in the bank loan agreement (see Notes 6 and
15) that prohibits assumption or creation of additional debt to any party
without written consent from the bank. The Letter also specified that the bank
reserved the right to restrict repayments of interest and principal on the debts
owed to our stockholders if, in the opinion of the bank, such repayments to our
stockholders would jeopardize our ability to service our debt to the bank and
may require the Company to obtain the bank's written consent in order to make
repayments on such debts to the stockholders.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

In 2001, the Company leased two facilities to house the Company's operations.

One of these leases was extended in February 1999 for an additional five-year
term, and expires in the year 2004. This lease requires monthly payments of
$1,874. In order to reduce the Company's fixed operating expenses in a declining
online advertising market, the Company vacated the premises and has been
negotiating with the landlord to be released from the remainder of this lease.
The landlord has verbally agreed to release the Company's obligation under the
lease provided a replacement tenant or sub-lessee can be found. To date, the
Company has not found a replacement tenant nor sub-lessee and is still bound by
this lease. The Company has recorded a loss of $14,994 in connection with the
expected sub-lease of this property.

In December 1999, the Company entered into a lease agreement with a four-year
term for a 10,000 square foot facility. The lease term commenced in February
2000 and required monthly payments of $7,643 for months one through four and
$8,492 for months five through twelve of the first year. The remainder of the
payments under the lease increase by $0.30 per square foot in February of each
year. As of December 31, 2001, the Company pays $8,746 per month. The Company
records rent expense for this facility on a straight-line basis over the life of
the lease, in accordance with SFAS No. 13, "Accounting for Leases." The Company
has the option of terminating the lease during the last two years of the lease
term by providing a six-month written notice to the landlord. In 2001, the
Company consolidated its operations at this location after vacating the location
discussed in the preceding paragraph.

                                     - 33 -

<PAGE>


                               eACCELERATION CORP.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company's future annual minimum lease payments under all non-cancelable
operating leases at December 31, 2001, are as follows:
<TABLE>
<CAPTION>

                           Year Ending
                          December 31,
                          -------------
                              <S>                       <C>
                              2002                      $    31,236
                              2003                           22,491
                              2004                           22,491
                              2005                            1,874
                                                        ------------
                                                        $    78,092
                                                        ============
</TABLE>
Total rent expense for the years ended December 31, 2000 and 2001 amounted to
$120,043 and $129,714, respectively.

LITIGATION

The Company is subject to a limited number of claims and actions that arise in
the ordinary course of business. 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. Management is unaware of any
matters that may have material impact on the Company's financial position,
results of operations, or cash flows.

EMPLOYMENT AND OTHER CONTRACTS

In July 1999, the Company entered into a consulting agreement with Millenium
Capital Quest for services consisting of financial public relations, corporate
structuring and marketing. The terms of the contract included, among other
requirements, a grant of options to purchase 34,300 shares of the Company's
common stock at an exercise price of $5.31. The options granted vest over five
years from the date of grant and their exercise is contingent on the closing of
an initial public offering. The agreement expired in 2000, but the options
associated with this contract expire on December 31, 2004.

In February 2000, the Company entered into a Severance, Settlement and General
Release agreement with Shane H. Traveller, the Company's former Chief Financial
Officer. Under this agreement, Mr. Traveller agreed to provide consulting
services to the Company in exchange for certain monetary payments, including a
payment of $22,300 if and when the Company's common stock becomes publicly
traded. Additionally, he retained options to purchase 10,000 shares of his
original 150,000 option grant. These options currently have an exercise price of
$5.31 per share, and will become vested and fully exercisable upon the Company's
common stock becoming publicly traded at some future date. Upon the vesting of
these options, the Company will record a charge to compensation expense in the
amount of $49,600 for the estimated fair value of the options. All of Mr.
Traveller's remaining options were cancelled.

On March 13, 2001, the Company amended its employment agreements with its two
stockholders. Each of these agreements is for a period of five years and each
provides compensation annually in the amount of $104,000 and a bonus based on
2.5% of earnings before income taxes, depreciation, amortization and
extraordinary items of the immediately preceding year. These agreements are not
yet effective. The amendments to these employment agreements provide for the
agreements to become effective upon the closing of a private placement of the
Company's securities with proceeds of at least $1 million or the commencement of
a public trading market for the Company's common stock.


                                     - 34 -

<PAGE>


                               eACCELERATION CORP.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9 - EXTRAORDINARY ITEM

During the 2001 third and fourth quarters, the Company negotiated with some of
its vendors to obtain settlements on an aggregate of $512,455 in balances owed
to these vendors. The vendors entered into written agreements with the Company
to settle the accounts at an average rate of 39 cents on the dollar, which
contributed significantly to easing the Company's cash flow burden. The total
gain recorded by the Company upon settling with these vendors equaled $312,443.
In accordance with SFAS No. 4, this gain is being reported as an extraordinary
item on the Company's statement of operations; however, no income tax effect for
this extraordinary item is reflected there, since the Company's income and
losses are included in the individual income tax returns of the Company's two
stockholders, as the Company has elected to be taxed as an S-corp. (Note 2). The
Company used cash from operations to satisfy the settlements.

