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

                                  FORM 10-KSB/A
                               (Amendment No. 1)

                                   (MARK ONE)
            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                     For the fiscal year ended June 30, 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: 0-27721

                             EBIZ ENTERPRISES, INC.
                 (Name of Small Business Issuer in its Charter)

                 NEVADA                                         84-1075269
    (State or other jurisdiction of                            (IRS Employer
     incorporation or organization)                          Identification No.)

     10225 E. VIA LINDA, SUITE 300
          SCOTTSDALE, ARIZONA                                     85258
(Address of principal executive offices)                        (Zip Code)

                                 (480) 346-2020
                           (Issuer's telephone number)

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

         Securities registered under Section 12(g) of the Exchange Act:

                          COMMON STOCK, $.001 PAR VALUE
                                (Title of Class)

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

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

Registrant's revenues for its most recent fiscal year were $20,973,661.

The aggregate market value of the common stock held by non-affiliates computed
based on the closing price of such stock on June 30, 2001 was approximately
$4,927,335.

The number of shares outstanding of the registrant's classes of common stock, as
of June 30, 2001 was 34,062,328.

Documents incorporated by reference: NONE

Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
                                     PART I

RECENT DEVELOPMENTS

BANKRUPTCY FILING. On September 7, 2001 we and our wholly owned subsidiary Jones
Business Systems, Inc. (JBSI) filed separate voluntary petitions to reorganize
under Chapter 11 of the Bankruptcy Code with the federal bankruptcy court in
Phoenix, Arizona. We are currently operating as a debtor-in-possession under the
supervision of the bankruptcy court. As a debtor-in-possession, we are
authorized to operate our business but may not engage in transactions outside
the ordinary course of business without approval of the bankruptcy court.
Subject to certain exceptions under the Bankruptcy Code, our filing for
reorganization automatically stayed the continuation of any judicial or
administrative proceedings against us. Any creditor actions to obtain possession
of property from us or to create, perfect, or enforce any lien against our
property has also been stayed. As a result, our creditors are precluded from
collecting pre-petition debts without the approval of the bankruptcy court.

We have the exclusive right for 120 days after our bankruptcy filing on
September 7, 2001 to file a plan of reorganization and 60 additional days to
obtain necessary acceptance. These periods may be extended by the bankruptcy
court upon a showing of good cause. We are developing a reorganization plan for
both companies which we expect to file with the bankruptcy court no later than
December 15, 2001. Confirmation of a plan of reorganization is necessary for us
to continue as a going concern. The bankruptcy filing was precipitated by our
inability to timely raise additional capital, the loss of the asset based credit
facility for our wholly owned subsidiary, JBSI, and debt that we are unable to
adequately support. The long-term implementation of our business plan and our
company strategies, as well as the achievement of the objectives of those
strategies, is dependent upon our ability to successfully restructure through a
confirmed plan of reorganization.

On September 13, 2001 we entered into a Stipulation for Use of Cash Collateral
(STIPULATION) with The Canopy Group, Inc. (CANOPY) which allows us to use 95% of
the collections received from pre-petition accounts receivable on which Canopy
holds a security interest. In exchange for this agreement, we granted to Canopy
a first lien security interest in all of our post petition receivables,
inventory and the proceeds thereof. In addition, we may use 95% of the proceeds
from all post petition accounts receivable and inventory to operate our
business. The remaining 5% is to be applied to the outstanding balance of the
debt owed to Canopy which approximates $4,100,000. The Stipulation has provided
some temporary relief for the cash flow challenges we continue to experience.

On September 24, 2001 we entered into an Agreement for Secured Line of Credit
(the SECURED LINE) with Caldera Systems, Inc. (CALDERA). Under terms of the
Secured Line, Caldera provided a $250,000 line of credit which will facilitate
our ability to purchase product from Caldera. In exchange for the granting of
the line of credit, we executed a promissory note for $542,125.61 representing
the pre-petition debt owed to Caldera and granted a junior security interest in
all of our assets to Caldera to secure the promissory note and all amounts that
may become due and owing under the line of credit.

On November 8, 2001 we entered into a Dealer Loan and Security Agreement for
Secured Line of Credit (the DEALER LOAN) with Textron Financial Corporation
(TEXTRON) and an Agreement to Provide Letter of Credit and Financial
Accommodations (the LOC) with Canopy. Under the terms of the Dealer Loan,
Textron will provide o us credit and financing in the amount of $500,000 to
facilitate the purchase of goods and inventory on favorable terms from our
suppliers. This will provide assistance in filling orders from our clients and
meeting the demand for our products. Under the LOC, Canopy has provided a
$500,000 letter of credit to secure the credit extended by Textron under the
Dealer Loan.

Even with the transactions set forth above, we have need for additional capital
and are continuing our efforts to locate and raise additional capital.

CEO RESIGNATION. Effective October 5, 2001, Dave Shaw resigned as CEO to pursue
other interests. Bruce Parsons was selected by our Board of Directors to replace
Mr. Shaw as CEO. Mr. Parsons now holds the titles of President and CEO.

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

Except for historical information contained herein, this Form 10-KSB contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the SECURITIES ACT) and Section 21E of the Securities
Exchange Act of 1934, as amended (the EXCHANGE ACT). We may also make
forward-looking statements from time to time in filings with the Securities and
Exchange Commission (SEC), press releases or otherwise. We intend that the
forward-looking statements be subject to the safe harbors created by these
statutory provisions. Wherever possible, we have identified the forward-looking
statements by words such as ANTICIPATES, BELIEVES, CONTEMPLATES, ESTIMATES,
EXPECTS, INTENDS, PLANS, PROJECTS, FORECASTS and similar expressions.

Forward-looking statements involve risks and uncertainties and include, but are
not limited to, statements regarding future events, plans and expectations.
Although we believe that the assumptions underlying our forward-looking
statements are reasonable, any of these assumptions could prove inaccurate. Our
forward-looking statements reflect only our current views with respect to future
events and financial performance or operations and speak only as of the date the
statements are made. Our actual results may differ materially from such
statements. Factors that may cause or contribute to such differences include,
but are not limited to, those discussed in DESCRIPTION OF BUSINESS - Factors
Affecting Future Performance and MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, as well as elsewhere in this
report and in the exhibits incorporated by reference.

The inclusion of forward-looking information should not be regarded as a
representation that the future events, plans or expectations contemplated will
be achieved. We disclaim any obligation to subsequently revise forward-looking
statements to reflect subsequent events or circumstances or the occurrence of
unanticipated events.

ITEM 1. DESCRIPTION OF BUSINESS

OVERVIEW AND BUSINESS DEVELOPMENT

ORGANIZATION STRUCTURE. Ebiz is a Nevada corporation incorporated in June 1998.
Our predecessor, Genras, Inc., was incorporated in Arizona in May 1995. On June
1, 1998, Vinculum Incorporated, a then non-operating company with an

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estimated 700 shareholders, acquired all the operating assets and liabilities of
Genras for 5,000,000 shares of Vinculum common stock. Prior to the acquisition,
Genras had no relationship with Vinculum. Vinculum was incorporated in Colorado
in May 1984 as VDG Capital Corporation and changed its name to Vinculum
Incorporated in December, 1994. Immediately following the acquisition of the
Genras assets, the former Genras stockholders held approximately 87% of the
outstanding shares of Vinculum's common stock. For financial accounting
purposes, the acquisition was treated as a recapitalization with Genras as the
acquirer. Ebiz was originally incorporated as a wholly owned subsidiary of
Vinculum. Ebiz was originally incorporated with the name Vinculum Incorporated,
changed its name to CPU MicroMart, Inc. in June 1998 and later changed its name
to Ebiz Enterprises, Inc. in May 1999. In August 1998 Vinculum merged into Ebiz
solely to change its domicile to Nevada.

We are a developer and provider of Linux-based solutions, computer systems,
software and accessories for the business computer market. We have developed and
operate Linux-centric Web sites that provide vendor neutral marketing and sales
channels for providers of Linux products and services, information and technical
support. We also manufacture and market proprietary Linux-based systems. Our
products are sold directly to end users through our Web sites and to corporate
customers and Value Added Resellers (VARs) through our own sales force.

During the second quarter of fiscal 2000, we decided to concentrate our
strategic focus on the Linux segment of the market which we believe has much
stronger growth opportunities than the low price, high volume, conventional
Windows-based computing systems market. We de-emphasized our programs for the
mass merchant and brokerage channels of distribution. At the same time we began
to restructure our organization to facilitate the implementation of our
expanding Linux marketing, Web site development and product development
programs. We made the decision to implement a growth-through-acquisition
strategy. During the last year, we made several acquisitions that were targeted
to strengthen and support the move into the Linux market.

PURCHASE AND INVESTMENT WITH CALDERA SYSTEMS, INC. On September 15, 2000, we
entered into a Purchase and Sale Agreement with Caldera Systems, Inc. (CALDERA)
for the acquisition of all of the intellectual property, technology and certain
specified assets related to Caldera's proprietary marketing distribution concept
known as Electronic Linux Marketplace. We paid to Caldera 1 million shares of
our common stock for the Electronic Linux Marketplace assets which were
transferred into a wholly owned subsidiary , partnerAxis, Inc. (PARTNERAXIS). We
then began further development of the business concept. As part of the
transaction, Caldera purchased $3 million of Ebiz common stock in a private
transaction. The $3 million proceeds received from Caldera were used to fund
partnerAxis, Inc.,a Web-based B2B entity providing knowledge exchange, Linux
product sales, advertising, membership and channel development, all within the
Linux marketplace.

We reached an agreement in principle with Caldera as reflected in a term sheet
dated January 2, 2001 regarding modification of the Purchase and Sale Agreement
entered into on September 15, 2000. We agreed with Caldera to modify the
Purchase and Sale Agreement with regard to the balance of the $3 million
proceeds which totaled $2.1 million at that time. Per the term sheet, $1 million
would be immediately deposited with an independent escrow agent and the
remaining $1.1 million would be deposited with the escrow agent no later than
June 30, 2001 (the ESCROW FUNDS). Prior to that date, we were entitled to use
those funds for purposes other than developing the business plan of partnerAxis,

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and, in fact, we used $1.1 million of the Escrow Funds for other purposes.
Should we fail to deposit the $1.1 million with the escrow agent by June 30,
2001, we are required to issue to Caldera a warrant to purchase 1 million shares
of our common stock at the price per share and on terms and conditions as set
forth in the warrant. Additional terms include payment of a 5% royalty on
revenues derived from partnerAxis in lieu of issuance of additional shares based
on earnings performance. In April 2001 and prior to completion of final
documents for the modification, we sold partnerAxis in the transaction described
below.

On April 16, 2001, we completed the sale of partnerAxis, Inc. (partnerAxis), to
BySynergy, LLC (BySynergy), pursuant to a Stock Purchase Agreement dated April
13, 2001. Pursuant to the agreement with BySynergy, BySynergy assumed all of the
unperformed obligations we owed to Caldera including the deposit of $1.1 million
with the escrow agent by June 30, 2001. The major factors leading to the
decision to sell partnerAxis were the costs necessary to operate the subsidiary,
approximately $500,000 during the quarter ended March 31, 2001. The disposition
relieved the requirement of raising the additional capital necessary to fund the
continuing development of partnerAxis until it could begin to produce revenues.
But most importantly, the disposition allowed us to focus primarily on our core
business of supplying computing solutions to our corporate and channel accounts
nationwide.

ACQUISITION OF LINUXMALL.COM, INC. On October 5, 2000, we completed the
acquisition of LinuxMall.com, Inc. (LINUXMALL) by the merger of LinuxMall into a
newly formed and wholly owned subsidiary. The price paid was $14.7 million
comprised of common stock, options and warrants. As one of the original Linux
companies founded in the early 1990's, LinuxMall had developed great appeal with
the on-line Linux community and had successfully marketed and sold Linux
accessories through its websites.

ACQUISITION OF JONES BUSINESS SYSTEMS, INC. On January 4, 2001, we completed the
acquisition of Jones Business Systems, Inc. (JBSI) by the merger of JBSI into a
newly formed wholly owned subsidiary. Under terms of the transaction, we paid
$7.8 million for JBSI comprised of common stock and options. JBSI is a national
solutions integrator, white box system builder and service provider. JBSI
manufactures the Terian product line of built-to-order computing solutions for
its reseller and enterprise partners. Terian systems combine the latest Intel
hardware technology with built-to-order flexibility and reliability. JBSI
supplies computing products and services to its reseller and enterprise partners
nationwide in the Linux, UNIX and Windows 2000 marketplaces and is one of the
nation's top distributors of Informix (Nasdaq: IFMX), SCO (Nasdaq: SCOC), Data
General (Nasdaq: DATA) and Acer products.

The acquisition strengthened our commitment to the expanding market for
specialized servers, also known as appliance servers. Specialized servers are a
new generation of single-purpose computer equipment created as a result of rapid
Internet growth and the evolution to a thin client architecture. Specialized
servers, including Web-hosting and database-hosting devices, are used
extensively by application service providers (ASPs) and Internet Service
Providers (ISPs). We share this space with companies such as Cobalt, Network
Engines and Network Appliance. The acquisition was anticipated to establish us
as a primary beneficiary of the migration from Unix to Linux. JBSI had
longstanding relationships with many UNIX VARs (value added resellers) offering
an existing client base for the Company's Linux solutions. We believed the
acquisition would turn that migration path into a superhighway and dramatically
increase the number of VARs providing Linux solutions. Moreover, JBSI had been

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building and supplying white boxes, products and services to the UNIX community
since 1991 and anticipating the rapid growth of the Linux and UNIX marketplaces.
JBSI built in-house systems and facilities to handle sales volume of more than
$200 million per year.

We address the high-growth markets we target through an integrated business
strategy that utilizes our Internet Web sites intended to appeal to a specific
vertical market audience. LINUXMALL.COM, EBIZMART.COM, and EBIZENTERPRISES.COM
have become a core element of our Linux strategy. We anticipate these sites will
become leading destinations to the Linux user market, providing community
resources and services, such as free e-mail, Linux directory, links to numerous
Linux-based sites and technology expertise. These sites are intended to provide
EVERYTHING LINUX and offer the largest selection available of Linux-compatible
technical products and related items.

While we believe we have the capability to succeed with our business plan and
assuming that a plan of reorganization can be confirmed, we are still an early
stage company with limited operating history. Our prior years of operations have
resulted in losses. Our auditors have qualified their opinion to our financial
statements indicating there is substantial doubt about our ability to continue
as a going concern. As a growing, early stage company, our ability to raise
capital as well as increase our sales revenue will be critical to our ability to
continue as a going concern. We are also concentrating the focus of our business
on utilization of the Linux operating system and away from some of our past
fulfillment distribution strategies. We anticipate that because of the focus on
Linux based products, our gross margins will increase and our operating expenses
will stabilize. See the sections captioned DESCRIPTION OF BUSINESS - Factors
Affecting Future Performance and MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS for a discussion of capital
constraints and other risks of our business.

BUSINESS OF ISSUER

                                THE LINUX MARKET

OVERVIEW. Linux is a free Unix-similar-computer operating system originally
created by Linus Torvalds at the University of Helsinki in Finland. Mr. Torvalds
began his work in 1991 when he released version 0.02 and worked steadily until
1994 when version 1.0 of the Linux Kernel was released. The current
full-featured version is 2.4 and development continues.

Linux is developed under the GNU General Public License and its source code is
freely available to everyone. However, companies and developers may charge for
the system and adaptations as long as the source code remains available. Linux
may be used for a wide variety of purposes including networking, software
development, and as an end-user platform. Linux systems are considered a viable,
low-cost alternative to other more expensive operating systems.

Due to the functionality and availability of the Linux system, it has become
popular worldwide. A vast number of software programmers of the Linux system
have taken the Linux source code and adapted it to meet their individual needs.
At this time, there are numerous ongoing projects for porting Linux to various
hardware configurations and purposes.

THE RAPIDLY GROWING LINUX MARKET. The Linux operating system is growing beyond
the early adopter phase and reaching the mainstream business market. Active
Linux users worldwide are estimated to be in excess of 10,000,000. Numerous
hardware and software manufacturers have announced and have deployed Linux-based
solutions.

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In a 1999 bulletin titled LINUX OPERATING SYSTEM MARKET OVERVIEW, IDC presented
its first-ever forecast for Linux. Through 2003, total Linux commercial product
shipments are predicted to grow faster than the total shipments of all other
client or server operating environments monitored by IDC. IDC estimates Linux
commercial shipments will increase at a compound annual growth rate (CAGR) of
25% from 1999 through 2003. This growth rate estimate may be compared to an
estimated 10% CAGR for all other operating environments combined and a 12% CAGR
for all other server operating environments combined. IDC reports on only
commercial shipments of Linux and is unable to track systems downloaded from the
Internet at no charge.

Linux has been used in academic and research environments since its inception
for applications such as e-mail, Web servers, bulletin boards and research
projects. In 1999, IDC expects more application vendors to port their offerings
to Linux and hardware vendors to continue to expand their available product
lines running Linux for server-side endeavors. Further, IDC believes that some
desktop initiatives, including an improved graphical user interface and
increased desktop application availability, have the ability to trigger interest
in Linux as a desktop operating system by 2003.