NOTE 10 - STOCK-BASED COMPENSATION

COMMON STOCK PURCHASE OPTIONS

Substantially all stock options reported in these financial statements are
options granted by ASIC to purchase shares of common stock of ASIC, the
Company's wholly-owned subsidiary. Prior to these options becoming exercisable,
it is the Company's intention to enter into an arrangement, pursuant to a merger
with ASIC or otherwise, whereby it will exchange these options, so that
optionholders at such time will receive one option to purchase one share of the
Company's common stock for every option to purchase two shares of ASIC's common
stock, at twice the exercise price. All amounts reported in this annual report
on Form 10-KSB have been adjusted to reflect the assumed exchange of options.
Additionally, it is assumed that eAcceleration has assumed all ASIC obligations
with respect to these options and the underlying plan, unless otherwise
indicated.

In 1995, the Company adopted the 1995 Stock Option Plan (the "1995 Plan")
pursuant to which officers, directors and employees of the Company were eligible
to receive options to purchase common stock of the Company. Options to purchase
27,500 shares were granted at $0.70 per share, vested over four years and expire
ten years from the date of grant. As of December 31, 2001, the Company had
25,000 options outstanding and exercisable.

In June 1999, the Board of Directors of ASIC adopted the 1999 Stock Option Plan
(the "1999 Plan"). Under the 1999 Plan, as amended, the Company may issue up to
5,000,000 shares of common stock. The 1999 Plan is currently administered by the
Board of Directors of ASIC, which determines the terms and conditions of the
options granted, including exercise price, number of options granted and the
schedule of when the options become exercisable. Incentive stock options may
only be issued to employees and generally vest evenly over ten years from the
date of grant and may not, in any case, vest beyond ten years from the date of
grant. Non-qualified stock options issued to non-employees vest evenly and
become exercisable over a period of five years from the date of the grant.
Forfeitures are returned to the plan and become available for grant. Vesting of
the employee options and non-employee options can only be accelerated in the
event that there is a merger, consolidation or transfer of substantially all of
the assets of the Company, and the successor to such transaction does not assume
the obligations relating to the options. Incentive stock options have an
exercise price of no less than the estimated fair value of the underlying shares
of the Company's common stock at the date of grant and non-qualified stock
options have an exercise price of not less than 85% of the estimated fair value
of the underlying stock on the date of grant. The Company shall not issue any
options or warrants with an exercise price of less than 85% of fair value of the
underlying shares of its common stock on the date of the grant. The Board of
Directors established the estimated fair value of the Company's common stock as
of July 1, 1999, to be equal to the since-terminated initial public offering
price of $6.25 per share. During 2001, most of the options issued under this
plan were cancelled.


                                     - 35 -

<PAGE>


                               eACCELERATION CORP.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of December 31, 2001, under the 1999 Plan, the Company had an aggregate of
17,500 employee options, net of cancellations, outstanding, each of which
currently has an exercise price of $6.25 per share. The Company also had an
aggregate of 61,800 options issued to non-employees, net of cancellations,
outstanding, each of which currently has an exercise price of $5.31 per share.
Non-employees consist of consultants providing technical consulting services
relating to software testing, servers, bandwidth and programming, financial
public relations and marketing services. All non-employee grants, except those
issued to Millennium Capital Quest, were granted under the 1999 Plan and are
subject to the terms discussed above. See Note 8 for a discussion of the options
granted to Millenium Capital Quest and to the Company's former chief financial
officer.

Options to purchase an aggregate of 61,800 shares of common stock issued to
non-employees were valued based on the Black-Scholes valuation model. The fair
value of each option granted to non-employees is estimated on the date of grant
using the Black-Scholes model with the following weighted-average assumptions
for grants in 1999: no dividend yield, an expected volatility of 99%, a
risk-free interest rate of 6.0%, and an expected option life of five years.
Future annual aggregate compensation for non-employee stock options to be
charged to future operations over the remaining vesting period as of December
31, 2001, is as follows:
<TABLE>
<CAPTION>

                           Year Ending
                           December 31,
                           ------------
                               <S>                   <C>
                               2002                  $    51,386
                               2003                       51,386
                               2004                       25,328
                                                     ------------

                                                     $   128,100
                                                     ============
</TABLE>

Compensation charges during the years ended December 31, 2000 and 2001 were
$145,868 and $85,486, respectively.