Linux servers are expected to have a larger impact on the worldwide server
appliance market, according to Dataquest Inc., a unit of Gartner Group, Inc., in
a July 1999 report. Dataquest estimates that by 2003, Linux servers will account
for approximately 24 percent of worldwide server appliance revenue, or $3.8
billion, and 14 percent of server appliance shipments, or 1.1 million units.
Linux based operating systems are now the most commonly used operating system
for Web sites, representing approximately 33% of all installations, according to
the April, 2000 Netcraft Web Server Survey.

Moreover, we have seen a convergence of the Linux and Unix markets as many
traditional Unix users are recognizing the advantages of Linux. Importantly,
this factor has opened Linux to a new audience of Unix users that are seeking
what Linux offers. Our wholly owned subsidiary JBSI has many longstanding
relationships with Unix customers who we expect will embrace Linux for many of
their future needs. Our selection of products and solutions will continue to
cover both the Linux and the Unix markets. As a result, the Linux-Unix
convergence fits neatly into what we expect to offer our clients and prospects.

OUR TARGET MARKETS. As the Linux-Unix operating system moves into the
mainstream, we intend to concentrate our marketing effects on Information
Technology (IT) professionals, computer industry VARs, educational and
governmental users and Linux enthusiasts. Persons in this target market include
chief information officers, network/system administrators, Web developers and
managers, programmers, software and hardware engineers as well as hobbyists and
individuals seeking affordable Internet access. We will also focus on large
corporations seeking to establish Linux in the consumer market through Internet
access appliances and software development.

                       BUSINESS OBJECTIVES AND STRATEGIES

Our objective is to deliver Linux-Unix solutions through channel partners who in
turn focus on the corporate business marketplace. We intend to achieve this
objective by utilizing three primary delivery channels in which we believe we
will have strong presence and positioning, especially after our acquisitions of
LinuxMall and JBSI. These channels are:

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*    DIRECT SALES. Our largest source of revenue and growth is expected to be
     through our own internal direct sales force. The sales force sells fully
     integrated Linux-Unix solutions to the corporate business environment -
     primarily through Value Added Resellers (VARs).

*    E-COMMERCE. Our flagship Web sites are LINUXMALL.COM and EBIZMART.COM.
     These sites provide marketing and distribution opportunities for providers
     of Linux-Unix products and services and advertisers to Linux users. These
     sites also serve the Linux-Unix user, providing a broad selection of
     products and merchandise, as well as technical support and community
     information. These Web sites are intended to be the home of the largest
     selection anywhere of Linux-compatible technical products and related
     items, including servers, desktop and notebook computer systems,
     communications and networking products, hardware, components, peripherals
     and software applications, games and utilities, and apparel and specialty
     merchandise.

Our strategic objectives are to:

*    Maintain our comprehensive Web sites that combine product marketing with
     Linux-Unix community interests such as news, resources, links pre- and
     post-sales technical support, hardware service and customer service;

*    Utilize our Linux-Unix product development expertise to create unique
     product lines for bundling into delivered solutions;

*    Generate revenue through product sales as well as through technical
     support, service and training opportunities, customer services, Internet
     advertising, marketing and Web links;

*    Expand sales, marketing, production and distribution of our branded product
     lines; and

*    Establish ourselves as an active member of the Linux-Unix community known
     to aggressively support the open source development initiative.

In order to meet these objectives, we will require additional funding to
implement our planned sales, marketing and product development activities. We
intend to deploy a marketing program focused on building our brand recognition.
We also intend to enhance the performance capabilities of our products to
produce competitive advantages.

We believe that our technology facility and sales and marketing expertise
differentiates our operations by allowing us to provide true merchant qualities
and capabilities, such as conducting our own purchasing, merchandising, order
fulfillment, supply-chain management, vendor marketing opportunities and product
technical support functions.

Our e-commerce Web sites offer targeted audiences relevant content, services and
a quality Linux-Unix and open source buying experience, which is a significant
element of our business plan. We believe the key elements to implement our plan
include:

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*    PROVIDING A MEANINGFUL VIRTUAL COMMUNITY DESTINATION ON THE INTERNET WITH
     OUR WEB SITES. By providing the broadest spectrum of Linux-Unix solutions
     to serve the needs of the Linux-Unix and business community, we believe we
     will provide common interest Internet destination points which will be a
     source for news and information as well as providing an opportunity for
     product purchases.

*    ENSURING A SECURE AND CONVENIENT ON-LINE BUYING EXPERIENCE. OUR e-commerce
     sites feature secure buying facilities that are open 24 hours a day, seven
     days a week. Our Web sites may be reached from the customer's home or
     office and feature extensive browsing and search capabilities.

*    DELIVERING EXCELLENT CUSTOMER SERVICE. We intend to provide the highest
     level of customer service from ordering to shipping, and offer pre- and
     post-sales support via the telephone, e-mail and online. We also offer
     online order tracking capabilities.

*    DEVELOPING CUSTOMER LOYALTY. We are focused on developing and promoting
     customer loyalty, building repeat purchase relationships with our customers
     and maximizing the number of return visits to our Web sites by our
     customers.

*    BUILDING BRAND LEADERSHIP POSITIONING. We are implementing integrated
     online and offline marketing strategies to enhance our brand recognition
     within the vertical markets we target, which include advertising, direct
     online marketing, trade shows and public relations activities.

                                  OUR WEB SITES

Our family of Web sites are an important component of our business strategy to
enhance sales of our products and services. The purpose of our Web sites is to
combine the best of the community interests with commercial business
opportunities of Linux-Unix. We intend to enhance and develop our Linux-Unix
product offerings, but focus our near-term efforts on developing partnerships
and relationships with manufacturers and suppliers of other Linux-Unix products
and to market their products and services through these sites. Our family of
sites include:

LINUXMALL.COM. LINUXMALL.COM is intended to be the central branding name for all
of our Web properties. It is our intention that buyers and sellers of products
and services, as well as Linux community members looking for news and
information will consider LINUXMALL.COM as a central aggregation site for Linux
on the Internet. All of our other Web properties will be contained within this
site.

EBIZMART.COM. EBIZMART.COM is our channel Web site which is designed as the
ultimate resource for our channel partners. Filled with information about the
Linux-Unix community, it is expected to keep our channel partners plugged-in
regarding the the products and solutions we offer.

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EBIZENTERPRISES.COM. EBIZENTERPRISES.COM is our corporate, public relations site
which is tailored to apprise the general public, investors, and other interested
parties about our strategic direction, management profiles, products and
solutions and other important events.

                              PRODUCTS AND SERVICES

In addition to our ability to integrate unique Linux-Unix solutions from other
suppliers for delivery to the corporate business environment, we have developed
our own line of branded products and services. These include Terian branded
servers, PCs and solution branded appliances such as Terian Pedestals, Terian
Rackmount, Terian Clusters, Terian Solution Appliances, and Terian PCs.

                                    MARKETING

We have a complete in-house direct sales department. This department generates
outbound and receives incoming customer calls, referrals and inquiries generated
by our various marketing activities and Web sites. We also accept sales orders
directly via a secure shopping cart located on each of our Web sites.

Our marketing and promotion strategy is intended to:

*    Develop unique Linux-Unix and Open Source software solutions.

*    Build brand recognition and become a market leader with our sites.

*    Generate significant market awareness for our products, our sites and our
     company through integrated marketing programs.

*    Effectively position and promote our products and our sites to their target
     audiences to increase consumer traffic to our sites, add new customers,
     stimulate demand and generate revenue.

*    Develop e-commerce and Internet service revenue from technical support,
     service and training, advertising fees, affiliate programs and content
     providers.

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*    Leverage our strategic partnerships with vendors, industry experts and
     channel partners to effectively merchandise, market and promote our
     initiatives.

*    Establish a comprehensive database and build strong customer loyalty to
     maximize repeat purchases.

*    Establish evaluation and accountability processes to manage our sites and
     measure the results of marketing programs and sales support activities.

ESTABLISH CORPORATE AND BRAND POSITIONING. With our business interests serving
the corporate business markets, we believe that it is necessary to quickly
establish and maintain a strong brand presence and communicate corporate and
brand positioning for each of our initiatives. We are implementing a
comprehensive sales and marketing program to promote Ebiz and our brand names.

Advertising in online and offline media will be utilized to support all of our
e-commerce initiatives and to build brand recognition. Print media advertising
campaigns are used in targeted trade, business and consumer publications based
on the perceived needs of the targeted customers.

Public and media relations activities have been used extensively, targeting key
online, print and broadcast media to generate visibility and awareness of our
sites, our products and our brands. We distribute newsworthy information on a
timely, consistent basis, produce professional electronic and printed press
materials and manage an accurate media contact database in-house.

Trade shows are used throughout our marketing program where appropriate to
create brand awareness, primarily among specific vertical market groups or
Internet industry associations. To enhance our corporate positioning and
perception, we intend to expand our presence at the select shows we attend. We
expect to accomplish this by providing multimedia presentation theater format
and individual demonstrations and to interact extensively with the press and
sales promotions to generate traffic and consumer excitement. To ensure
consistency of message, all trade shows revolve around a central theme or
concept that is key to the positioning of our new and featured products.

DIRECT MARKETING AND SALES PROMOTION PROGRAMS. We intend to develop targeted
customer retention and promotion programs designed to reward frequent customers.
A Database/Direct Marketing Program has been established for each site to enable
us to develop community databases, which can be marketed to cross-sell, re-sell
and up-sell our products. This will be accomplished through product
registrations, Web customer registrations and newsletter lists. Customer
information will be captured into an enterprise-wide customer database system,
which will then be accessible by the sales team for follow-up and reporting.

From this database, we intend to address many marketing activities, including
lead management and database marketing. Our goal will be to segment this
database and communicate with key segments on a weekly or bi-weekly basis at a
minimum. We will also promote new products and enhancements, promotions,
training opportunities, sales events and other activities, through direct mail.

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                                CUSTOMER SERVICE

Our customer service department includes customer service and technical support
representatives. Our customer service representatives are available from 8:00
a.m. to 6:00 p.m. Central Standard Time, Monday through Friday to assist
customers in placing orders, finding desired products and registering credit
card information. Technical support representatives assist customers in setting
up, configuring and troubleshooting our branded products, and provide return
material authorizations for defective products. We provide technical support
over the telephone, via e-mail and online. We also provide comprehensive user
documentation, online tutorials and a detailed database of product-related
problems and solutions.

Both customer service groups are a valuable source of feedback regarding user
satisfaction. Our sites also contain customer service pages that outline store
policies and provide answers to frequently asked product questions.

                             INFORMATION TECHNOLOGY

The market in which we compete is characterized by rapidly changing technology,
evolving industry standards, frequent service and new product announcements,
product enhancements and changing customer demands. Accordingly, our success
depends upon our ability to adapt to rapidly changing technologies, to adapt our
services to evolving industry standards, and to continually improve the
performance, reliability and features of our products and service. We have
implemented a broad array of scaleable site management, search, customer
interaction and distribution services systems that we use to process customers'
orders and payments. These systems use a combination of our own proprietary
technologies and commercially available licensed technologies. The systems that
we use to process customers' orders and payments are integrated with our
accounting and financial reporting systems. We focus our internal development
efforts on creating and enhancing the specialized, proprietary software that is
unique to our business.

Our systems have been designed on industry standard architectures and have been
designed to reduce downtime in the event of outages or catastrophic occurrences.
Our systems are available 24-hours-a-day, seven-days-a-week. Our system hardware
is located in our Stafford, Texas facility.

                   PRINCIPAL SUPPLIERS AND STRATEGIC ALLIANCES

Our principal suppliers have over the past two years included Ingram Micro,
Inc., Kingston Technology Company, ViewSonic Corporation and Advanced
Microdivices, Inc. As we have moved more into the mainstream Linux community
through both internal growth and acquisitions, other major suppliers have
arisen. These suppliers include Caldera Systems, Inc., Corel Corporation, Suse,
Inc., Walnut Creek, Inc. and Red Hat Software, Inc. As we focus on producing
bundled computer systems utilizing the Linux operating system, we anticipate
that suppliers such as 3ware, TurboLinux, Storm Linux and Cobalt Networks, Inc.
will also become significant suppliers to Ebiz.

                                       11
<PAGE>
                                   COMPETITION

Several companies such as Red Hat, Inc. are building business models around
Linux by selling customer service, technical support and applications with the
system. Red Hat has dominated this market by entering into distribution
agreements with large hardware makers such as IBM and Dell resulting in it
accounting for approximately 56 percent of operating systems of all Linux
servers shipped last year, according to IDC, a statistical research company that
tracks data in the technology and computer industry. Several Linux based Web
site portals which offer technical news, software downloads, Web site tools,
resources, links and services, as well as product marketing, have been recently
developed. The sites highlight the growing competition in the open-source world,
and among Linux operating system developers in particular. There are numerous
Linux portals offering information, software, services and resources. The sites
that offer some of the same content or services as our site include
JUSTLINUX.COM, LINUXLINKS.COM, LINUXSTART.COM, LINUX.ORG, LINUX.COM,
FIRSTLINUX.COM, LINUXTODAY.COM, SLASHDOT.ORG, FRESHMEAT.COM and
LINUXBANDWAGON.COM. Sites that directly compete with our site in content,
services and products included REDHAT.COM, ATIPA.COM and PENGUIN.COM.

                              INTELLECTUAL PROPERTY

We rely primarily on trademark and copyright laws to protect our intellectual
property although in our brief history, we have not developed significant
intellectual property. We have registered several URL domain names, which
include our primary Web sites discussed above as well as others that we
anticipate in utilizing in the future.

                                    EMPLOYEES

We currently have approximately 40 full-time employees. Our employees are not
covered by any collective bargaining agreements.

                      FACTORS AFFECTING FUTURE PERFORMANCE

OUR INABILITY TO SUCCESSFULLY ACHIEVE CONFIRMATION OF A PLAN OF REORGANIZATION
UNDER THE BANKRUPTCY CODE WILL ELIMINATE OUR CONTINUATION AS A GOING CONCERN AND
CAUSE THE VALUE OF OUR CAPITAL STOCK TO BE ZERO. The bankruptcy filing that we
made along with our wholly owned subsidiary JBSI in September 2001 has provided
the immediate benefit of staying any debt collection actions that may be
pending, offers a method for us to restructure our debts and provides a
procedure for us to reorganize as a viable going concern. However, there are
numerous factors that may prevent confirmation of a plan including the
acceptance of the plan by the various classes of claims and interest holders.
There are no assurances that a plan of reorganization will be confirmed which is
necessary and essential for us to continue our operations.

In addition, without a confirmed plan of reorganization the value of both our
preferred stock and our common stock will be zero. Even under a confirmed plan
of reorganization the value of both our preferred and common stock may be
significantly impaired.

WE ARE AN EARLY STAGE COMPANY WITH LIMITED OPERATING HISTORY MAKING IT DIFFICULT
TO EVALUATE OUR FUTURE PROSPECTS. We have recently entered the Linux computer
manufacturing industry and have limited results of operations from this segment
of our business. We have even more recently focused on development of Linux
servers, desktops and appliances, each utilizing the Linux operating

                                       12
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system. We are devoting considerable resources to the development of these lines
and our family of sites marketed under the name LINUXMALL.COM, EBIZMART.COM, and
EBIZENTERPRISES.COM. See OUR BUSINESS - Our Web Sites.

We have acquired other businesses in the Linux-Unix industry. In March, 2000, we
acquired InfoMagic, Inc. We also acquired LinuxMall in October, 2000 and JBSI in
January, 2001. While we believe the combination of these businesses will be
successful and lead to profitable operations, in the short-term, integration of
these businesses into our operations may lead to continued losses.

We will encounter numerous risks and difficulties encountered by early stage
companies in the rapidly developing Linux markets as well as risks associated
with the manufacturing and distributing of computer systems and services. We may
not be successful in addressing these risks and there can be no assurance that
our business strategies will be successful. See MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and
Capital Resources - Fiscal 2000 Liquidity for additional discussion of the
possible effect of our strategies on future operations.

WE HAVE A HISTORY OF LOSSES AND ANTICIPATE FUTURE LOSSES. For the fiscal years
ended June 30, 2000 and 2001, we sustained net losses attributable to common
shareholders of approximately $9,969,374 and $49,090,384, respectively. Future
losses are likely to occur. Our independent auditors have noted that these,
among other factors raise substantial doubt about our ability to continue as a
going concern. We have yet to generate and maintain sufficient profitability to
sustain or grow operations without additional external funding. No assurances
can be given that we will be successful in continuing to grow our revenues or
reaching or maintaining profitable operations.

OUR SUCCESS IS DEPENDENT UPON OUR ABILITY TO RAISE ADDITIONAL CAPITAL AND THERE
ARE NO ASSURANCES WE WILL FIND ADDITIONAL CAPITAL RESOURCES. Our need for
additional capital in the near term is no less urgent because of our bankruptcy
filing. The necessity for additional capital to support continued operations
prior to confirmation of a plan of reorganization is essential. Since inception
we have funded operations with debt and equity capital. Our ability to operate
profitably under our current business plan is largely contingent upon success in
obtaining additional sources of debt and equity capital. There can be no
assurance that sources of capital will be available on satisfactory terms or at
all. Without additional capital we may not be able to fully implement our
business or operating and development plans. No assurance can be given that any
such financing, if obtained, will be adequate to meet our ultimate capital
needs. If adequate capital cannot be obtained or obtained on satisfactory terms,
our operations could be negatively impacted.