Stock option activity under the 1995 Plan and 1999 Plan was as follows:
<TABLE>
<CAPTION>
                                                                   Weighted                             Weighted
                                                 Number             Average             Number          Average
                                               of Options          Exercise           of Options        Exercise
                                               Outstanding          Prices           Exercisable (1)     Prices
                                            ------------------------------------   --------------------------------
<S>                                         <C>             <C>    <C>             <C>                  <C>
Outstanding, January 1, 2000                      996,800          $   6.01               25,000        $   0.70

Options granted                                    10,000              5.31 (3)              -                -

Options cancelled                                (390,000)  (2)        6.06                  -                -
                                            --------------                         --------------

Outstanding, December 31, 2000                    616,800          $   5.72               25,000        $   0.70
                                            ==============                         ==============

Options granted                                     -                  -                   -                 -

Options cancelled                                (512,500)  (2)        6.00                -                 -
                                            --------------                         --------------

Outstanding, December 31, 2001                    104,300          $   4.36               25,000        $   0.70
                                            ==============                         ==============
--------------------------------
</TABLE>


                                     - 36 -

<PAGE>


                               eACCELERATION CORP.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


(1) The 1999 Plan provides that options vested under the Plan shall not be
exercisable until the occurrence of a Liquidity Event, i.e., a merger,
consolidation, or transfer of substantially all the assets of the Company, or
the closing of a public offering of the Company's stock with proceeds of at
least $10 million. Accordingly, none of the options vested under the 1999 Plan
are exercisable. As of December 31, 2001, of the 61,800 options outstanding with
an exercise price of $5.31, there were 20,720 options fully vested; of the
17,500 options outstanding with an exercise price of $6.25, there were 3,500
options fully vested. In total, the number of options vested amounted to 49,220,
with a total weighted average exercise price of $3.04.

(2) In 2000, all options cancelled were the result of employees terminating
their employment in the Company. In March and April 2001, four non-employees and
fifteen employees chose to voluntarily cancel their options to purchase 462,500
shares of common stock. Additionally, two employees, who held options to
purchase 50,000 shares, terminated their employment with the Company during the
year.

(3) The exercise price of these options was less than the market price of the
Company's common stock on the date of grant, which price was $6.25. This option
grant was done in accordance with the Company's policy of issuing non-qualified
stock options to non-employees with an exercise price of no less than 85% of the
market value of the underlying common stock at the date of grant.

The following table summarizes stock options outstanding at December 31, 2001:
<TABLE>
<CAPTION>
                                     Options Outstanding                                     Options Exercisable
                ----------------------------------------------------------------  ---------------------------------------
                                                                    Weighted                                 Weighted
   Exercise       Number Outstanding     Average Remaining           Average                                  Average
    Price           at December 31,       Contractual Life          Exercise       Number Exercisable        Exercise
  of Options            2001                  (Years)                Price       at December 31, 2001         Price
--------------    ------------------     ------------------     ----------------  --------------------    ---------------

<S>               <C>                          <C>                  <C>           <C>                         <C>
$     0.70                25,000               3.67                 $  0.70              25,000               $  0.70

$     5.31                61,800               3.50                 $  5.31                -     (1)          $  5.31

$     6.25                17,500               8.00                 $  6.25                -     (1)          $  6.25
                  ---------------                                                 --------------
                         104,300               4.81                 $  4.36              25,000               $  0.70
                  ===============                                                 ==============
--------------------
<FN>
(1) See footnote (1) above.
</FN>
</TABLE>

PRO FORMA DISCLOSURE

Had compensation cost for the Company's employee stock options been accounted
for using the fair value method of accountancy described by SFAS No. 123 (see
Note 2), the Company's reported net loss of $(1,374,564) and net loss per share
of $(0.04) for the year ended December 31, 2000, would have been increased to
$(1,567,674) and $(0.05) per share, respectively. For the year ended December
31, 2001, the Company reported a net loss of $(753,176) and a net loss per share
of $(0.02). Using the fair value method prescribed by SFAS No. 123 would have
increased the Company's net loss to $(761,786) and net loss per share would have
remained unchanged at $(0.02) per share. For purposes of this disclosure, the
fair value of each option granted to employees is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1999: no dividend yield, an expected volatility of
99%, a risk-free interest rate of 6.0%, and an expected option life of ten
years.

                                     - 37 -

<PAGE>


                               eACCELERATION CORP.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 11 - DISTRIBUTIONS TO STOCKHOLDERS

During 2001, the Company's two stockholders received distributions in the
aggregate amount of $11,940. During 2000, distributions to such stockholders
were made in the aggregate amount of $1,362.

NOTE 12 - SEGMENT DATA

The Company's operations in 2001 were divided into two primary segments,
internet advertising and software licensing.

The Company's internet advertising segment sells various forms of advertising to
other businesses in the form of banners, text links, pop-ups/pop-unders,
completion pages, dialog boxes and newsletter slots. The advertisements are
displayed to visitors to our websites who can respond to the ads online by
performing a pre-determined action, as well as download some of our
internally-produced software for free in exchange for viewing the
advertisements.

The Company's software licensing segment is primarily engaged in producing
software products for licensing to our Japanese software licensing customer,
Sourcenext.

Revenues from the Company's eAnthology online subscription were less than 0.1%
of total revenues for the years 2000 and 2001, and are included in the internet
advertising segment for purposes of this disclosure.