WE ARE DEPENDENT UPON CORPORATE AND CONSUMER ACCEPTANCE OF THE LINUX OPERATING
SYSTEM AND OUR BRANDED SYSTEMS. Systems utilizing the Linux operating system are
relatively new. Our strategy to become a vendor neutral distributor in this
market evolved from our prior strategies. While we believe that this strategy
fills a void that is needed in the Linux user market, we have not proven this
strategy. Also, the success of this strategy is directly dependent upon the wide
spread acceptance of the Linux operating system for corporate and personal use.

Our relatively new server, desktop and appliance lines all utilize the Linux
operating system. Acceptance of the Linux operating system will be critical to
the success of these product lines. None of our manufactured computer systems
have brand name recognition to the same extent as most of our

                                       13
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competitors. There can be no assurance that our computer systems will meet with
consumer acceptance. If our systems are not met with the consumer acceptance we
anticipate, our revenues and operating results will likewise not reach the
levels we anticipate.

WE FACE INTENSE COMPETITION IN THE COMPUTER PRODUCT DISTRIBUTION AND E-COMMERCE
MARKETS AND WE CAN GIVE NO ASSURANCES THAT WE WILL BE ABLE TO COMPETE
SUCCESSFULLY. The computer hardware and software distribution business is an
intensely competitive industry, and we face increasing competition in every
aspect of this business. We also compete in the computer systems manufacturing
market, which is also highly competitive. E-commerce distribution is a
relatively new industry and is anticipated to attract significant competition.
The market for Linux based solutions is new, fragmented, rapidly changing and
also highly competitive.

In the computer systems manufacturing and distribution market, we face
significant competition from several large companies that have more established
distribution channels as well as better name recognition and much greater
financial resources than we do. Some of these companies include Compaq Computer
Corporation, Dell Computer Corporation, Gateway, Inc., Hewlett-Packard Company
and International Business Machines Corporation. These companies have systems
capable of utilizing the Linux operating system. We also face competition in the
Linux market from other companies that are directly focusing on this market,
such as Red Hat, Inc. and VA Linux Systems, Inc.

WE CANNOT GUARANTEE THAT WE WILL BE ABLE TO MANAGE FUTURE GROWTH. Any future
growth we may experience will present many challenges and place additional
pressure on our already limited resources and infrastructure. In the event we
can achieve confirmation of a plan of reorganization and emerge from bankruptcy,
no assurances can be given that we will be able to execute the plan of
reorganization and effectively manage future growth. Our future growth may place
a significant strain on our managerial, operational, financial and other
resources. Our success will depend upon our ability to manage growth
effectively, which will require that we continue to implement and improve our
operational, administrative, financial and accounting systems and controls and
continue to expand, train and manage our employees. Our systems, procedures and
controls may not be adequate to support operations and we may not be able to
achieve the rapid execution necessary to successfully penetrate the Linux
market. Our inability to manage internal or acquisition-based growth effectively
would cause a significant strain on our resources and our resulting financial
performance would be materially adversely affected.

WE CARRY A SIGNIFICANT LEVEL OF PRODUCT INVENTORY THAT CAN BECOME OUTDATED
RAPIDLY. Computer component inventory can become outdated due to rapid
technological and product advances. While we obtain our inventory at competitive
prices, if we are unable to dispose of this inventory for a profit due to a
shift in consumer demand or product advances or if we liquidate this inventory
at low margins or below costs, our profitability will be adversely affected.

WE MUST STOCK SUFFICIENT INVENTORY TO MEET OUR CUSTOMERS NEEDS. It is also
critical to our success that we stock sufficient inventory to meet customer
demand for both third party products and our Linux computer systems. Our
inability to adequately stock inventory, due to capital constraints, procurement
difficulties or other reasons would adversely affect our operating results both
on a quarterly and annual basis.

                                       14
<PAGE>
WE HAVE EXPERIENCED DIFFICULTY IN ACCURATELY FORECASTING OUR SALES, WHICH
RESULTS IN OUR INVENTORY LEVELS AND SALES REVENUES TO VARY FROM OUR ESTIMATES.
As a result of our limited operating history, it is difficult to accurately
forecast our net sales and we have limited meaningful historical financial data
upon which to base planned inventory purchases and operating expenses. We base
our current and future expense levels on our operating plans and estimates of
future net sales, and our expenses are to a large extent fixed. Sales and
operating results are difficult to forecast because they generally depend on the
volume and timing of the orders we receive. As a result, we may be unable to
adjust our spending in a timely manner to compensate for any unexpected revenue
shortfall. This inability could cause our net losses in a given quarter to be
greater than expected.

OUR OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS AND MAY RESULT IN
CONTINUED LOSSES. As a result of our limited operating history, rapid growth and
change in business focus, and because of the emerging nature of the Linux market
in which we compete, our historical financial data is of limited value in
planning future operating expenses. Our expense levels will be based in part on
expectations concerning future revenues. Our revenue is derived primarily from
product sales, which are difficult to forecast accurately. We may be unable to
adjust spending in a timely manner to compensate for any unexpected shortfall in
revenues. A significant shortfall in demand for our products could have an
immediate and material adverse effect on our business, results of operations and
financial condition. Our business development and marketing expenses will
increase significantly as we expand our operations. To the extent that such
expenses precede or are not rapidly followed by increased revenue, our business,
results of operations and financial condition may be materially adversely
affected.

Our quarterly operating results may fluctuate significantly in the future as a
result of a variety of factors, many of which are outside our control. These
factors include:

*    the level of demand for our products;

*    the level of demand for conventional and e-commerce marketing;

*    the introduction of new products or services by us or our competitors;

*    our ability to attract and retain personnel with the necessary strategic,
     technical and creative skills required for effective operations;

*    the amount and timing of expenditures by customers;

*    customer budgetary cycles;

*    the amount and timing of capital expenditures and other costs relating to
     the expansion of operations;

*    our success in finding and acquiring suitable acquisition candidates;

*    pricing changes in the industry;

*    technical difficulties with respect to the use of the Internet;

                                       15
<PAGE>
*    economic conditions specific to Internet technology usage;

*    government regulation and legal developments regarding the use of the
     Internet; and

*    general economic conditions.

As a strategic response to changes in the competitive environment, we may from
time to time make certain pricing, service, technology or marketing decisions or
business or technology acquisitions that could have a material adverse effect on
our quarterly results. We may also experience seasonality in our business in the
future, resulting in diminished revenues as a consequence of decreased demand
during certain periods of the year. Due to all of these factors, our operating
results may fall below the expectations of securities analysts and investors in
any future quarter. In such event, the trading price of our common stock will
likely be materially and adversely affected.

SECURITY RISKS OF E-COMMERCE MAY DETER PURCHASES OF OUR PRODUCTS. Our
relationship with our customers may be adversely affected if the security
measures that we use to protect their personal information, such as credit card
numbers, are ineffective. If, as a result, we lose many customers, our net sales
and results of operations would be harmed. We cannot predict whether events or
developments will result in a compromise or breach of the technology we use to
protect a customer's personal information. Furthermore, our 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 breaches. We cannot give assurance that we can prevent all security
breaches or will have adequate capital and other resources to devote to security
measures.

CREDIT CARD FRAUD COULD HARM OUR NET SALES RESULTS. A failure to adequately
control fraudulent credit card transactions would decrease our net sales and
results of operations because we do not carry insurance against this risk.

OUR INABILITY TO COLLECT ACCOUNTS RECEIVABLE ON A TIMELY BASIS COULD CAUSE OUR
CASH FLOW TO BE IMPAIRED AND REDUCE OUR PROFITABILITY. While we have gained
significant expertise in dealing with Internet distribution and collection
issues and have instituted credit review and approval procedures, no assurances
can be given that future unexpected problems and collection risks will not
develop from these and other customers which could reduce our profitability or
increase our losses.

RISKS ASSOCIATED WITH MANUFACTURING COMPUTER SYSTEMS, SUCH AS TECHNICAL SUPPORT,
QUALITY CONTROL AND PRODUCTION PROBLEMS, COULD RESULT IN SIGNIFICANT PRODUCT
RETURNS AND CUSTOMER DISSATISFACTION. We are increasingly generating revenues
from manufacturing our own brand of computers. This activity creates a wide
variety of risks associated with manufacturing, including but not limited to
defects and warranty costs exceeding expectations. Also, customer service and
technical support requirements could exceed expectations and have severe adverse
effects on operations. No assurances can be given that we will be able to handle
production and quality control issues as we increase manufacturing activity.
While we perform a substantial amount of pre-delivery testing of our systems and
believe we have a lower than industry average return of our manufactured
products, we may experience significant returns in the future that could reduce
our profitability and harm our reputation in the market.

                                       16
<PAGE>
IF OUR SUPPLIER RELATIONSHIPS ARE DISRUPTED, OUR ABILITY TO MANUFACTURE COMPUTER
SYSTEMS WOULD BE HARMED. We purchase components utilized in our computer
manufacturing operations from various suppliers. If we are unable to obtain
sufficient quantities of components our net sales would be adversely affected.
We are also subject to risks of fluctuations in our component prices. If prices
charged by our vendors escalate, our cost of goods sold would increase and our
net income could decrease as a result.

IF OUR INTELLECTUAL PROPERTY PROTECTION IS INADEQUATE, COMPETITORS MAY GAIN
ACCESS TO OUR TECHNOLOGY AND PROPRIETARY PROPERTY WHICH COULD UNDERMINE OUR
COMPETITIVE POSITION. We deal in technically complex products and multi-layered
supply and distribution sources. We have limited proprietary property, and are
relying heavily on copyright, trademark, trade secret, nondisclosure and
confidentiality measures to protect these limited rights. See OUR BUSINESS -
Intellectual Property for a discussion of our intellectual property rights. Such
protections may not preclude competitors from developing similar technologies or
services competitive with ours. While we do not believe that any of our
intellectual property infringes on proprietary rights of third parties, no
assurance can be given that infringement claims may not be asserted. Litigation
resulting from assertion of our rights or from defense of a third party claim
could be expensive and adversely affect our operations even if we were
ultimately successful. There is also no assurance that we will have sufficient
resources to sustain or defend protracted legal actions to protect our
proprietary rights.

OUR SUCCESS DEPENDS ON OUR ABILITY TO CONTINUE TO ADAPT TO A RAPIDLY CHANGING
INDUSTRY. The computer industry is characterized by rapid change, frequent new
product introductions, changing customer demands, evolving standards, and many
other uncontrollable and unforeseeable trends and changes. Our future success
will greatly depend upon our ability to timely and effectively address changes
in this industry. No assurances can be given that we will be able to effectively
deal with these changes, which could result in our operations being
unprofitable.

WE MAY PURSUE ACQUISITIONS OF COMPLIMENTARY BUSINESSES, PRODUCTS AND
TECHNOLOGIES WHICH, IF UNSUCCESSFULLY IMPLEMENTED, COULD DETER OUR OPERATIONS
AND GROWTH. As part of our growth strategy, we have acquired other businesses.
Other acquisitions may occur in the future which could have material adverse
consequences to our operations or to our stock value. A component of our future
growth strategy is possible acquisition of other companies that meet our
criteria for strategic fit, geographic location, revenues, profitability, growth
potential and operating strategy. Successful implementation of this strategy
depends on our ability to identify suitable acquisition candidates, acquire such
companies on acceptable terms and integrate their operations successfully with
ours. Moreover, in pursuing acquisition opportunities we may compete with other
companies with similar growth strategies, certain of which may be larger and
have financial and other resources greater than ours. Competition for
acquisition targets likely could also result in increased prices of acquisition
targets and a diminished pool of companies available for acquisition.
Acquisitions involve a number of other risks, including adverse effects on
reported operating results from increases in goodwill amortization, the risks of
acquiring undisclosed or undesired liabilities, acquired in-process technology,
stock compensation expense and increased compensation expense resulting from
newly hired employees, the diversion of management attention, potential disputes
with the seller of one or more acquired entities and the possible failure to
retain key acquired personnel. Any acquired entity or assets may not perform
relative to our expectations. Our ability to meet these challenges has not been
established.

                                       17
<PAGE>
WE DEPEND UPON OUR KEY PERSONNEL AND SKILLED EMPLOYEES AND THEY WOULD BE
DIFFICULT TO REPLACE. While no assurances can be given that our current
management resources will enable us to succeed as planned, a loss of one or more
of our current officers or key employees could severely and negatively impact
our operations. No assurances can be given that we will not suffer the loss of
key human resources for any variety of reasons. Our future success also depends
on our continuing ability to attract, retain and motivate highly skilled
employees. Competition for employees in the industry is intense. We may be
unable to retain our key employees or to attract, assimilate or retain other
highly qualified employees in the future. We have experienced difficulty from
time to time in attracting the personnel necessary to support the growth of our
business and we may experience similar difficulties in the future.

WE MAY NOT HAVE ADEQUATE INSURANCE TO COVER ALL OF OUR RISKS. We anticipate the
need to procure additional insurance coverage related to product liability, key
man insurance and other risks currently not adequately covered. Failure to
timely obtain additional insurance coverage could have an adverse effect on our
business.

CONTROL OF US IS CONCENTRATED IN PARTIES SUBJECT TO A SHAREHOLDER VOTING
AGREEMENT WHICH LIMITS THE ABILITY OF OTHER SHAREHOLDERS TO INFLUENCE CORPORATE
DECISIONS. Control of us is concentrated within a small number of stockholders
who are subject to a shareholder voting agreement executed as part of the
acquisition of JBSI in January 2001. All current members of our Board of
Directors and several executive officers are parties to the shareholder voting
agreement. The shareholder voting agreement directs those who are parties to the
agreement how to vote their shares of common stock for the election of
directors.When acting in concert, the group subject to the shareholder voting
agreement can effectively control the election of our Board of Directors. The
shareholder voting agreement will terminate in December 2002. As a practical
matter, the current Board of Directors and management will continue to control
Ebiz into the foreseeable future.

THE CONVERSION PRICE OF THE DEBENTURE IS NOT FIXED AND COULD RESULT IN EXCESSIVE
DILUTION. Although our bankruptcy filing has stayed the enforcement of the terms
of the Debenture and it is highly unlikely that any conversion of the Debenture
will occur during our bankruptcy, relief from the bankruptcy court to permit
such enforcement and in turn, conversion, may be possible. The conversion price
of our outstanding Debenture is at variable rates depending upon the market
price of our stock and capped at fixed amounts. See MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and
Capital Resources. This conversion feature could allow the Debenture to be
converted at times when our stock prices are relatively low, could cause our
stock prices to further decline due to the dilutive nature of the conversions
and could generally result in excessive dilution to our current stockholders.
The terms of the Debenture provide us with the ability to redeem for cash under
certain circumstances in lieu of converting the Debenture. While we may exercise
the redemption for cash feature as deemed appropriate to prevent what we
consider to be excessive dilution, there is no assurance that we will have
sufficient cash reserves to redeem the Debenture at any given time of conversion
or at all. We currently do not have any sources of cash reserves sufficient to
redeem the amount of the Debenture that is presently convertible into our common
stock.

THE PRICE OF OUR COMMON STOCK IS HIGHLY VOLATILE. Our stock is currently traded
in the over the counter market. Our stock is subject to high price volatility,
low volumes of trades and large spreads in bid and ask prices quoted by market
makers. Due to the low volume of shares traded on any trading day, persons
buying or selling in relatively small quantities may easily influence prices of
our common stock. This low volume of trades could also cause the price

                                       18
<PAGE>
of our stock to fluctuate greatly, with large percentage changes in price
occurring in any trading day session. Holders of our common stock may also not
be able to readily liquidate their investment or may be forced to sell at
depressed prices due to low volume trading. If high spreads between the bid and
ask prices of our common stock exist at the time of a purchase, the stock would
have to appreciate substantially on a relative percentage basis for an investor
to recoup its investment.

In addition, under a plan of reorganization, existing equity holders may receive
nothing unless new value is given. Following a successful reorganization, if one
is to occur, no assurance can be given that an active market in new common stock
will develop or be sustained. If an active market does not develop, holders of
new common stock may be unable to readily sell the shares they hold or may not
be able to sell their shares at all.

ITEM 2. DESCRIPTION OF PROPERTY

We and several of our subsidiaries had leases for office and warehouse space in
effect at the time of the bankruptcy filings . The bankruptcy filings stayed any
enforcement actions for unpaid rent at the time of the filings. Evaluations are
underway as to the strategic need of space represented by those leases. With the
discontinuation of our sales force in Scottsdale, Arizona, we have eliminated
our need for office space in Arizona. As a result of the acquisition of JBSI, we
lease approximately 50,000 square feet of office/warehouse space in Stafford,
Texas through 2004 at an annual rate of $354,000. Because of our bankruptcy
filing, it is doubtful that we will reaffirm the lease under the current terms.
We anticipate that a new lease, on much more favorable terms, will be negotiated
with the landlord.

LinuxMall is obligated under certain leases of office space in Aurora, Colorado
at an annual rate of approximately $58,000 through March 2004, of office space
in Edina, Minnesota at an annual rate of approximately $107,000 through March
2003 and of office space in Lawrence, Kansas at an annual rate of approximately
$9,100 through January 2003. Since early in 2001, these spaces have not been
used by LinuxMall and payments have not been made on those leases because of
insufficient funds from the LinuxMall operations.