The following table pertains to the Company's operating segments:
<TABLE>
<CAPTION>
                                                                                                 Consolidated
Reported segments:                          Advertising         Licensing       Operations           Total
-----------------                           -----------         ----------      ----------       ------------
<S>                                         <C>                 <C>             <C>              <C>
Revenues:
December 31, 2000                           $ 6,089,293         1,585,453           -            $ 7,674,746
December 31, 2001                           $ 1,658,559         1,575,000           -            $ 3,233,559

Gross profit (loss):
December 31, 2000                           $   471,120           330,207           -            $   801,327
December 31, 2001                           $  (242,079)          224,992           -            $   (17,087)

Total assets:
December 31, 2000                           $ 1,014,201           172,916       1,423,002        $ 2,610,119
December 31, 2001                           $   146,421            88,234         142,053        $   376,708

Depreciation and amortization:
December 31, 2000                           $    46,432            18,424           9,525        $    74,381
December 31, 2001                           $    31,677            10,713           6,820        $    49,210

Additions to long-lived assets:
December 31, 2000                           $    56,513            28,812           7,708        $    93,033
December 31, 2001                           $     2,875              -                948        $     3,823

Extraordinary gain on settlement of debt:
December 31, 2001                           $   201,725              -            110,718        $   312,443
</TABLE>

                                     - 38 -

<PAGE>


                               eACCELERATION CORP.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

A reconciliation of total operating segment gross profit to total net loss
before extraordinary items for the years 2000 and 2001 is as follows:
<TABLE>
<CAPTION>
                                                                December 31,            December 31,
                                                                   2000                     2001
                                                              --------------          --------------
<S>                                                           <C>
Gross profit for reportable segments                          $     801,327           $      (17,087)
Corporate general and administrative expenses                    (2,135,757)                (978,748)
Other expense, net                                                   (40,134)                 (69,784)
                                                              --------------          ---------------
Loss before extraordinary items                               $  (1,374,564)          $   (1,065,619)
                                                              ==============          ===============
</TABLE>

The Company's geographic revenue information is based on the country in which
the sales originate, since all the Company's operations are located in the
United States of America. Following is a table that shows the origin of our
revenues for the years 2000 and 2001:
<TABLE>
<CAPTION>
                                                                               ALL OTHER      CONSOLIDATED
Geographic segments:                       U.S.               ASIA              FOREIGN          TOTAL
                                      -------------       -------------      -------------    ------------
<S>                                   <C>                 <C>                <C>              <C>
Revenues from external customers:
December 31, 2000                     $  5,615,882        $  2,029,575       $     29,289     $ 7,674,746
December 31, 2001                     $  1,457,530        $  1,690,146       $     85,883     $ 3,233,559
</TABLE>

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

SALES CONCENTRATION

During years ended December 31, 2000 and 2001, revenues from our largest Asian
clients accounted for approximately 28% and 49% of the Company's total revenues
respectively, and all of its software licensing revenues. See Note 5 and Note 15
for a discussion of the Company's contracts with these Asian clients.

During 2000, two Internet advertising and marketing clients, ProSTEP, Inc., and
Cool Savings, accounted for 15% and 10% of the Company's total revenues,
respectively, and 19% and 13% of the Company's Internet advertising revenues,
respectively. During 2001, one client, Investor's Business Daily, accounted for
11% of the Company's total revenue and for 22% of the Company's Internet
advertising revenue.

RECEIVABLES CONCENTRATION

As of December 31, 2000, three of the Company's Internet advertising clients had
receivable balances in excess of 10% of the Company's gross accounts receivable;
their aggregate balance at that date was $684,711, which constituted 59% of
gross accounts receivable.

As of December 31, 2001, one of the Company's Internet advertising clients had a
balance in excess of 10% of the Company's gross accounts receivable; its
aggregate balance at that date was $116,730, which constituted 47% of gross
accounts receivable. The Company has reserved 100% of the receivable from this
customer as uncollectible.

NOTE 13 - BAD DEBT EXPENSE

In 2000, the Company recognized a loss of $546,112 on advertising accounts
receivable that the Company deemed uncollectible, largely because of the
developments at that time in the online advertising industry, such as high rates
of failure of companies in the industry, declining revenues, and lack of demand.

                                     - 39 -

<PAGE>





                               eACCELERATION CORP.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

In the year 2001, the Company recognized bad debt expense on its advertising
accounts receivable in the amount of $149,418, for the same reasons described
above, as the decline in the online advertising industry continued. However, the
Company also recovered amounts owed to it from previously-written-off accounts
receivable in the amount of $259,790, amounts which were booked as reductions to
the bad debt expense account, and which offset the expense recognized for the
year.

NOTE 14 - IMPAIRMENT OF INVESTMENT

In October 2000, the Company entered into a securities purchase agreement with
Contera Corporation ("Contera"), whereby the Company purchased 10,000 shares of
Contera's common stock for $50,000, and received warrants to purchase 100,000
shares of Contera's common stock at an exercise price of $5.00 per share. The
Company received the right to purchase a second set of 10,000 shares of
Contera's common stock and a second set of warrants to purchase 100,000 shares
of Contera's common stock under the same terms and conditions as the initial
sale. In 2000, the Company impaired $45,000 of the original $50,000 investment
due to financial difficulties of Contera.

In 2001, the Company purchased an additional 7,000 shares of Contera common
stock for $35,000, and received warrants to purchase 70,000 shares of
Contera's common stock at $5.00 per share. The Company impaired the remainder of
the balance in the investment in 2001 due to financial difficulties experienced
by Contera and the death of a key member of Contera's management. The Company
does not expect to recover any of its investment in Contera.