ITEM 3. LEGAL PROCEEDINGS

Miscellaneous claims, including vendor collection suits, and a claim from a
former service provider are outstanding. We believe that these disputes will be
resolved without material adverse consequences to our operations. Additionally,
litigation involving LinuxMall and the founder of Frank Kasper & Associates,
Frank Kasper, Jr., regarding an employment contract has resulted in a judgment
against LinuxMall for approximately $282,000. The judgment is now final and some
effort has been made to collect the judgment from LinuxMall. The operations of
LinuxMall are currently insignificant and there are insufficient funds to
satisfy the judgment.

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

None.

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                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

Our stock is currently traded on the OTC Bulletin Board. Our stock was
temporarily delisted from the OTC Bulletin Board from November 4, 1999 through
December 23, 1999 for failure to meet the deadline for being subject to the
Exchange Act reporting requirements. During this period, our common stock was
traded through the National Quotation Bureau.

The following table sets forth the high and low bid prices for our common stock
as reported by the OTC Bulletin Board and the National Quotation Bureau in the
periods indicated. The quotations set forth below reflect inter-dealer prices,
without retail mark-up, markdown or commission, and may not reflect actual
transactions.

FISCAL 2000                                                 High           Low
                                                           -------       -------
     First Quarter ended September 30, 1999                $ 5.375       $3.4375
     Second Quarter ended December 31, 1999                   3.50        2.8214
     Third Quarter ended March 31, 2000                       3.50        1.6875
     Fourth Quarter ended June 30, 2000                       2.00        1.4688

FISCAL 2001                                                 High           Low
                                                           -------       -------
     First Quarter ended September 30, 2000                $  1.50       $  0.76
     Second Quarter ended December 31, 2000                 0.6875        0.3086
     Third Quarter ended March 31, 2001                     1.1250          0.75
     Fourth Quarter ended June 30, 2001                       0.29          0.07

HOLDERS

As of June 30, 2001, there were approximately 550 owners of record of our common
stock. The transfer agent for our common stock is ComputerShare Investor
Services in Lakewood, Colorado.

DIVIDEND POLICY

Under Nevada law, dividends may only be paid out of net profits. Holders of our
common stock are entitled to receive dividends, if any, as declared by our Board
of Directors. We have never declared or paid a dividend on our common stock and
we do not intend to pay dividends in the foreseeable future. We are required to
accrue a 10% ($10 per share) cumulative annual dividend for each share of our
Series A Preferred outstanding. This dividend is payable as and when declared by
our Board of Directors before payment of any dividends on common stock may be
made. Dividends on the shares of Series A Preferred may be payable in whole or
in part, at our discretion, in cash or in kind with our common stock. Under the
provisions of a cash collateral order with our largest

                                       20
<PAGE>
secured creditor, Canopy , which order has been issued by the bankruptcy court,
no provision has been made to utilize proceeds of the cash collateral for the
payment of dividends and we have no other funds for paying any dividends. We are
also subject to restrictions on the payment of dividends under the terms of our
outstanding Debenture held by JEM Ventures EBIZ, LLC. Unless otherwise directed
by the bankruptcy court, our bankruptcy filing has stayed the enforceability of
the terms of the Debenture.

SALES OF UNREGISTERED SECURITIES

On March 31, 2000, we issued 2,500,000 shares of common stock to Mr. Shi-En
Shiau for a total purchase price of $5,000,000. The purchase price was paid
$500,000 in cash and $4,500,000 by delivery of a promissory note. A total of
$400,000 of additional cash was received on the promissory note. The remaining
balance on the note was not timely paid and under the terms of the agreement, as
amended, the 2,500,000 shares were canceled and we have agreed to deliver
584,415 shares in consideration for the cash payments received. No underwriters
were involved and the shares were exempt from registration under section 4(2) of
the Securities Act of 1933 (the Act). The shares were issued to Mr. Shi-En Shiau
in a private transaction for investment only and not with a view to distribution
of the shares.

On September 15, 2000, we issued 3,000,000 shares of common stock to Caldera for
a total purchase price of $3,000,000 which was paid in cash. The proceeds from
the sale were originally restricted for use in development of the Electronic
Linux Marketplace assets which were transferred to partnerAxis. No underwriters
were involved and the shares were exempt from registration under section 4(2) of
the Act. The shares were issued to Caldera in a private transaction for
investment only and not with a view to distribution as part of our purchase of
the Electronic Linux Marketplace assets.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

The following discussion provides information that we believe is relevant to an
assessment and understanding of our results of operations and financial
condition for the fiscal year ending June 30, 2001. The following discussion
should be read in conjunction with the Financial Statements and related notes.
See INDEX TO FINANCIAL STATEMENTS and the Financial Statements referenced in the
index.

RECENT DEVELOPMENTS

BANKRUPTCY FILING. On September 7, 2001 we and our wholly owned subsidiary JBSI
filed separate voluntary petitions to reorganize under Chapter 11 of the
Bankruptcy Code with the federal bankruptcy court in Phoenix, Arizona. We are
currently operating as a debtor-in-possession under the supervision of the
bankruptcy court. As a debtor-in-possession, we are authorized to operate our
business but may not engage in transactions outside the ordinary course of
business without approval of the bankruptcy court.

The accompanying financial statements have been prepared on a going concern
basis which assumes continuity of operations and realization of assets and
liquidation of liabilities in the ordinary course of business. As a result of
the reorganization proceedings, there are uncertainties relating to our ability

                                       21
<PAGE>
to continue as a going concern. The financial statements do not include any
adjustments that might be necessary as a result of the outcome of the
uncertainties discussed herein including the effects of any plan of
reorganization.

Since the filing of the voluntary petitions on September 7, 2001, significant
bankruptcy related events have occurred which include the Bankruptcy court
entering final orders approving (i) the Stipulation on September 13, 2001, (ii)
the Secured Line on September 24, 2001, and (iii) the Dealer Loan and LOC on
November 8, 2001 (See LIQUIDITY AND CAPITAL RESOURCES ).

OVERVIEW

ACQUISITION OF LINUXMALL.COM, INC.

On October 5, 2000, we completed the acquisition of LinuxMall.com, Inc. by the
merger of LinuxMall into a newly formed wholly owned subsidiary. Linuxmall.com
owned some of the most popular Linux oriented websites on the internet. These
sites include Linuxmall.com, Linuxnews.com, PenguinPower.com and others.
Additionally, Linuxmall.com has extensive history in the Linux industry.
LinuxMall, including its founder and Board of Advisors, are a collection of the
primary initiators of the Linux movement.

The purpose of this acquisition was to merge the extensive Linux expertise of
LinuxMall and its associated customer base, with our sales and manufacturing
expertise. Additionally, the high profile nature of the LinuxMall.com website
brought additional exposure for us in the Linux community. By the end of 2000,
all LinuxMall operations were consolidated into the Scottsdale, Arizona office
and the Denver facility was closed.

ACQUISITION OF JBSI, INC.

On January 4, 2001, we completed the acquisition of JBSI by the merger of JBSI
into a newly formed wholly owned subsidiary . A ten-year old company with a
loyal customer base, JBSI was one of the largest resellers of Santa Cruz
Operations (SCO) Unix software in the country. JBSI also has a state-of-the-art
50,000 square foot, uniquely configured manufacturing facility designed to
support the Value Added Reseller (VAR) channel.

We determined the primary source of new Linux users were migrating from the Unix
environment. This conclusion was underscored by the pending sale of SCO Unix to
Caldera Systems, Inc., a leading supplier of Linux operating software. The
purpose of this merger was to capitalize on JBSI's Unix customer base by
capturing future Linux users as they began their migration path from Unix.
Furthermore, JBSI's manufacturing facilities located in Stafford, Texas were
better equipped to handle our projected manufacturing needs . By March 31, 2001,
a majority of our operations had been moved and integrated into the Stafford,
Texas facilities. The Scottsdale offices were relocated to a smaller facility
housing only a sales force and corporate offices.

ACQUISITION AND DISPOSITION OF PARTNERAXIS

On September 19, 2000, we acquired from Caldera all of the intellectual property
and certain other specified assets related to Caldera's proprietary marketing
and distribution concept known as the Electronic Linux Marketplace (ELM). We
operated these assets as a separate, wholly owned corporation known

                                       22
<PAGE>
as partnerAxis, Inc. PartnerAxis attempted to build a business-to-business
Web-based exchange for Linux product sales, advertising, knowledge membership
and channel development. PartnerAxis was intended to be a unique virtual
community specifically designed to attract users, manufacturers and electronic
solution providers, and to provide information and support to develop and market
Linux solutions (and other innovations).

The ELM assets consisted principally of ideas, concepts, software systems and
other intellectual property related to the ELM. Certain specified computer and
office equipment were also acquired in this transaction.

In the first quarter of 2001 it became apparent to management that the
development of the partnerAxis concept would take more time and additional
capital than was originally projected. Consequently, a buyer for partnerAxis was
sought. On April 16, 2001, we completed the sale of partnerAxis, Inc to
BySynergy, pursuant to a Stock Purchase Agreement dated April 13, 2001. The
Company realized a loss of $3,612,171 in relation to this sale.

LONG TERM DEBT WITH FINOVA CAPITAL AND CANOPY

With the acquisition of JBSI we assumed a revolving line of credit (RLOC) and a
term note, both from Finova Capital Corporation. Both instruments were
guaranteed by a first position lien on all of our assets, including our accounts
receivable. On April 15, 2001, the Finova RLOC expired and access to funds as a
result of this instrument was terminated. As a result, we had no access to cash
for operations, as all collected receivables were diverted to pay down the
Finova RLOC.

After some discussions by management with Finova, the RLOC was extended until
June 30, 2001. On June 30, 2001. The RLOC was terminated permanently. In August,
2001 Canopy assumed Finova's first position lien by purchasing the $2,000,000
balance of the term note and the approximately $350,000 balance of the RLOC.
Canopy reestablished access to collected accounts receivable at that time,
thereby providing cash to us for our operations.

RESULTS OF OPERATIONS

YEAR ENDED JUNE 30, 2001 COMPARED TO YEAR ENDED JUNE 30, 2000. Net revenue was
$20,973,661 for the year ended June 30, 2001 compared to $11,900,667 for the
year ended June 30, 2000. The increase of $9,072,994, approximately 76.2% over
the prior period, was primarily due to the volume added by the JBSI acquisition
in January 2001.

Cost of sales for the year ended June 30, 2001 was $18,434,284 as compared to
10,961,638 for the year ended June 30, 2000, an increase of $7,472,646. The cost
of sales percentage for year ended June 30, 2001 decreased to 87.9% of sales
from 92.1% of sales for the same period in 2000, resulting in a corresponding
gross profit margin increase to 12.1% from 6.8%, after effect of restructuring
charge, of sales for these same periods. The improvement was the result of our
strategic shift towards Linux products and systems and the addition of higher
margin sales by the JBSI acquisition. During the year ended June 30, 2001, we
recorded a charge to cost of sales of approximately $577,000 for obsolete and
inactive inventory. The gross profit for the year ended June 30, 2001 was
$2,539,377, an increase of $1,600,348 from the year ended June 30, 2000.

                                       23
<PAGE>
Selling, general and administrative expense was $10,506,995, or 50% of revenue,
for the year ended June 30, 2001 as compared to $7,312,259, or 61% of revenue,
for the same period in the prior year. The increase of $3,194,736, or 43.7%, was
primarily due to additional expenses incurred related to the JBSI and LinuxMall
acquisitions. Most of these additional expenses were one-time in nature such as
professional fees and additional travel. In addition we incurred duplicate
overhead costs related to the separate operation of the companies until the
integrations were complete. We also incurred restructuring charges related to
the closing of the facilities in Arizona and Colorado. Additional one-time costs
of approximately $800,000 came from the development of partnerAxis, which we
disposed of in April 2001 and recorded a loss of $3,612,171. The increases were
partially offset by a decrease of $1,844,000 in marketing and advertising
expenses. The reduction was primarily due to the elimination of the CNET
advertising program that we participated in during fiscal 2000.

Depreciation and amortization expense for the year ended June 30, 2001 was
$6,273,681, an increase of $6,008,681 over the $265,000 recorded for the year
ended June 30, 2000. The increase was due to the amortization of the partnerAxis
intangible assets and the amortization of the goodwill recorded as the result of
the LinuxMall and JBSI acquisitions.

Interest expense was $4,818,639 for the year ended June 30, 2001 as compared to
$3,188,415 for the year ended June 30, 2000. The increase of $1,630,224 was
primarily due to the amortization expenses related to the Debenture, costs
recorded for the warrants issued in connection with capital financings, and
interest on additional debt assumed with the acquisition of LinuxMall and JBSI.
Interest and other income for the year ended June 30, 2001 was $183,814, a
decrease of $51,620 from the same period in 2000, related to the decrease in
restricted cash balance.

During the last quarter of 2001 we determined that there was an impairment of
the goodwill and other intangibles related to the Linuxmall and JBSI
acquisitions which resulted in a charge of $25,142,645 which includes the
writedown of the investment in Vericenter due to the unlikeliness of collection.

The preceding factors resulted in a net loss attributable to common stockholders
of $49,090,384, or $2.32 per diluted share, for the year ended June 30, 2001 as
compared to a net loss attributable to common stockholders of $10,121,304, or
$1.32 per diluted share, for the year ended June 30, 2000.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2001 we had cash and cash equivalents of $557,894 representing a
$506,897 increase from the total of $50,997 at June 30, 2000.

OPERATING ACTIVITIES. Our net cash used in operating activities was $6,511,016
for the fiscal year ended June 30, 2001. The major sources were reductions in
accounts receivable and increases in accounts payable offset by a decrease in
accrued expenses, primarily accrued interest.

                                       24
<PAGE>
INVESTING ACTIVITIES. The net cash used in investing activities was $252,660 and
$265,921 for the twelve months periods ending June 30, 2001 and June 30, 2000,
respectively. The primary use of the cash was for purchase of furniture and
fixtures.

FINANCING ACTIVITIES. During the year ended June 30, 2000, the net cash provided
by financing activities was $7,270,573. The transfer of restricted cash of
approximately $4,200,000 was used for conversion of the Debenture to common
stock ($2.1 million), repayment of Debenture principal ($1.4 million) and to
reduce interest payable ($0.7 million). We also received 3 million from the
issuance of 4 million shares of common stock to Caldera.

DEBENTURE AND WARRANT

On August 25, 1999 we issued the Debenture and warrant for a total of $7.1
million. The Debenture is due February 24, 2002. The principal of the Debenture
was initially convertible into a minimum of 947,260 shares of our common stock.
The holder could convert up to $394,444 face amount of the Debenture upon
issuance and up to $394,444 on each monthly anniversary date thereafter (each, a
DUE DATE). Any amount not converted accumulates and may be converted thereafter.
The holder is prohibited from converting any amount of the Debenture which would
cause the holder's total ownership of common stock to equal five percent or more
of the total shares outstanding. The per share conversion price was initially
equal to the lesser of (a) $7.4953 or (b) the average of the three lowest
closing bid prices of our common stock for the 15 consecutive trading days
ending on the trading day immediately preceding submission of a notice to
convert by the holder. In the event the closing bid price of our common stock is
less than $7.4953 per share at any time during the five trading days preceding a
Due Date, we have the right to redeem for cash the monthly conversion amount of
the Debenture (in lieu of allowing the holder to convert such amount) at
premiums ranging from 105% to 108%. The Debenture is secured by current deposits
at American National Bank and Trust Company of Chicago. The initial amount
deposited was $5,000,000 reduced by $500,000 released during February 2000,
$250,000 in July 2000 and $2,083,500 in October 2000. In connection with the
release of the $250,000 in July 2000, we issued a warrant to acquire 125,000
shares of common stock at $2.00 per share. The warrant is exercisable at any
time prior to July 12, 2003. As of June 30, 2001, the warrant had not been
exercised. The required amount of the restricted cash decreases by $0.7042 for
every $1 of principal reduction of the Debenture whether the reduction occurs by
conversion or redemption. Aggregate conversions of principal and accrued
interest have been made and as of June 30, 2001, $2,725,209 of principal and
accrued interest had been converted to 2,831,028 shares of common stock.

On February 8, 2000, we agreed with the holder of the Debenture to modify the
terms of conversion of the Debenture. The per share conversion price of the
accrued principal convertible as of February 25, 2000 of $2,761,108 and
outstanding interest as of February 7, 2000 of $140,203 was changed to equal the
lesser of (a) $3.84, or (b) the average of the three lowest closing bid prices
of its common stock for the 15 consecutive trading days ending on the trading
day immediately preceding the submission of a conversion notice by the holder.
The $3.84 per share price equaled the conversion price of the Debenture on
January 25, 2000

On March 31, 2000 we agreed with the Debenture holder agreed to an additional
modification to the conversion price formula by changing the reset price
determinant to the average of the three lowest trading prices from the three
lowest closing bid prices occurring in the 15 day period prior to conversion.
All other aspects of the formula remained unchanged.

                                       25
<PAGE>
On October 19, 2000, we agreed to additional modifications of the Debenture. The
holder agreed to convert $2,083,500 principal amount of the Debenture in
exchange for 2,500,000 shares of our common stock. The holder agreed to reduce
the cash collateral requirements of the Debenture by $2,083,500. We also agreed
to convert the per share conversion ratio for an additional $416,500 principal
amount of the Debenture to the lesser of (a) $1.00 or (b) the average of the
lowest trading prices occurring on any three of the 15 day period prior to a
conversion.

The original warrant included as part of the transaction when we issued the
Debenture was exercisable for the purchase of 245,000 shares of our common
stock, 60,000 at $7.4723 per share, 60,000 at $8.6219 per share and 125,000 at
$6.3227 per share. The exercise prices were modified on October 19, 2000 to
$4.00 per share in connection with the transaction described above. The warrant
is exercisable at any time prior to August 22, 2004. As of June 30, 2001 none of
the warrants have been exercised.

On June 11, 2001, the Debenture holder withdrew the remaining amount which was
approximately $2,091,000 of the restricted cash. The cash withdrawn was used to
reduce outstanding interest of approximately $678,000 and principal of
approximately $1,413,000. The remaining principal balance of the debenture at
June 30, 2001 was approximately $3,113,000.

On September 13, 2001 we entered into a Stipulation with Canopy which allows us
to use 95% of the collections received from pre-petition accounts receivable on
which Canopy holds a security interest. In exchange for this agreement, we
granted Canopy a first lien security interest in all of our post petition
receivables, inventory and the proceeds thereof. In addition, we may use 95% of
the proceeds from all post petition accounts receivable and inventory to operate
our business. The remaining 5% is to be applied to the outstanding balance of
the debt owed to Canopy which approximates $,100,000. The Stipulation has
provided some temporary relief for the cash flow challenges we continue to
experience.

On September 24, 2001 we entered into the Secured Line with Caldera. Under terms
of the Secured Line, Caldera provided a $250,000 line of credit to us which will
facilitate our ability to purchase product from Caldera. In exchange for the
granting of the line of credit, we executed a promissory note for $542,125.61
representing the pre-petition debt owed to Caldera and granted a junior security
interest in all of our assets to Caldera to secure the promissory note and all
amounts that may become due and owing under the line of credit.

On November 8, 2001 we entered into the Dealer Loan with Textron, and the LOC
with Canopy. Under the terms of the Dealer Loan, Textron will provide us credit
and financing in the amount of $500,000 to facilitate the purchase of goods and
inventory on favorable terms from our suppliers. This will provide assistance in
filling orders from our clients and meeting the demand for our products. Under
the LOC, Canopy has provided a $500,000 letter of credit to secure the credit
extended by Textron under the Dealer Loan.

As a result of the above factors, among others, our auditors have modified their
opinion to our financial statements indicating there is substantial doubt about
our ability to continue as a going concern.

                                       26
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          INDEX TO FINANCIAL STATEMENTS

Report of Independent Public Accountants                                      28

Balance Sheet at June 30, 2001                                                29

Statement of Operations for the Year Ended June 30, 2001                      30

Statement of Stockholders' Equity (Deficit) for the Year
  ended June 30, 2001                                                         31

Statement of Cash Flows for the Year Ended June 30, 2001                      32

Notes to Financial Statements for the Year Ended June 30, 2001                33

Report of Independent Public Accountants                                      50

Balance Sheets at June 30, 2000 and 1999                                      51

Statements of Operations for the Years Ended June 30, 2000 and 1999           52

Statements of Stockholders' Equity (Deficit) for the Years
  ended June 30, 2000 and 1999                                                53

Statements of Cash Flows for the Years Ended June 30, 2000 and 1999           54

Notes to Financial Statements for the Years Ended June 30, 2000 and 1999      55

                                       27
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO EBIZ ENTERPRISES, INC.:

We have audited the accompanying consolidated balance sheets of EBIZ
Enterprises, Inc., a Nevada corporation, (the Company) as of June 30, 2001, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EBIZ Enterprises,
Inc. as of June 30, 2001, and the results of its operations and its cash flows
for the year then ended 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 discussed in Note 1 to the
financial statements, the Company incurred net losses and had negative cash
flows from operations in 2001, has an accumulated deficit, does not have
sufficient capital to support its operations, and has filed petitions to
reorganize under Chapter 11 of the Bankruptcy Code with the federal bankruptcy
court. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The accompanying financial statements do not include
any adjustments to classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.


/s/ SEMPLE & COOPER LLP

PHOENIX, ARIZONA
OCTOBER 2, 2001

                                       28
<PAGE>
                             EBIZ ENTERPRISES, INC.
                           CONSOLIDATED BALANCE SHEET
                                  JUNE 30, 2001

                                     ASSETS


Current Assets:
  Cash                                                             $    557,894
  Accounts receivable, net of allowance for doubtful
    accounts of $1,085,815                                            1,958,486
  Inventory, net                                                        999,365
  Prepaid expenses and other current assets                             179,543
                                                                   ------------
     Total current assets                                             3,695,288
Property and Equipment, net                                           1,183,361
Deferred Loan Fees, net                                                  52,443
Restricted cash                                                         258,879
Goodwill, net                                                         2,832,230
Other Assets                                                             69,557
                                                                   ------------
            Total assets                                           $  8,091,758
                                                                   ============

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities:
  Accounts payable                                                 $  9,499,695
  Accrued expenses                                                    2,383,609
  Notes payable                                                       4,722,873
  Related party Notes payable                                         2,330,986
  Convertible Debenture, net of discount                              2,889,579
                                                                   ------------
            Total current liabilities                                21,826,742

Notes payable                                                           486,812
                                                                   ------------
            Total liabilities                                        22,313,554
                                                                   ------------

Commitments and Contingencies
Stockholders' Equity (Deficit):
  Convertible preferred stock; $0.001 par value;
    5,000,000 shares authorized; 7,590 shares
    issued and outstanding                                              366,737
  Common stock; $0.001 par value; 70,000,000 shares
    authorized; 34,062,328 shares issued and outstanding                 34,063
  Additional paid-in capital                                         46,715,220
  Accumulated deficit                                               (61,337,816)
                                                                   ------------
     Total stockholders' equity (deficit)                           (14,221,796)
                                                                   ------------
            Total liabilities and stockholders' equity             $  8,091,758
                                                                   ============

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

                                       29
<PAGE>
                             EBIZ ENTERPRISES, INC.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                        FOR THE YEAR ENDING JUNE 30, 2001

Net Revenue                                                        $ 20,973,661
Cost of Sales                                                        18,434,284
                                                                   ------------
  Gross profit                                                        2,539,377

Selling, General and Administrative Expenses                         10,506,995
Depreciation and Amortization                                         6,273,681
Provisions for Doubtful Accounts                                      1,383,544
Loss on Sale of partnerAxis                                           3,612,171
                                                                   ------------
  Loss from Operations                                              (19,237,014)

Other Income (Expense):
  Interest Expense                                                   (4,818,639)
  Interest & Other income                                               183,814
  Impairment of Intangibles & Investments                           (25,142,645)
                                                                   ------------
Net loss                                                            (49,014,484)
                                                                   ------------

Dividends on preferred stock                                            (75,900)
                                                                   ------------
Net Loss Attributable To Common Stockholders                       $(49,090,384)
                                                                   ============

Net Loss Per Common Share, Basic and Diluted                       $      (2.32)
                                                                   ============

Weighted Average Common Shares: Basic and Diluted                    21,197,886
                                                                   ============

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

                                       30
<PAGE>
                             EBIZ ENTERPRISES, INC.
            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                        FOR THE YEAR ENDING JUNE 30, 2001

<TABLE>
<CAPTION>
                                 Preferred Stock       Common Stock        Additional       Note        Accumulated    Stockholders'
                                -----------------   --------------------     Paid-in     Receivable      Earnings/         Equity
                                Shares    Amount      Shares     Amount      Capital      for Stock       Deficit        (Deficit)
                                ------   --------   ----------   -------   -----------   ------------   ------------   ------------
<S>                              <C>     <C>         <C>         <C>       <C>           <C>            <C>            <C>
BALANCE, JUNE 30, 2000           7,590   $366,737    8,497,566   $ 8,498   $ 9,808,580   $         --   $(12,247,432)  $ (2,063,617)
Options and warrants issued
  for consulting services           --         --           --        --        54,923             --             --         54,923
Stock issued for services           --         --      361,600       362       385,838             --             --        386,200
Warrants issued to debenture
  holder                            --         --           --        --     1,363,496             --             --      1,363,496
Accrued dividends on
  preferred stock                   --         --           --        --            --             --        (75,900)       (75,900)
Beneficial conversion feature
  of convertible debentures         --         --           --        --       302,566             --             --        302,566
Conversion of debt and interest     --         --    5,415,733     5,415     5,057,915             --             --      5,063,330
Stock, options and warrants
  issued for business
  acquisitions                      --         --   19,547,429    19,548    28,542,142        248,800             --     28,810,490
Expiration of redemption
  provisions on Common Stock        --         --      240,000       240     1,199,760             --             --      1,200,000
Impairment of Note Receivable
  for Common Stock                  --         --           --        --            --       (248,800)            --       (248,800)
Net loss, warrants and options      --         --           --        --            --    (49,014,484)   (49,014,484)
                                 -----   --------   ----------   -------   -----------   ------------   ------------   ------------
BALANCE, JUNE 30, 2001           7,590   $366,737   34,062,328   $34,063   $46,715,220   $         --   $(61,337,816)  $(14,221,796)
                                 =====   ========   ==========   =======   ===========   ============   ============   ============
</TABLE>

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

                                       31
<PAGE>
                             EBIZ ENTERPRISES, INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                        FOR THE YEAR ENDING JUNE 30, 2001

<TABLE>
<S>                                                                               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                        $(49,014,484)
  Adjustments to reconcile net loss to net cash used in operating activities-
    Depreciation and amortization                                                    6,273,681
    Stock, options and warrants exchanged for services                                 441,123
    Impairment of intangibles and investments                                       25,505,092
    Warrants issued to debt holders                                                  1,363,496
    Loss on Sales of partnerAxis                                                     3,612,171
    Increase in reserves and allowances                                              2,686,736
    Interest costs of Beneficial Conversion Feature                                  1,679,202
    Amortization of discount and loan fees                                             741,374
    Changes in assets and liabilities:
      Accounts receivable                                                              509,335
      Inventory                                                                       (376,265)
      Prepaid expenses and other current assets                                         16,060
      Accounts payable                                                               1,154,528
      Accrued expenses                                                              (1,103,065)
                                                                                  ------------
          Net cash used in operating activities                                     (6,511,016)
                                                                                  ------------

CASH FLOWS FROM INVESTING ACTIVITIES: (net of effect of business acquisitions):
  Cash from Business acquisitions                                                      128,355
  Increase in other assets                                                              (5,686)
  Purchase of furniture, fixtures, intellectual property and equipment,net            (375,329)
                                                                                  ------------
          Net cash used in investing activities                                       (252,660)
                                                                                  ------------

CASH FLOWS FROM FINANCING ACTIVITIES: (net of effect of business acquisitions):
  Net (repayments)  borrowings under  line of credit                                   912,206
  Borrowings under notes payable                                                     1,581,462
  Principal repayments of notes payable                                             (2,468,380)
  Transfer from/(to) restricted cash (non-current), net                              4,245,285
  Sale of stock, net of expenses                                                     3,000,000
                                                                                  ------------
          Net cash provided by financing activities                                  7,270,573
                                                                                  ------------

  Net increase in cash                                                                 506,897
  Cash, beginning of year                                                               50,997
                                                                                  ------------
  Cash, end of year                                                               $    557,894
                                                                                  ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for interest                                             301,453

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND OPERATING ACTIVITIES:
  Issuance of common stock for services                                                386,200
  Dividends accrued on preferred stock                                                  75,900
  Beneficial Conversion Feature on Convertible Debentures                            1,679,202
  Issuance of warrants and options for consulting services                              54,923
  Issuance of warrants to Debenture holder                                           1,363,496
  Conversion of debt and related interest to common stock                            5,063,330
  Issuance of common stock for business acquisitions                                25,561,690
</TABLE>

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

                                       32
<PAGE>
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND USE OF
ESTIMATES

NATURE OF OPERATIONS

EBIZ Enterprises, Inc. (the Company) manufactures and sells its Terian general
purpose application computer servers as a packaged computing solution with
software applications provided by its independent software vendor partners and
vertical channel partners. The Company also distributes and serves as a
value-added reseller of computer equipment and software throughout the United
States. The Company is based in Houston, Texas.

On October 5, 2000, the Company completed the acquisition of LinuxMall.com, Inc.
(LINUXMALL) by the merger of LinuxMall into a newly formed wholly owned
subsidiary of the Company. LinuxMall owns some of the most popular Linux
oriented websites on the internet. Additionally, Linuxmall.com has extensive
history in the Linux industry. LinuxMall, including its founder and Board of
Advisors, are a collection of the primary initiators of the Linux movement. The
purpose of this acquisition was to merge the extensive Linux expertise of
LinuxMall and its associated customer base, with the sales and manufacturing
expertise of EBIZ. Additionally, the high profile nature of the LinuxMall.com
website brought additional exposure for EBIZ in the Linux community. (See Note
2)

On January 4, 2001, the Company completed the acquisition of JBSI by the merger
of JBSI into a newly formed wholly owned subsidiary of the Company. JBSI was one
of the largest resellers of Santa Cruz Operations (SCO) Unix software in the
country. The purpose of this merger was to capitalize on JBSI's Unix customer
base by capturing future Linux users as they began their migration path from
Unix. Furthermore, JBSI's manufacturing facilities located in Stafford, Texas
were better equipped to handle the projected manufacturing needs of EBIZ
Enterprises. (See Note 2)

The Company was originally incorporated in Colorado in May 1984, as VDG Capital
Corporation. Following a reorganization, the Company's name was changed to
Vinculum Incorporated (Vinculum) in August 1994. In June 1998, the Company
acquired the operating assets and liabilities of Genras, Inc. (an Arizona
corporation) and reincorporated in Nevada as CPU Micromart, Inc. In May 1999,
the Company changed its name to EBIZ Enterprises, Inc.

MANAGEMENT PLANS

Our objective is to deliver Linux-Unix solutions through channel partners who in
turn focus on the corporate business marketplace. We intend to achieve this
objective by utilizing two primary delivery channels in which we believe we will
have strong presence and positioning, especially after our acquisitions of
LinuxMall and JBSI. These channels are:

*    DIRECT SALES. Our largest source of revenue and growth is expected to be
     through our own internal direct sales force. The sales force sells fully
     integrated Linux-Unix solutions to the corporate business environment -
     primarily through Value Added Resellers (VARs).

*    E-COMMERCE. Our flagship Web sites are LINUXMALL.COM and EBIZMART.COM.
     These sites provide marketing and distribution opportunities for providers
     of Linux-Unix products and services and advertisers to Linux users. These
     sites also serve the Linux-Unix user, providing a broad selection of
     products and merchandise, as well as technical support and community
     information. These Web sites are intended to be the home of the largest
     selection anywhere of Linux-compatible technical products and related
     items, including servers, desktop and notebook computer systems,
     communications and networking products, hardware, components, peripherals
     and software applications, games and utilities, and apparel and specialty
     merchandise.

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Our strategic objectives are to:

*    Maintain our comprehensive Web sites that combine product marketing with
     Linux-Unix community interests such as news, resources, links pre- and
     post-sales technical support, hardware service and customer service;

*    Utilize our Linux-Unix product development expertise to create unique
     product lines for bundling into delivered solutions;

*    Generate revenue through product sales as well as through technical
     support, service and training opportunities, customer services, Internet
     advertising, marketing and Web links;

*    Expand sales, marketing, production and distribution of our branded product
     lines; and

*    Establish ourselves as an active member of the Linux-Unix community known
     to aggressively support the open source development initiative.

In order to meet these objectives, we will require additional funding to
implement our planned sales, marketing and product development activities.

On September 7, 2001 the Company filed a voluntary petition under Chapter 11 of
the Bankruptcy Code with the federal bankruptcy court in Phoenix, Arizona. We
are developing a reorganization plan which we expect to file with the bankruptcy
court by December 15th, 2001. Confirmation of a plan of reorganization is
necessary for the Company to continue as a going concern. The bankruptcy filing
was precipitated by our inability to raise additional capital, the loss of the
asset base credit facility for our wholly owned subsidiary, JBSI and debt that
the Company was unable to adequately support. The long term implementation of
our business plan and our company strategies as well as the achievement of the
objectives of those strategies is dependent upon our ability to successfully
restructure through a confirmed plan of reorganization.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company incurred losses and had
negative cash flows from operations in 2001 and 2000 and does not have
sufficient capital needed to support its operations. Our inability to
successfully achieve confirmation of a plan of reorganization under the
Bankruptcy Code will eliminate our continuation as a going concern. The
bankruptcy filing of the Company in September 2001 has provided the immediate
benefit of staying any debt collection actions that may be pending, offers a
method for the Company to restructure its debts and provides a procedure for the
Company to reorganize as a viable going concern. However, there are numerous
factors that may prevent confirmation of a plan including the acceptance of the
plan by the various classes of claims and interest holders. There are no
assurances that a plan of reorganization will be confirmed which is necessary
for the Company to continue operations. The accompanying financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its subsidiaries from their respective dates of acquisition. All intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.