NOTE 15 - SUBSEQUENT EVENTS

SOURCENEXT AGREEMENT

In January 2002, the Company entered into a new agreement with Sourcenext
Corporation, the exclusive distributor of the Company's products in Japan, which
replaced the previous agreement with Sourcenext that would have otherwise
expired in May 2002. This new contract, which was effective January 7, 2002,
supercedes the previous contract and states that all financial obligations to
either party under the previous contract have been deemed satisfied as of the
date of this agreement. This new agreement grants Sourcenext the exclusive right
to reproduce, display, license and sub-license to third parties in Japan, all
of the Company's intellectual and proprietary rights in its software products
produced under the contract in exchange for guaranteed, consecutive, monthly
payments of $150,000, from which a 10% tax is withheld by Sourcenext. The
monthly payments are payable in advance by the 7th of each month. The agreement
does not have a fixed termination date, but is cancelable by either party at any
time after May 31, 2002, by giving three months prior notice to the other party.

NOTES PAYABLE TO STOCKHOLDERS

In January 2002, the Company borrowed an additional $179,000 from the Company's
two stockholders, under two notes payable, to provide additional liquidity for
the Company and to be used for working capital. These two notes are covered by
the provisions of the Letter discussed in Note 7.

LONG-TERM LOAN FOR PURCHASE OF EQUIPMENT

In February 2002, the Company borrowed $52,500 from the local bank referred to
in Note 6 above to fund the purchase of certain computer equipment in connection
with the development of the Company's eAnthology online subscription service.
The loan accrues interest at 8.0%, matures on February 15, 2005, and is payable
in 36 equal monthly principal and interest installments of $1,645. The loan
agreement contains certain covenants, which are substantially the same as the
covenants contained in the loan agreement discussed in Note 6 above, including
the covenant forbidding assumption of debt to any party without written consent
from the bank, and the maintenance of insurance covering the aforementioned
computer equipment, as well as the rest of the Company's property. The loan

                                     - 40 -

<PAGE>

                               eACCELERATION CORP.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

is secured by substantially all the assets of the Company and is personally
guaranteed by the Company's two stockholders.

CAPITAL CONTRIBUTION

In March 2002, the Company's two stockholders contributed $40,000 of additional
paid-in capital to the Company in the form of cash. This capital contribution
was utilized for working capital.

ADOPTION OF 2002 EQUITY INCENTIVE PLAN

In March 2002, the Company's two stockholders approved the eAcceleration Corp.
2002 Equity Incentive Plan. Under the terms of the 2002 Equity Incentive Plan,
the Company's Board of Directors or a committee thereof may grant stock options,
stock bonuses, restricted stock, stock appreciation rights, performance grants
and other types of awards to employees, consultants and others who perform
services for the Company at such prices as may be determined by the Board of
Directors (which price may be no less than 85% of the fair market value of the
common stock on the date of grant in the case of nonqualified stock options).
The options will generally vest over a period of 10 years from the date of
grant. The maximum number of shares of common stock that initially may be issued
under the 2002 Equity Incentive Plan is 5,000,000.  No options or other awards
have been granted under this Plan.

NOTE 16 - GOING CONCERN AND LIQUIDITY

The Company experienced net losses during the years ended December 31, 2000 and
2001 in the amounts of $(1,374,564) and $(753,176) respectively, and as of
December 31, 2001, had a stockholders' deficiency and a working capital
deficiency of $(821,339) and $(752,895), respectively. Our accountants have
issued an explanatory paragraph which raises substantial doubt about the
Company's ability to continue as a going concern.

COMPANY'S PLANS

The Company believes that these losses are primarily attributable to the
significant decline in its advertising revenues, which is consistent with
the overall decline in online advertising prices and demand for those services
industry-wide. The Company expects to reduce its future losses by generating
revenues from the eAnthology online subscription service, but there is no
assurance that the revenue generated by the eAnthology service will be
sufficient to remedy the Company's cash flow deficiencies, or that the Company
will not continue to incur losses. The Company has utilized a number of measures
to curb or offset the negative cash flow from operations caused by the decline
in online advertising revenues. These measures include:

-    Development of the eAnthology online subscriber base as an additional means
     of distributing some or all of the internally-produced software for a fee;

-    Negotiation of a new contract with the Japanese distributor, Sourcenext,
     with whom the Company has agreed to continue licensing its products for
     distribution in Japan in exchange for fixed monthly payments of $150,000;

-    Settlements with the largest advertising customers, tighter credit-granting
     policies and aggressive collection efforts, in order to maximize the amount
     of cash collected on receivables;

-    Settlements with the largest vendors, especially advertising vendors to
     whom large, past-due balances are owed; and

-    Stockholder loans for an aggregate of $404,000 under several long-term
     notes payable, and capital contributions in the amount of $40,000, to meet
     current operating expenses.