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<PAGE>
CASH AND CASH EQUIVALENTS

The Company considers highly liquid investments with an original maturity of
three months or less from the date of purchase to be classified as cash and cash
equivalents.

REVENUE RECOGNITION

Revenues are recognized upon shipment of product under confirmed customer
purchase orders. Provision is made for an estimate of doubtful accounts and is
based on historical experience. A provision is also made for estimated returns
and warranty repairs. System component and replacement costs are generally
covered under the third-party manufacturer's warranty. The Company had an
allowance for warranty repair costs of approximately $18,000 at June 30, 2001
related to the sales of its computers.

The Company has authorized distributorship agreements with various
manufacturers. These agreements also provide for periodic reimbursement of a
portion of the Company's advertising expenses and credit toward purchases based
on the Company's transaction volume.

The cost of software to be sold, leased or otherwise marketed that has
alternative future use is recorded in cost of sales in the period the related
revenue is recognized. The Company did not sell any software that was internally
developed and no costs were incurred for internal development of software during
2001. In accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or otherwise Marketed, the Company expenses the
research and development costs incurred until technological feasibility is
attained. The Company would consider technological feasibility upon the
completion of a product design and working model.

The Securities and Exchange Commission (SEC) released Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements, on December 3, 1999.
On June 26, 2000 the SEC staff announced that they are delaying the required
implementation date for SAB No. 101 with the issuance of SAB No. 101B. The SAB
provides additional guidance on the accounting for revenue recognition,
including both broad conceptual discussions as well as certain industry-specific
guidance. The new guidance concerning customer acceptance and installation terms
may have a significant impact on the timing of the Company's revenue
recognition. The Company does not anticipate any material impact from the
adoption of SAB No. 101 on its future results of operations and financial
position.

ADVERTISING AND PROMOTION

Advertising costs are expensed as incurred and are included in sales and
marketing expenses in the accompanying consolidated statement of operations.
Advertising expense was approximately $632,000 for the year ended June 30, 2001.

INCOME TAXES

The Company accounts for income taxes using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. In estimating future tax consequences, all
expected future events are considered other than enactments of changes in the
tax law or rates.

LOSS PER SHARE

No outstanding options or warrants were assumed to be exercised for purposes of
calculating diluted earnings per share for the year ended June 30, 2001, as
their effect was anti-dilutive.

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PENDING ACCOUNTING PRONOUNCEMENTS

In September 2001 the Financial Accounting Standards Board adopted Opinion No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. The
pronouncement provides a single, comprehensive accounting model for impairment
and disposal of long-lived assets and discounted operations. The Company does
not expect the adoption of the standards to have a material effect on the
financial statements. The standard is effective for fiscal years beginning after
December 15, 2001.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT

During the year ended June 30, 2001 the Company adopted SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
The Company has determined that there was no material effect on the financial
statements from the adoption of this financial standard.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT

In June 2001 the Financial Accounting Standards Board adopted Opinion No. 141,
Business Combinations, and Opinion No. 142, Goodwill and Other Intangibles. The
pronouncements provide for the cessation of the pooling method of accounting for
business combinations as well as providing that goodwill and other intangible
assets that have indefinite useful lives will not be amortized but rather will
be tested at least annually for impairment. The Company does not expect the
adoption of the standards to have a material effect on the financial statements.
The effective dates for Financial Accounting Standards Nos. 141 and 142 are July
1, 2001 and for fiscal years beginning after December 15, 2001, respectively.

STOCK BASED COMPENSATION

The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standard (SFAS) No. 123, Accounting for Stock-Based
Compensation Issued to Employees. SFAS No. 123 prescribes using the fair value
method of accounting for stock-based compensation issued to employees; however,
the Company has elected, as permitted by SFAS No. 123, to continue to use the
intrinsic value method in its primary financial statements. The intrinsic value
method records compensation expense for stock based upon the difference between
the exercise price and the fair market value of the Company's stock at the date
of grant, recognized over the vesting period of the options.

CONCENTRATION OF CREDIT RISK

Financial instruments which subject the Company to concentrations of credit risk
consist primarily of cash equivalents and accounts receivable. The Company
maintains a majority of its cash equivalent balance in overnight sweep
investments. Management believes that concentrations of credit risk with respect
to accounts receivable are limited because the Company's customer base is large
and dispersed across many different industries and geographic regions. The
Company performs ongoing credit evaluations of its customers to minimize risks.

INVENTORY

Inventory consists of microcomputers and related peripheral products and
software and is valued at the lower of cost (first-in, first-out) or market. The
inventory balance at June 30, 2001 is shown net of an allowance for obsolescence
of $1,048,912.

PROPERTY AND EQUIPMENT

Property and equipment are carried at cost. The cost of additions and
improvements is capitalized, while maintenance and repairs are charged to
operations when incurred. Depreciation is recorded using the straight-line
method over the estimated useful life of the asset.

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LONG-LIVED ASSETS

The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The carrying amount
of a long-lived asset is considered impaired when anticipated undiscounted cash
flows expected to result from the use of the asset and its eventual disposition,
is less than its carrying amount.

In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets, the Company recorded an impairment loss on the long-lived assets of its
Linuxmall.com business. The trends in the Linuxmall.com business indicated that
the undiscounted future cash flows from this business would be less than the
carrying value of the long-lived assets related to that business. Accordingly,
during the year ended June 30, 2001 the Company recognized an asset impairment
loss of $17,062,336 ($17,062,336 net of tax, or $0.80 per share). This loss is
the difference between the carrying value of the Linuxmall.com assets and
related goodwill and other intangibles, and the fair value of these assets based
on discounted estimated future cash flows.

The Company also recorded an impairment loss on the long-lived assets of its
JBSI business. The trends in the JBSI business indicated that the undiscounted
future cash flows from this business would be less than the carrying value of
the long-lived assets related to that business. Accordingly, during the year
ended June 30, 2001 the Company recognized an asset impairment loss of
$7,085,978 ($7,085,978 net of tax, or $0.33 per share). This loss is the
difference between the carrying value of the JBSI assets and related goodwill
and other intangibles, and the fair value of these assets based on discounted
estimated future cash flows.

The Corporation also recorded an impairment loss on the long-lived assets of its
Infomagic business. The trends in the Infomagic business indicated that the
undiscounted future cash flows from this business would be less than the
carrying value of the long-lived assets related to that business. Accordingly,
during the year ended June 30, 2001 the Corporation recognized an asset
impairment loss of $406,371 ($406,371 net of tax, or $0.02 per share). This loss
is the difference between the carrying value of the Infomagic assets and related
goodwill and the fair value of these assets based on discounted estimated future
cash flows.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company enters into various types of financial instruments in the normal
course of business and in connection with acquisitions and divestitures. The
Company does not hold or issue financial instruments for trading purposes nor
does it hold interest rate, leveraged or other types of derivative financial
instruments. The carrying values of cash and cash equivalents, accounts
receivables, notes receivable, related party receivables, accounts payable and
indebtedness reflected in the June 30, 2001 consolidated balance sheet
approximate their fair value at that date.

USE OF ESTIMATES

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

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<PAGE>
NOTE 2
ACQUISITIONS

AQUISITION OF LINUXMALL.COM, INC.

On October 5, 2000, the Company completed the acquisition of LinuxMall.com by
the merger of LinuxMall into a newly formed wholly owned subsidiary of the
Company. Under the terms of the final transaction, the Company paid $14.7
million for the acquisition comprised of 7.4 million shares of the Company's
common stock valued at $9.6 million, options to purchase 0.9 million shares of
the Company's common stock valued at $0.9 million, warrants for 4.6 million
shares of the Company's common stock valued at $4.1 million and related
transaction costs totaling $0.1 million. The fair value of all shares to be
issued to acquire LinuxMall equals approximately $9.6 million or $1.30 per
share. In addition, $5.7 million in net liabilities are included in the
calculation for a total consideration of $20.5 million. Approximately 2.5
million shares were issued in January 2001 upon conversion of the remaining
outstanding preferred convertible debentures. The amendments to the original
purchase agreement were not significant, except for a change in the conversion
ratio on October 3, 2000, which reduced the ratio from 2.2 to 1 for all shares
to a ratio of 2.0 to 1 for preferred stock and 1.8 to 1 for common stock, which
triggered a new measurement date for the purchase price determination. The
transaction was accounted for under the purchase method of accounting in
accordance with APB 16. The Company engaged a third party to determine the
purchase price allocation of the intangible assets acquired. The allocation of
the total purchase price is as follows:

                                                 Period of
                                                Amortization
                                   Amount         In Years
                                ------------    ------------
ALLOCATION:
Current assets                  $    722,071
Other non-current assets             461,163
Current liabilities               (4,387,921)
Long-term debt                    (2,526,270)
Assembled workforce                  330,000         3
Technology                         1,310,000         3
Customer List                        770,000         2
Trademarks                         4,210,000         5
Goodwill                          13,845,771         5
                                ------------
                                $ 14,734,814
                                ============

The liabilities were comprised of convertible debt, trade accounts payable and
accrued expenses.

During the year ended June 30, 2001 the Company recognized an asset impairment
loss of $17 million. This loss is the difference between the carrying value of
the Linuxmall.com assets and related goodwill and other intangibles, and the
fair value of these assets based on discounted estimated future cash flows. (See
Note 1)

AQUISITION OF JBSI, INC.

On January 4, 2001, the Company completed the acquisition of JBSI by the merger
of JBSI into a newly formed wholly owned subsidiary of the Company. Under the
terms of the final transaction, the Company paid $7.7 million for the
acquisition comprised of 8.3 million shares of the Company's common stock valued
at $6.0 million and options for 3.7 million shares of the Company's common stock

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<PAGE>
valued at $1.7 million. The fair value of all shares to be issued to acquire
JBSI equals approximately $6.0 million or $0.7312 per share. The fair value of
the options was calculated by using the Black-Scholes pricing model using the
following weighted average assumptions: stock price of $0.7312, exercise price
of $0.40, risk free rate of 6.48%, expected life of two years, a volatility
factor of 80% and a dividend yield of 0%. In addition, $3.7 million in net
liabilities are included in the calculation of the total consideration of $11.5
million. Amendments to the Plan of Merger dated November 20, 2000 were not
significant, and this measurement date was used for the purchase price
determination. The transaction wasaccounted for under the purchase method of
accounting in accordance with APB 16. The Company has engaged a third party to
determine the purchase price allocation of the intangible assets acquired. The
intangible assets are anticipated to be amortized over a useful life of two to
five years.

During the year ended June 30, 2001 the Company recognized an asset impairment
loss of $7.1 million. This loss is the difference between the carrying value of
the JBSI assets and related goodwill and other intangibles, and the fair value
of these assets based on discounted estimated future cash flows. (See Note 1)

PURCHASE AND INVESTMENT WITH CALDERA SYSTEMS, INC.

On September 15, 2000, the Company entered into a Purchase and Sale Agreement
with Caldera Systems, Inc. (CALDERA) for the acquisition of all of the
intellectual property, technology and certain specified assets related to
Caldera's proprietary marketing distribution concept known as Electronic Linux
Marketplace. The Company planned to further develop the business concept in a
wholly owned subsidiary, partnerAxis, Inc. (PARTNERAXIS). The Company issued 4
million shares of its common stock to Caldera as its initial payment for cash
and assets. The stock issued was valued at $1.60 per share, the average closing
price for September 11, 2000 through September 15, 2000. Of the $6.4 million
total, $3,360,811 was recorded as partnerAxis intangible assets, $3 million as
restricted cash and $39,189 as furniture and equipment in the accompanying
consolidated financial statements. The $3 million of restricted cash was
dedicated for use in developing and implementing the partnerAxis business plan.
The intangible assets were anticipated to be amortized over a useful life of 2
to 3 years. Up to 4 million additional shares of common stock were issuable to
Caldera based on the earnings performance of partnerAxis, as defined in the
Purchase and Sale Agreement, during the period of December 15, 2000 through
December 15, 2001.

The Company reached an agreement in principle with Caldera as reflected in a
term sheet dated January 24, 2001 regarding modification of the Purchase and
Sale Agreement entered into on September 15, 2000. As part of the Purchase and
Sale Agreement, $3 million in proceeds from the sale to Caldera of 3 million
shares of common stock of the Company were to be used in developing the business
plan of partnerAxis. Caldera and the Company agreed to modify the Purchase and
Sale Agreement with regard to the balance of the $3 million proceeds which now
totals $2.1 million. Pursuant to the term sheet, $1 million was tobe immediately
deposited with an independent escrow agent and the remaining $1.1 million was to
be deposited with the escrow agent no later than June 30, 2001 (the ESCROW
FUNDS). Prior to June 30, 2001, the Company could use those funds for purposes
other than developing the business plan of partnerAxis, and the Company did, in
fact, use $1.1 million of the Escrow Funds for other purposes. In the event the
Company failed to deposit the $1.1 million with the escrow agent by June 30,
2001, the Company was required to issue to Caldera a warrant to purchase 1
million shares of common stock of the Company at the price per share and on
terms and conditions as set forth in the warrant. Additional terms included
payment of a 5% royalty on revenues derived from partnerAxis in lieu of issuance
of additional shares based on earnings performance. Prior to June 30, 2001, the
Company sold partnerAxis as discussed below.

On April 16, 2001, the Company completed the sale of its wholly owned
subsidiary, partnerAxis, Inc.(partnerAxis), to BySynergy, LLC (BySynergy),
pursuant to a Stock Purchase Agreement dated April 13, 2001. The Company
realized a loss of $3,612,171 in relation to the sale of partnerAxis.

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<PAGE>
At the Closing, the Company conveyed all of the outstanding capital stock of
partnerAxis to BySynergy for a nominal cash payment, and the Company delegated
to BySynergy certain duties and obligations of the Company (the Obligations) set
forth in the Use Restriction Agreement dated September 15, 2000 by and between
the Company and Caldera Systems, Inc. (Caldera) as modified. BySynergy expressly
assumed the Obligations and agreed to fully perform all of the Obligations which
are identified as (i) providing a minimum of $1.1 million in financing for
partnerAxis by depositing $1.1 million with the escrow agent no later than June
30, 2001 and continuing to develop, fund and operate partnerAxis until December
31, 2001, (ii) paying to Caldera a 5% royalty on the total gross revenue earned
by partnerAxis, their successors and assigns with respect to the business of
partnerAxis, and (iii) granting to Caldera, for its internal business purposes
only, a perpetual fully paid-up, royalty free license to use all of the
intellectual property, technology, software, the computer programs, trade
secrets, data, designs, proprietary works and processes now-existing or as it
may be developed in the future that is used in or related to or associated with
the business of partnerAxis.

NOTE 3
PROPERTY AND EQUIPMENT

Property and equipment consists of the following at June 30, 2001:

                                    ESTIMATED

                                                  useful life
                                                  ------------
Furniture, fixtures and office equipment          3 to 7 years      $ 1,008,750
Software                                            3 years              80,779
Property under capital lease                        5 years             348,846
Leasehold improvements                            2 to 5 years           96,835
                                                                    -----------
                                                                      1,535,210
Accumulated depreciation                                               (351,849)
                                                                    -----------

                                                                    $ 1,183,361
                                                                    ===========

NOTE 4
RELATED PARTY INDEBTEDNESS

On August 22, 2000, the Company issued a Secured Convertible Promissory Note to
Canopy in the amount of $500,000 in exchange for cash. The note bears interest
at the annual compounded rate of 10% per annum and is convertible into shares of
common stock at $1.00 per share at the holder's discretion. The original
maturity date of the note was September 22, 2000. The fair market value of the
Company's stock was $1.26 on the date of issuance. A beneficial conversion
feature of $130,000 has been recorded as interest expense.

The note was amended December 31, 2000 and combined with a $500,000 Secured
Convertible Promissory Note dated July 10, 2000 from LinuxMall to Canopy plus
all accrued interest (the AMENDED NOTE). The Amended Note was issued for a total
principal amount of $1,041,781 and was due June 30, 2001. If the Amended Note is
not timely paid it is convertible into shares of common stock at a per share
conversion price equal to the lesser of 50% of the average closing price of the
stock for the five day period prior to conversion or 200% of the closing price
on the date of the Amended Note. In addition, warrants to purchase 1,230,769
shares of the Company's common stock at $0.375 per share were issued

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<PAGE>
to Canopy. The fair value of these warrants, as calculated by using the
Black-Scholes pricing model, was estimated to be approximately $215,000, using
the following weighted average assumptions: stock price of $0.375, exercise
price of $0.375, risk free rate of 6.48%, expected life of two years, a
volatility factor of 80% and a dividend yield of 0%, and is recorded as interest
expense. As of June 30, 2001 the note is in default yet the debtor has not
requested a conversion of the debt to common stock pursuant to the conversion
provision.