                                    - 41 -

<PAGE>

                               eACCELERATION CORP.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


If the Company requires additional funds for operations, the Company believes
that its stockholders will provide additional funding, if it is unable to obtain
financing independently. However, there is no assurance that such additional
funding from the stockholders will be available when needed, especially in light
of restrictions on third-party borrowings imposed by the Company's agreements
with its bank.

In addition to the above, the Company borrowed $275,000 in June 2001 under a
promissory note from a local bank to use for working capital (see Note 6), and
recently borrowed $52,500 for purchases of equipment to support the eAnthology
online subscription (See Note 15). These two loans contain restrictive covenants
which affect the Company's ability to borrow money from third parties, including
stockholders (see Notes 6 and 7). There is no assurance that the measures taken
by the Company and described above will have a positive impact on the Company's
cash flow, financial position or results of operations.

NOTE 17- FOURTH QUARTER ADJUSTMENT

In March and April 2001, the Company cancelled certain stock options at
the election of the non-employee option holders. At the time of such
cancellations, the Company reversed all previously recorded expense from the
amortization of such options and did not record any expense for the three-month
periods ended March 31, 2001 or June 30, 2001, with respect to the cancelled
options.  At December 31, 2001, the Company recorded a charge to compensation
expense totaling $231,280 to appropriately reflect the effects in 2001 of the
cancellation of the options. Had the expense been recorded during the first
and second quarters, relevant disclosure in the statement of operations for
such periods would have been presented as follows:

<TABLE>
<CAPTION>
                                        AS ORIGINALLY
                                           REPORTED             AS CORRECTED
                                        -------------           ------------
THREE MONTHS ENDED MARCH 31, 2001
<S>                                     <C>                     <C>
Cost of internet revenues               $  629,966              $  689,448
Cost of licensing revenues              $  299,543              $  356,738
General and administrative              $  353,092              $  380,545
Loss from operations                    $   27,784              $ (116,346)
Net income (loss)                       $   27,673              $ (116,457)
Net income (loss) per share             $     -                 $     -

THREE MONTHS ENDED JUNE 30, 2001
Cost of internet revenues               $  476,348              $  507,726
Cost of licensing revenues              $  268,961              $  306,756
General and administrative expenses     $  211,777              $  229,754
Loss from operations                    $ (363,646)             $ (450,796)
Net loss                                $ (364,189)             $ (451,339)
Net loss per share                      $    (0.01)             $    (0.01)

</TABLE>

The following is a summary of the Company's quarterly results of operations
data, for each of the quarters in the year ended December 31, 2001, reflecting
the fourth quarter adjustment set forth above:

<TABLE>
<CAPTION>
                                        2001 Quarterly Periods Ended

                           March 31       June 30       September 30       December 31       Total
                           --------       -------       ------------       -----------       -----

<S>                        <C>            <C>            <C>                <C>             <C>
Total revenues             $ 1,310,385    $   593,440    $  840,670         $   489,064     $ 3,233,559
Total costs and expenses   $ 1,426,731    $ 1,044,236    $  744,424         $ 1,014,003     $ 4,229,394
Income (loss) before
   extraordinary item      $  (116,457)   $  (451,339)   $   90,355         $  (588,178)    $(1,065,619)
Extraordinary item         $      -       $      -       $  294,178         $    18,265     $   312,443
Net income (loss)          $  (116,457)   $  (451,339)   $  384,533         $  (569,913)    $  (753,176)
Loss per share before
   extraordinary item      $      -       $    (0.01)    $     -            $     (0.02)    $     (0.03)
Extraordinary item per
   share                   $      -       $      -       $     0.01         $      -        $      0.01
Net income (loss)
   per share               $      -       $     (0.01)   $     0.01         $     (0.02)    $     (0.02)
</TABLE>


                                     - 42 -

<PAGE>

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

         None.


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

Clint Ballard             39    president, chief executive officer and director

Diana T. Ballard          45    chairman of the board, secretary and treasurer

E. Edward Ahrens          54    chief financial officer

Edward P. Swain, Jr.      66    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.

     CLINT 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. Ms. Ballard is the wife of
Clint Ballard.

     E. EDWARD AHRENS has been our chief financial  officer since February 2000.
Mr. Ahrens has been self employed as a certified public accountant from October
1993 through the present, and in this capacity has been our regular accountant,
providing accounting and controller functions to us since 1995. Mr. Ahrens
continues to maintain his accounting practice on a part-time basis, while
devoting a majority of his time to his position as our chief financial officer.
Mr. Ahrens received a bachelor degree in 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. Additionally, he
has served as a director and chairman of the audit committee of Fibermark, Inc.
since 1998. Mr. Swain has served as an advisory board member of Interactive
Financial Services Group since January 2002, where he served as director from
December 1998 to January 2002, and he 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

                                     - 43 -

<PAGE>

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 Clint 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 Clint 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. In 2000, directors received no cash compensation for their
services to us as directors, but were reimbursed for expenses actually incurred
in connection with attending meetings of the board of directors and shall
continue to receive any such reimbursements in 2001. Our non-employee directors
began receiving payments of $500 per fiscal quarter in March 2001. Members of
the board of directors are eligible to participate in ASIC's 1999 stock option
plan.

         In November 2001, Edward P. Swain, Jr. and William E. Hoke were
designated to 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 and financial controls. The audit
committee recommends the engagement of 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.

         We currently have no compensation committee or nominating committee.

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 2001 fiscal
year.

ITEM 10.  EXECUTIVE COMPENSATION.

         The following summary compensation table sets forth, for the three
years ended December 31, 2001, the cash and other compensation paid to Clint
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 2001 whose total compensation, for
services rendered during 2001, was $100,000 or more.
<TABLE>
<CAPTION>
                                                  SUMMARY COMPENSATION TABLE
                                                       Annual compensation
                                    --------------------------------------------
<S>                                 <C>          <C>               <C>
Name and
principal position                  Year             Salary           Bonus**
                                    ----             ------           -------

Clint Ballard                       2001         $  104,000        $  150,000
  President and chief               2000            104,000                 0
  executive officer                 1999            104,000           194,929

Diana T. Ballard                    2001         $  104,000 *      $        0
 Chairman of the board,             2000            104,000 *               0
   secretary and treasurer          1999            104,000 *         194,929
</TABLE>

------------
* In 1999 and 2000, we paid Ms. Ballard no salary. The estimated annual value of
her services is $104,000. Accordingly, Ms. Ballard is deemed to have earned
$104,000 in 1999 and 2000, and we accounted for this amount as

                                     - 44 -

<PAGE>

contributed capital with a corresponding charge to our operations in such years.
The amount shown for 2001 represents actual salary paid to her.

**Bonuses listed on the table for 1999 represent S-corporation distributions.
Bonuses in 2001 represent actual cash bonuses.

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

EMPLOYMENT AGREEMENTS

         We have entered into employment agreements with each of Clint Ballard
and Diana T. Ballard. Neither of these agreements are effective yet. The
employment agreement with Clint 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 income before taxes,
depreciation, amortization and extraordinary items 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 income before taxes, depreciation, amortization and extraordinary items
with respect to fiscal years during the term of the agreement.

         Each of these agreements, as amended, becomes effective upon the
closing of any investment of at least $1 million by any investor or investors in
a private placement of our securities or the commencement of a public trading
market for our common stock, expires on the fifth anniversary of such triggering
event and 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.

                                     - 45 -

<PAGE>

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 1, 2002 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

     -    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>
Clint Ballard (1)                             34,300,000                        100%
Diana T. Ballard (1)                          34,300,000                        100%
E. Edward Ahrens                                       0                           *
Edward P. Swain, Jr.                                   0                           *
William E. Hoke                                        0                           *
All officers and directors
as a group (5 persons)                        34,300,000                        100%
-------------------
* Less than one percent
<FN>
         (1) The shares beneficially owned by Clint Ballard include 17,150,000
shares owned by his wife, Diana T. Ballard, and the shares beneficially owned by
Diana T. Ballard include 17,150,000 shares owned by Clint Ballard.
</FN>
</TABLE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         In March 2002, our two stockholders, Clint Ballard, our president
and a director and Diana T. Ballard, our chairman of the board, made a capital
contribution of an aggregate of $40,000, which was used for working capital.

         During November and December 2001, and January 2002, we borrowed an
aggregate of $404,000 from our two stockholders 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. and Ms. 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 November 1999, we entered into employment agreements with Clint
Ballard, our president and chief executive officer and Diana T. Ballard, our
chairman of the board. These agreements, neither of which is effective yet, were
amended in March 2001 to provide for the agreements to become effective upon the
closing of a private placement of our securities with proceeds of at least $1
million or the commencement of a public trading market for our common stock.

         In September 1999, we granted options to purchase 50,000 shares of our
common stock to our current director and former consultant, Edward P. Swain, Jr.
These options had an exercise price of $5.31 per share and were scheduled to
vest in equal installments over a five-year period. In March 2001, the options
granted to Mr. Swain were voluntarily cancelled by him.

                                     - 46 -

<PAGE>

         In October 1999, we granted options to Shane H. Traveller, our former
chief financial officer, to purchase 150,000 shares of common stock. In February
2000, Mr. Traveller resigned as our chief financial officer and entered into a
severance, settlement and general release agreement with us. Under this
agreement, Mr. Traveller agreed to provide consulting services to us in exchange
for certain monetary payments, including a payment of $22,300 if and when our
common stock becomes publicly traded. Additionally, he retained options to
purchase 10,000 shares of his original 150,000 option grant. These options
currently have an exercise price of $5.31 per share and will become fully
vested and exercisable upon our common stock becoming publicly traded at some
future date. All other options granted to Mr. Traveller have been cancelled.

         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.

         None.


                                     - 47 -

<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: March 29, 2002                         eAcceleration Corp.