On January 29, 2001, the Company issued a Secured Convertible Promissory Note to
Canopy in the amount of $1,000,000 in exchange for cash. The note bears interest
at the annual compounded rate of 10% per annum and is due on October 29, 2001
(THE CANOPY 1/29/01 NOTE). If the Canopy 1/29/01 Note is not timely paid it is
convertible into shares of common stock at a per share conversion price equal to
the lesser of 50% of the average closing price of the stock for the five day
period prior to conversion or 200% of the closing price on the date of the
Canopy 1/29/01 Note. In addition, warrants to purchase 1,063,829 shares of the
Company's common stock at $0.47 per share were issued to Canopy. The fair value
of these warrants, as calculated by using the Black-Scholes pricing model, was
estimated to be approximately $233,000, using the following weighted average
assumptions: stock price of $0.47, exercise price of $0.47, risk free rate of
6.48%, expected life of two years, a volatility factor of 80% and a dividend
yield of 0%, and is recorded as interest expense.

The components of Related Party indebtedness at June 30, 2001 are summarized as
follows:

Note payable to a stockholder, fixed interest amount,
  due on demand, unsecured                                               71,928
Note payable to a stockholder resulting from acqusition,
  fixed interest amount, due on demand, unsecured                       177,596
Convertible note payable to a related entity, interest
  at 10%, payable on June 30, 2001, in default. Secured
  by all assets of the Company                                        1,041,781
Convertible note payable to a related entity, interest
  at 10%, payable on October 29, 2001. Secured by all
  assets of the Company                                               1,000,000
Note payable in exchange for cash, interest at 10%,
  payable on October 5, 2001; secured by specific
  accounts recivables and inventory                                      39,681
                                                                     ----------
                                                                      2,330,986
Less - current maturities                                            (2,330,986)
                                                                     ----------
                                                                     $       --
                                                                     ==========

As of June 30, 2001, the note payable to a related entity in the amount of
$1,041,781 was in default. The note has conversion provisions which have not
been exercised as of the financial statement date.

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<PAGE>
NOTE 5
INDEBTEDNESS

The components of indebtedness at June 30, 2001 are summarized as follows:

Financial institution borrowings:
  Line of credit, as amended in 1998 - $10 million, interest
    at prime plus 2.5%, matures July 2001                           $ 2,270,311
  Term note, as amended in 1998 - principal due in July 2001,
    interest at prime plus 2.5%                                       2,000,000
Other borrowings:
  Subordinated convertible debentures from acquisitions,
    interest at 6% interest payable monthly with principal
    due April 30, 2002                                                  183,837
  Note payable resulting from acquisition, interest at 10.5%,
    payable in equal quarterly installments beginning
    February 12, 1999 with principal due May 12, 2001, in default       300,000
  Note payable resulting from acquisition, interest at 6%,
    payable quarterly with all principal due October 18, 2002           100,000
  Capital leases resulting from acquisitions, with aggregate
    monthly payments approximating $12,000 and bearing
    interest at rates between 9% and 11%; expiring
    through June, 2004                                                  355,537
                                                                    -----------
                                                                      5,209,685
Less - current maturities                                            (4,722,873)
                                                                    -----------
                                                                    $   486,812
                                                                    ===========

Borrowings under the line of credit are limited to 85% of eligible accounts
receivable and 50% of eligible inventory. The line of credit is secured by all
accounts receivable, inventory and property and equipment of the Company. The
term note is secured by property and equipment. These borrowings contain various
covenants which require, among other things, the maintenance of certain working
capital and financial ratios and limitations on the declaration of dividends. In
August 2001, Canopy assumed Finova's first position lien by purchasing the
$2,000,000 balance of the term note and the approximately $350,000 balance of
the LOC. Canopy reestablished access to collected accounts receivable at that
time, thereby allowing the Company cash for operations.

The aggregate maturities of indebtedness described above are as follows:
$5,051,000 in 2002; $125,000 in 2003 and $34,000 in 2004.

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<PAGE>
NOTE 6
CONVERTIBLE DEBENTURE

In August, 1999 the Company completed a private placement of a $7.1 million
convertible debt facility (the DEBENTURE). In conjunction with the Debenture,
the Company issued warrants to acquire 245,000 shares of common stock at a
market-based exercise price as defined by the Debenture agreement. The warrants
were originally exercisable for the purchase of shares of common stock as
follows: 60,000 at $7.4723 per share, 60,000 at $8.6219 per share and 125,000 at
$6.3227 per share. The fair value of these warrants, as calculated by using the
Black-Scholes pricing model, was estimated to be approximately $796,000, using
the following weighted average assumptions: stock price of $7.625, risk free
interest rate of 5.63%, expected life of two years, a volatility factor of 80%
and a dividend yield of 0%, and is recorded as a debt discount in the
accompanying consolidated financial statements. Additional issuance costs of
approximately $197,000 were paid and recorded as deferred loan fees in the
accompanying consolidated financial statements. Discounts and deferred loan fees
are amortized using the straight-line method, which approximates the effective
interest method, as additional interest expense over the term of the loan.

The Company received an initial infusion of $2.1 million as a result of issuance
of the Debenture, which was utilized to repay outstanding debt at June 30, 1999
and to provide working capital. The remaining $5.0 million was deposited with a
bank to collateralize a letter of credit issued as security for the Debenture.

The Debenture is convertible, at the holder's option, into shares of the
Company's common stock over an 18 month period at approximately $394,000 per
month. The Company's ability to reduce the cash collateral and to have these
amounts available for working capital is contingent upon the holder converting
the Debenture or the Company's ability to pay down the Debenture with cash from
other sources. If the holder, at its discretion, converts the Debenture, the
Company could draw approximately $.70 for each $1 of Debenture principal
converted to fund operations. This ratio has been modified. The unconverted
balance, if any, of the Debenture and the unconverted accrued interest is due
February 24, 2002.

The per share conversion price was initially equal to the lesser of (a) $7.4953
or (b) the average of the three lowest closing bid prices of the Company's
common stock for the 15 consecutive trading days ending on the trading day
immediately preceding submission of a notice to convert by the holder. In the
event the closing bid price of the Company's common stock is less than $7.4953
at any time during the five trading days preceding a due date, the Company has
the right to redeem for cash the monthly conversion amount of the Debenture at
premiums ranging from 105% to 108%.

The Debenture required that the related shares of the Company's common stock
issuable upon conversion of the Debenture be registered under the Securities Act
of 1933 and the regulations of the SEC before the holder could begin to convert
the Debenture to common stock. The necessary registration was initiated by the
Company in October 1999 and became effective in February 2000. As of June 30,
2001, the holder had accrued the rights to convert all the outstanding principal
of approximately $4.5 million of the principal of the Debenture into shares of
the Company's common stock.

The Company recorded a beneficial conversion feature of approximately $3.6
million related to the issuance of the Debenture. The beneficial conversion
feature was based on the difference between the closing trade price and the
conversion price on the date of issuance on the portion of the Debenture that
was convertible, net of the proceeds allocated to the warrants. For the portion
of the Debenture not convertible upon issuance, the holder accrues the right to
convert over a period of 18 months.

In February 2000, the Debenture was amended to reduce the conversion price on
accrued principal of $2,761,108 and interest of $140,203 to equal the lesser of
(a) $3.84 or (b) the average of the three lowest closing bid prices of the
Company's common stock for the 15 consecutive trading days ending on the trading
day immediately preceding submission of a notice to convert by the holder. In
March 2000, the Debenture was amended to change the formula on the variable
conversion price from the three lowest closing bid prices to the three lowest

                                       43
<PAGE>
trading prices in the 15 consecutive trading days ending on the trading day
immediately preceding submission of a notice to convert by the holder. In
connection with the amendments to the Debenture, the Company recorded additional
deferred loan fees of approximately $140,000, which are being amortized over the
remaining term of the Debenture that the holder accrues the right to convert.

In July 2000, the Debenture was amended to reduce the conversion price of
$264,087 of principal to the lesser of (a) $1.00 or (b) the average of the three
lowest trade prices of the Company's common stock for the 15 consecutive trading
days ending on the trading day immediately preceding submission of a notice to
convert by the holder. In connection with the amendment to the Debenture, the
Company recorded additional deferred loan fees of approximately $170,000, which
are being amortized over the remaining term of the Debenture that the holder
accrues the right to convert.

In connection with the February 2000 amendment, $500,000 of the cash collateral
was released by the holder. In connection with the July 2000 amendment, an
additional $250,000 of cash collateral was released by the holder.

Also, in conjunction with the July 2000 release of funds, the Company issued
warrants to acquire 125,000 shares of common stock at $2.00 per share. The fair
value of these warrants, as calculated by using the Black-Scholes pricing model,
was estimated to be approximately $125,000, using the following weighted average
assumptions: stock price of $1.56, exercise price of $2.00, risk free rate of
6.48%, expected life of five years, a volatility factor of 80% and a dividend
yield of 0%, and is recorded as financing costs in the accompanying consolidated
financial statements. The remaining net cash collateral is reflected as other
restricted cash in the accompanying consolidated financial statements.

On October 19, 2000, the Debenture holder and the Company agreed to additional
modifications of the Debenture. The Company agreed to convert $2,083,500
principal amount of the Debenture in exchange for 2.5 million shares of the
Company's common stock. The Debenture holder agreed to reduce the collateral
requirements under the Debenture by a total of $2,083,500 immediately, and by up
to an additional $416,500, in two $208,250 increments provided November and
December net revenues equaled or exceeded certain projected levels. Upon
reduction of the collateral requirements, the outstanding Debenture
balance/letter of credit requirement ratio is to be reset and all further
reductions of Debenture principal will reduce the letter of credit requirement
by the amount of such ratio. The Company also agreed to reduce the per share
conversion ratio of the Debenture to the lesser of (a) $1.00 or (b) the amount
equal to the average of the lowest three trade prices of the Company's common
stock for the 15 consecutive trading days ending on the day preceding the date
of submission of a conversion notice, for an additional $416,500 principal
amount of the Debenture and to re-price the exercise price of an existing
outstanding warrant to purchase 245,000 shares to $4.00 per share. The warrant
was originally exercisable at $6.3227 per share for 125,000 shares, $7.4723 per
share for 60,000 shares and $8.6219 per share for 60,000 shares. The fair market
value of the re-priced warrant, as calculated by the Black-Scholes pricing
model, was estimated to be approximately $55,000, using the following weighted
average assumptions: stock price of $0.88, exercise price of $4.00, risk free
interest rate of 6.48%, expected life of 3.5 years, a volatility factor of 80%
and a dividend yield of 0%. In connection with the re-pricing of the warrant,
the Company recorded additional deferred loan fees of approximately $55,000,
which will be amortized as interest expense over the remaining term of the
Debenture.

In connection with October 19, 2000 modification of the Debenture, the Company
issued warrants to purchase 850,000 shares of its common stock at $1.00 per
share and 500,000 shares at $1.10 per share to Canopy. In consideration for
issuance of the warrants, Canopy purchased the 2.5 million shares issued upon
conversion of the Debenture from the Debenture holder. The fair value of these
warrants, as calculated by the Black-Scholes pricing model, was estimated to be
approximately $740,000, using the following weighted average assumptions: stock
price of $0.84, risk free interest rate of 6.48%, expected life of five years, a
volatitlity factor of 80% and a dividend yield of 0%. In connection with the
issuance of the warrants, the Company recorded a charge to interest expense of
approximately $740,000.

                                       44
<PAGE>
On June 11, 2001, the Debenture holder withdrew the remaining approximately
$2,091,000 of the restricted cash. The cash withdrawn was used to reduce
outstanding interest of approximately $678,000 and principal of approximately
$1,413,000. The remaining principal balance of the debenture at June 30, 2001
was approximately $3,113,000.

Interest payable to the holder has been accrued monthly since September 1999
with approximately $150,000 paid in cash, as required by the terms of the
Debenture, prior to the registration process. During February 2000,
approximately $140,500 of interest was converted into 36,546 shares of common
stock. An additional $8,200 of interest converted into 4,799 shares of common
stock during March through June 2000. The fair value of the Company's common
stock ranged from $6.90 to $1.92 on the dates of the interest conversions during
the period from February to June 2000. The Company recorded a beneficial
conversion feature on the conversion of interest for the period of February
through June of 2000 of approximately $86,000. Additionally, during February
through June 2000, approximately $429,000 of principal was converted to 222,683
shares. No conversions were made during July and August 2000. During September
2000, approximately $60,900 of principal and $3,293 of interest was converted
into 63,563 and 3,437 shares of common stock, respectively. The fair value of
the Company's common stock ranged from $1.06 to $2.13 on the dates of the
interest conversion in September 2000. The Company recorded a beneficial
conversion feature on the conversion of interest of approximately $2,000, which
is reflected as additional interest expense during the three months ending
September 30, 2000. As of June 30, 2001 the remaining balance of accrued
interest payable was approximately $14,585.

NOTE 7
INCOME TAXES

The Company has cumulative net operating losses as of June 30, 2000, in excess
of $64 million. The Company's ability to utilize its net operating losses to
offset future taxable income may be limited under the Internal Revenue Code
Section 382 change in ownership rules. The Company has established a valuation
reserve as it has not determined that it is more likely than not that the
deferred tax asset is realizable.

The provision for income taxes for the year ended June 30, 2001 consists of the
following:

Current tax expense (benefit)                                      $         --
Deferred tax expense (benefit)                                               --
                                                                   ------------
(Benefit) for income taxes                                         $         --
                                                                   ============

                                       45
<PAGE>
Deferred income tax assets (liabilities) at June 30, 2001 consist of the
following:

Current deferred tax assets (liabilites):
  Reserves and other accruals                                      $    830,000
  Valuation Allowance                                                  (830,000)
                                                                   ------------
          Total current deferred tax assets (liabilites)           $         --
                                                                   ============

Non-current deferred tax assets (liabilites):
  Amortization of goodwill                                         $     19,000
  Net operating loss carry forward                                   23,790,000
  Valuation allowance                                               (23,809,000)
                                                                   ------------
          Total non-current deferred tax assets (liabilities)                --
                                                                   ------------
               Net deferred tax asset (liability)                  $         --
                                                                   ============

NOTE 8
STOCKHOLDERS' EQUITY

REVERSE STOCK SPLIT

Share amounts in the accompanying consolidated financial statements and notes to
the consolidated financial statements give retroactive effect to a one-for-ten
reverse stock split effective June 1998.

CAPITALIZATION

The Company amended its Articles of Incorporation in 1999 to authorize the
issuance of up to 70,000,000 shares of Class A common stock. In addition, the
Articles of Incorporation authorize the issuance of up to 5,000,000 shares of
preferred stock. The Board of Directors of the Company, at its sole discretion,
may establish par value, divide the shares of preferred stock into series, and
fix and determine the dividend rate, designations, preferences, privileges,
ratify powers, if any, and determine the restrictions and qualifications of the
shares of each series of preferred stock as established.

PREFERRED STOCK

The Board of Directors has designated 100,000 shares of Series A Convertible
Preferred Stock, (Preferred Stock) and during fiscal 1999, the Company issued
10,895 shares of Preferred Stock, at $100 per share. Net proceeds from the
issuance of Preferred Stock was approximately $869,000. These shares have a
liquidation preference of $100 per share, and are entitled to a $10 per share
cumulative, annual dividend, accrued quarterly commencing April 1, 1999, and
payable at the discretion of the Company. The Company, at its discretion, may
redeem the Preferred Stock whenever the price of its common stock is equal to or
greater than $9.00 per share 20 out of 30 consecutive trading days. Each share
of Preferred Stock may be converted, at the option of the holder into common
stock at a conversion rate of one share for every $6.00 of principal converted.
In addition, the Preferred Stock automatically converts into common stock
whenever the price of the Company's common stock is equal to or greater than
$13.50 per share 20 out of 30 consecutive trading days.

During March through May 2000, shareholders converted 3,305 shares of Preferred
Stock to 55,086 shares of the Company's common stock.

                                       46
<PAGE>
WARRANTS TO PURCHASE COMMON STOCK

The Company had outstanding warrants, issued in connection with financing
transactions, to purchase 86,644 shares of common stock through December 2000.

As of June 30, 2001 the following groups of warrants were outstanding:

     Expiration Date              Exercise Price             Common Shares
     ---------------              --------------             -------------
     February 2002                     7.20                        9,086
     December 2003                  3.00 - 8.25                  230,000
     August 2004                    6.32 - 8.62                  245,000
     November 2002                     1.00                       70,000
     July 2002                         2.00                      125,000
     August 2003                       2.00                       37,500
     March 2005                        0.88                      600,000
     December 2005                     1.10                    1,000,000
     March 2005                        1.10                    1,363,636
     April 2005                        1.10                    1,611,368
     October 2002                      1.10                      500,000
     October 2002                      1.00                      850,000
     January 2003                     0.375                    1,230,769
     January 2003                      0.47                    1,063,829

STOCK, WARRANTS AND OPTIONS ISSUED FOR CONSULTING SERVICES

The Company records equity instruments that are issued for goods and services at
the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more readily determinable. The Company utilizes
the Black-Scholes pricing model to determine fair value.

In November 2000, the Company issued 70,000 options to a consulting firm for
consulting services related to investor relations. The fair value of these
warrants, as calculated by using the Black-Scholes pricing model, was estimated
to be approximately $19,000, using the following assumptions: stock price of
$0.72, risk free rate of 6.48%, expected life of two years, a volatility factor
of 80% and a dividend yield of 0%. The warrants vested 100% upon issuance and
had an exercise price of $1.00.

In December 2000, the Company issued 70,000 options to an individual for
consulting services related to strategic planning. The fair value of these
options, as calculated by using the Black-Scholes pricing model, was estimated
to be approximately $36,000, using the following assumptions: stock price of
$0.51, risk free rate of 6.48%, expected life of ten years, a volatility factor
of 80% and a dividend yield of 0%. The options vested 100% upon issuance and had
an exercise price of $2.00.