                                  By: /s/Clint Ballard
                                      ---------------------------------------
                                                  Clint 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 March 29, 2002 by
the following persons in the capacities indicated. Each person whose signature
appears below constitutes and appoints Clint 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/ Clint Ballard                President, Chief Executive Officer and Director
-------------------------------- (Principal Executive Officer)
       Clint 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



<PAGE>


                                  EXHIBIT INDEX

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

3.1        Certificate of Incorporation of the Registrant (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 Registrant (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 Registrant and Clint 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 Registrant and
           Clint Ballard.
10.4       Employment Agreement between the Registrant 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).
10.5       Amendment No. 1 to Employment Agreement between the Registrant and
           Diana T. Ballard.
10.6       Form of Indemnification Agreement between the Registrant 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).
10.7       Form of Escrow Agreement between the Registrant and American Stock
           Transfer & Trust Co. (Incorporated by reference to Exhibit 10.6 to
           the Company's Registration Statement on Form SB-2 (Registration
           Number 333-90867), filed with the Commission on November 12, 1999).
10.8       Distribution Agreement between the Registrant and Pointe Control, as
           amended (Incorporated by reference to Exhibit 10.7 to the Company's
           Registration Statement on Form SB-2 (Registration Number 333-90867),
           filed with the Commission on November 12, 1999).
10.10      Lease Agreement, as amended, between the Registrant and Finn Hill
           Partnership (Incorporated by reference to Exhibit 10.9 to the
           Company's Registration Statement on Form SB-2 (Registration Number
           333-90867), filed with the Commission on November 12, 1999).
10.11      Lease Agreement between the Registrant 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).
10.12      Consulting Agreement between the Registrant and Millennium Capital
           Quest, as amended (Incorporated by reference to Exhibit 10.11 to
           Amendment No. 2 to the Company's Registration Statement on Form SB-2
           (Registration Number 333-90867), filed with the Commission on April
           4, 2000).
10.13      Amendment and Termination Agreement between the Registrant and
           Millennium Capital Quest. (Incorporated by reference to Exhibit 10.20
           to the Company's Registration Statement on Form SB-2 (Registration
           Number: 333-90867), filed with the Commission on May 23, 2000).
10.14      Amendment to Amendment and Termination Agreement between the
           Registrant and Millenium Capital Quest (Incorporated by reference to
           Exhibit 10.24 to Amendment No. 4 to the Company's Registration
           Statement on Form SB-2 (Registration Number 333-90867), filed with
           the Commission on July 6, 2000).
10.15      Severance, Settlement and General Release Agreement between the
           Registrant and Shane H. Traveller, as amended and restated
           (Incorporated by reference to Exhibit 10.12 to Amendment No. 2 to the
           Company's Registration Statement on Form SB-2 (Registration Number
           333-90867), filed with the Commission on April 4, 2000).
10.16      Amendment to Severance, Settlement and General Release Agreement
           between the Registrant and Shane H. Traveller (Incorporated by
           reference to Exhibit 10.23 to Amendment No. 4 to the Company's
           Registration Statement on Form SB-2 (Registration Number 333-90867),
           filed with the Commission on July 6, 2000).


<PAGE>


                            EXHIBIT INDEX (CONTINUED)

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

10.17      Form of Lock-in Agreement among the Registrant, Clint Ballard and
           Diana T. Ballard (Incorporated by reference to Exhibit 10.13 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).
10.18      Termination Agreement among the Registrant, Clint Ballard and Diana
           T. Ballard with respect to the Lock-in Agreement among such parties
           (Incorporated by reference to Exhibit 10.18 to the Company's annual
           report on Form 10-KSB for the fiscal year ended December 31, 2000).
10.19      Stockholders Agreement among the Registrant, Clint Ballard and Diana
           T. Ballard (Incorporated by reference to Exhibit 10.14 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).
10.20      Termination Agreement among the Registrant, Clint Ballard and Diana
           T. Ballard with respect to the Stockholders Agreement among such
           parties (Incorporated by reference to Exhibit 10.20 to the Company's
           annual report on Form 10-KSB for the fiscal year ended December 31,
           2000).
10.21      Distribution Agreement between Registrant and Sourcenext Corporation
           (Incorporated by reference to Exhibit 10.20 to Amendment No. 3 to the
           Company's Registration Statement on Form SB-2 (Registration
           Number 333-90867), filed with the Commission on May 23, 2000).
10.22      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).
10.23      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).
10.24      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).
10.25      Promissory Note of the Registrant in favor of Clint 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).
10.26      Distribution Agreement between the Registrant and Sourcenext
           Corporation, dated January 7, 2002.
10.27      Promissory note of the Registrant in favor of Clint Ballard, dated
           December 20, 2001.
10.28      Promissory note of the Registrant in favor of Clint Ballard, dated
           January 3, 2002.
10.29      Promissory note of the Registrant in favor of Clint Ballard, dated
           January 31, 2002.
10.30      Change in Terms Agreement, dated December 13, 2001, by Acceleration
           Software International Corporation in favor of American Marine Bank
           dba Silverdale Bank.
10.31      Promissory Note, dated February 15, 2002, by eAcceleration Corp. in
           favor of American Marine Bank dba Silverdale Bank.
10.32      Commercial Security Agreement, dated February 15, 2002, by
           eAcceleration Corp. in favor of American Marine Bank dba Silverdale
           Bank.
10.33      Subordination agreement among Silverdale State Bank, eAcceleration
           Corp. and Clint Ballard.
21.1       List of Subsidiaries