In February and March 2001, the Company issued 230,000 and 131,600 shares of
common stock to two different consulting firms for consulting services related
to investor relations. The fair value of the common stock, determined by using
the fair market value of the stock on the date of Board of Director approval,
was determined to be $287,000 and $99,000 respectively.

COMMON STOCK ISSUED FOR ADVERTISING

In January, 2000 the Company entered into a Premier Advertiser Agreement with
CNET, Inc. Under the agreement, the Company became a part of CNET's PREMIER
ADVERTISER program for CNET's Linux Center and received advertising for, and

                                       47
<PAGE>
links to, the Company's Web site, TheLinuxStore.com. The term of the agreement
was through February 2001, subject to earlier termination. The Company was
required to purchase a minimum of $2 million of advertising under the agreement
during its stated term. Additionally, the Company paid an integration fee equal
to $1.2 million by issuing 240,000 shares of its common stock to CNET, Inc.
valued at the fair value of $5.00 per share on the date of the agreement. This
integration fee was recorded as prepaid advertising and was being amortized over
the term of the agreement. The advertising on the CNET Linux Center began in
February, 2000. The 240,000 shares of common stock issued are redeemable at the
discretion of the holder within one year of the signing of the agreement. As of
January, 2001, the expiration of the redemption provision, the shares were no
longer redeemable, therefore, the shares have been reflected as common stock as
of June 30, 2001.

In May 2000, the Company negotiated the termination of the agreement. Under the
terms of the termination agreement, CNET is to release the Company from its
liabilities under the agreement upon the Company's registration of the 240,000
shares of common stock. Accordingly, the remaining balance of the integration
fee, $1,050,000, was expensed in the fourth quarter of fiscal 2000 and $501,000
was recorded as a liability for unpaid promotions pending release upon the
registration of the common stock.

CONVERSION OF DEBENTURES TO COMMON STOCK

As a result of the merger with LinuxMall, we assumed convertible debentures in
the amount of approximately $2.6 million. These debentures were required to
convert into common stock ninety days after the date of the merger with
LinuxMall. The debentures converted into 2,508,410 shares of common stock on
January 3, 2001, at a conversion rate of $1.10.

SETTLEMENT OF ACCOUNTS PAYABLE WITH COMMON STOCK

As part of the merger with LinuxMall, we agreed to settle a specific amount of
accounts payable owed to two vendors. In January 2001, we issued 303,287 shares
of common stock in exchange for settlement of $156,375 of accounts payable, at a
conversion rate of $0.5156 per share.

NOTE 8
EMPLOYEE COMPENSATION

401K PLAN

The Company sponsors a defined contribution 401(k) Savings Plan for its
employees. Company contributions to the plan are discretionary and totaled
$23,036 for the year ended June 30, 2001.

STOCK OPTION PLAN

Our Board of Directors adopted, and our shareholders approved, effective
December 1998, the 1998 Equity Incentive Plan (the PLAN). In December 2000, the
Board of Directors amended the Plan to increase the number of shares of our
common stock available under the Plan. The purpose of the Plan is to promote the
interests of our company and to motivate, attract and retain the services of
persons upon whose judgment, efforts and contributions the success of our
business depends. A further purpose of the Plan is to align the personal
interests of such persons with the interests of our shareholders through equity
participation in our growth and success. The Plan provides for granting options,
incentive stock options and restricted stock awards, or any combination of the
foregoing for up to 12,000,000 shares of our common stock. Our bankruptcy filing

                                       48
<PAGE>
has stayed the enforcement by an option holder of the terms of any unexercised
option grant. The effect of this is that no unexercised option can now be
exercised unless the Bankruptcy Court directs otherwise. As of June 30, 2001, a
total of 12,048,368 stock options were outstanding of which 8,250,353 were
vested under the Plan. A total of 101,500 options to purchase shares under the
Plan have been exercised.

Information with respect to stock options outstanding as of June 30, 2001, is as
follows:

                                                                WEIGHTED AVERAGE
                                                   OPTIONS       EXERCISE PRICE
                                                  ----------    ----------------
Options outstanding at beginning of year             747,000        $    2.94
  Granted                                         11,301,368             0.61
  Exercised                                               --               --
  Canceled                                                --               --
                                                  ----------        ---------
Options outstanding at end of year                12,048,368        $    0.75
                                                  ==========        =========
Options exercisable at end of year                 8,250,353        $    0.77
                                                  ==========        =========
Weighted average fair value per share
  of options granted                                                $    0.25
                                                                    =========

Information with respect to stock options outstanding and stock options
exercisable at June 30, 2001 is as follows:

                          OPTIONS OUTSTANDING            OPTIONS EXCERCISABLE
                   ---------------------------------     ---------------------
                                 WEIGHTED-
                                  AVERAGE    WEIGHTED-                 WEIGHTED-
                                 REMAINING    AVERAGE                   AVERAGE
    RANGE OF         NUMBER     CONTRACTUAL  EXERCISE      NUMBER      EXERCISE
EXERCISE PRICES    OUTSTANDING     LIFE        PRICE     EXERCISABLE     PRICE
---------------    -----------     ----        -----     -----------     -----
 $0.28 - $0.97      11,301,368     9.00        $0.61       7,785,743     $0.64
 $1.00 - $2.25         416,000     7.61        $1.76         277,530     $1.79
 $3.00 - $3.75         198,000     8.33        $3.63          88,700     $3.63
 $4.88 - $5.50         133,000     7.67        $5.49          98,380     $5.43
                   -----------                           -----------
                    12,048,368                             8,250,353
                   ===========                           ===========

The following pro forma disclosures of net loss are made assuming the Company
had accounted for the stock options pursuant to the provision of SFAS No. 123,
Accounting for Stock-Based Compensation.

                                       49
<PAGE>
Net loss:
  As reported                                                      $(49,090,384)
  Pro forma                                                        $(52,050,412)

Loss per common and common share equivalent:
  As reported - basic                                              $      (2.32)
  As reported - diluted                                            $      (2.32)
  Pro forma - basic                                                $      (2.46)
  Pro forma - diluted                                              $      (2.46)

The fair value of each option is estimated on the date of grant using the
Black-Scholes options pricing model with the following weighted average
assumptions used for grants during fiscal 2000: risk-free interest rate of
6.00%, expected life of one to five years, volatility factor of 80%, and an
assumed dividend yield of 0%.

NOTE 8
COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases an office and warehouse facility in Stafford, Texas. Rental
expense related to this lease was approximately $122,000. Aggregate rental
expense under noncancelable operating leases for the year ended June 30, 2001
was approximately $434,310. The aggregate future rental payments under
noncancelable operating leases are as follows:

YEAR ENDING
  JUNE 30:                                AMOUNT
-----------                              ---------
   2002                                    223,000
   2003                                    206,000
                                         ---------
                                         $ 429,000
                                         =========

LITIGATION

In the normal course of its business, the Company is subject to certain
contractual obligations and litigation. In management's opinion, upon
consultation with legal counsel, there is no current litigation which will
materially affect the Company's financial position or results of operations.

NOTE 9
SUBSEQUENT EVENTS

In August 2001, Canopy assumed Finova's first position lien by purchasing the
$2,000,000 balance of the term note and the approximately $350,000 balance of
the RLOC. Canopy reestablished access to collected accounts receivable at that
time, thereby allowing EBIZ cash for operations.

On September 7, 2001 the Company filed a voluntary petition under Chapter 11 of
the Bankruptcy Code with the federal bankruptcy court in Phoenix, Arizona. We
are developing a reorganization plan which we expect to file with the bankruptcy
court within the time of exclusivity granted by the code. Confirmation of a plan
of reorganization is necessary for the Company to continue as a going concern.
The bankruptcy filing was precipitated by our inability to timely raise
additional capital, the loss of the asset base credit facility for our wholly
owned subsidiary, JBSI and debt that the Company was unable to adequately
support. The long term implementation of our business plan and our company
strategies as well as the achievement of the objectives of those strategies is
dependent upon our ability to successfully restructure through a confirmed plan
of reorganization.

                                       50
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO EBIZ ENTERPRISES, INC.:

We have audited the accompanying balance sheets of EBIZ Enterprises, Inc., a
Nevada corporation, (the Company) as of June 30, 2000 and 1999, and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 financial statements referred to above present fairly, in
all material respects, the financial position of EBIZ Enterprises, Inc. as of
June 30, 2000 and 1999, and the results of its operations and its cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company incurred net losses and had negative cash
flows from operations in 2000 and 1999, has an accumulated deficit, and does not
have sufficient capital to support its operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
accompanying financial statements do not include any adjustments to
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.

ARTHUR ANDERSEN LLP

Phoenix, Arizona
October 5, 2000 (except with respect
to the matter discussed in Note 2
as to which the date is March 23, 2001)

                                       51
<PAGE>
                             EBIZ ENTERPRISES, INC.

                                 BALANCE SHEETS
                             JUNE 30, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                 2000            1999
                                                             ------------    ------------
<S>                                                          <C>             <C>
                                     ASSETS

Current Assets:
  Cash ...................................................   $     50,997    $     76,366
  Accounts receivable, net of allowance for doubtful
    accounts of $75,988 and $40,000 in 2000 and 1999,
    respectively .........................................        585,846       1,669,816
    Inventory, net .......................................        747,545       1,568,148
    Prepaid expenses and other current assets ............         28,158         128,184
                                                             ------------    ------------
          Total current assets ...........................      1,412,546       3,442,514
Property and Equipment, net ..............................        532,896         474,778
Deferred Loan Fees, net ..................................        131,079              --
Restricted Cash ..........................................      4,504,164              --
Goodwill .................................................        629,162              --
                                                             ------------    ------------
                                                             $  7,209,847    $  3,917,292
                                                             ============    ============

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities:
  Accounts payable .......................................   $  1,880,822    $  1,423,178
  Accrued expenses .......................................      1,367,135         468,549
  Line of credit .........................................        250,000         350,000
  Notes payable ..........................................         71,928         610,000
                                                             ------------    ------------
          Total current liabilities ......................      3,569,885       2,851,727
Convertible Debenture, net of discount ...................      4,503,579              --
                                                             ------------    ------------
          Total liabilities ..............................      8,073,464       2,851,727
                                                             ------------    ------------
Commitments and Contingencies
Redeemable Common Stock ..................................      1,200,000              --
                                                             ------------    ------------
Stockholders' Equity (Deficit):
  Convertible preferred stock; $.001 par value; 5,000,000
    shares authorized; 7,590 and 10,895 shares issued and
    outstanding at June 30, 2000 and 1999, respectively;
    liquidation value $100 per share .....................        366,737         868,599
  Common stock; $.001 par value; 70,000,000 shares
     authorized; 8,497,566 and 7,261,715 shares issued and
     outstanding at June 30, 2000 and 1999, respectively .          8,498           7,262
  Additional paid-in capital .............................      9,808,580       2,315,832
  Accumulated deficit ....................................    (12,247,432)     (2,126,128)
                                                             ------------    ------------
          Total stockholders' equity (deficit) ...........     (2,063,617)      1,065,565
                                                             ------------    ------------
                                                             $  7,209,847    $  3,917,292
                                                             ============    ============
</TABLE>

      The accompanying notes are an integral part of these balance sheets.

                                       52
<PAGE>
                             EBIZ ENTERPRISES, INC.

                            STATEMENTS OF OPERATIONS
                   FOR THE YEARS ENDED JUNE 30, 2000 AND 1999

                                                        2000            1999
                                                    ------------    -----------
Net Revenue .....................................   $ 11,900,667    $15,290,202
Cost of Sales ...................................     10,961,638     14,358,772
Restructuring Charge -- Inventory ...............        125,430             --
                                                    ------------    -----------
     Gross profit ...............................        813,599        931,430
Selling, General and Administrative Expense .....      7,312,259      2,425,895
Depreciation and Amortization ...................        265,000         68,483
Provision for Doubtful Accounts .................        274,074         86,520
Restructuring Charge ............................         26,500             --
                                                    ------------    -----------
Loss from Operations ............................     (7,064,234)    (1,649,468)
Other Income (Expense):
  Interest Expense ..............................     (3,188,415)      (119,291)
  Interest & Other Income .......................        235,434          2,538
  Other .........................................             --       (110,903)
                                                    ------------    -----------
Net Loss ........................................    (10,017,215)    (1,877,124)
Dividends on Preferred Stock ....................       (104,089)       (77,057)
                                                    ------------    -----------
Net Loss Attributable to Common Stockholders ....   $(10,121,304)   $(1,954,181)
                                                    ============    ===========
Net Loss per Common Share, Basic and Diluted ....   $      (1.32)   $     (0.29)
                                                    ============    ===========
Weighted Average Common Shares, Basic and Diluted      7,685,232      6,821,083
                                                    ============    ===========

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

                                       53
<PAGE>
                             EBIZ ENTERPRISES, INC.

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                   FOR THE YEARS ENDED JUNE 30, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                ADDITIONAL
                                    PREFERRED STOCK            COMMON STOCK                           TOTAL        STOCKHOLDERS'
                                ----------------------    -----------------------     PAID-IN      ACCUMULATED        EQUITY
                                 SHARES       AMOUNT        SHARES       AMOUNT       CAPITAL        DEFICIT         (DEFICIT)
                                ---------    ---------    ----------   ----------   -----------    ------------    ------------
<S>                             <C>          <C>           <C>         <C>          <C>            <C>             <C>
Balance, June 30, 1998 ......          --    $      --     6,256,450   $    6,256   $   858,712    $   (171,947)   $    693,021
  Sale of common stock, net
    of offering costs of
    $80,000 .................          --           --       455,781          457       900,845              --         901,302
  Sale of preferred stock,
    net of offering costs of
    $220,901 ................      10,895      868,599            --           --            --              --         868,599
  Common stock issued for
    services and inventory ..          --           --       158,528          158       218,593              --         218,751
  Common stock issued for
    warrants exercised ......          --           --       390,956          391       293,057              --         293,448
  Deemed dividend on
    preferred stock for
    beneficial conversion
    feature .................          --           --            --           --        44,625         (44,625)             --
  Accrued dividends on
    preferred stock .........          --           --            --           --            --         (32,432)        (32,432)
  Net loss ..................          --           --            --           --            --      (1,877,124)     (1,877,124)
                                ---------    ---------    ----------   ----------   -----------    ------------    ------------
Balance, June 30, 1999 ......      10,895      868,599     7,261,715        7,262     2,315,832      (2,126,128)      1,065,565
  Exercise of stock
    options .................          --           --       101,500          102       101,398              --         101,500
  Warrants issued for
    consulting services .....          --           --            --           --       199,185              --         199,185
  Warrants issued to
    debenture holder ........          --           --            --           --       796,219              --         796,219
  Stock issued for
    services ................          --           --        30,822           30        98,969              --          98,999
  Stock issuance costs ......          --     (171,362)           --           --        (3,370)             --        (174,732)
  Accrued dividends on
    preferred stock .........          --           --            --           --            --        (104,089)       (104,089)
  Preferred stock
    conversion ..............      (3,305)    (330,500)       55,086           55       330,445              --              --
  Beneficial conversion
    feature of convertible
    debentures ..............          --           --            --           --     3,793,448              --       3,793,448
  Conversion of debt and
    interest ................          --           --       264,028          265       577,238              --         577,503
  Stock issued for business
    acquisition .............          --           --       200,000          200       699,800              --         700,000
  Private placement of common
    stock ...................          --           --       584,415          584       899,416              --         900,000
  Net loss ..................          --           --            --           --            --     (10,017,215)    (10,017,215)
                                ---------    ---------    ----------   ----------   -----------    ------------    ------------
Balance, June 30, 2000 ......       7,590    $ 366,737     8,497,566   $    8,498   $ 9,808,580    $(12,247,432)   $ (2,063,617)
                                =========    =========    ==========   ==========   ===========    ============    ============
</TABLE>

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

                                       54
<PAGE>
                             EBIZ ENTERPRISES, INC.

                            STATEMENTS OF CASH FLOWS
                   FOR THE YEARS ENDED JUNE 30, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                2000            1999
                                                            ------------    ------------
<S>                                                         <C>             <C>
Cash Flows from Operating Activities:
  Net loss ..............................................   $(10,017,215)   $ (1,877,124)
  Adjustments to reconcile net loss to net cash used in
     operating activities --
     Depreciation and amortization ......................        265,000          68,483
     Stock exchanged for services and interest ..........      1,349,000          80,599
     Warrants issued for consulting services ............        199,185              --
     Interest cost on beneficial conversion feature .....      2,106,379              --
     Amortization of discounts and loan fees ............        381,379              --
     Changes in assets and liabilities, net of effect of
      business acquired:
       Accounts receivable ..............................      1,083,970      (1,396,987)
       Due from officers ................................             --           3,432
       Inventory ........................................        834,244      (1,122,551)
       Prepaid expenses and other current assets ........        100,026         (32,919)
       Accounts payable .................................        457,644         898,054
       Accrued expenses .................................        794,495         436,117
                                                            ------------    ------------
          Net cash used in operating activities .........     (2,445,893)     (2,942,896)
                                                            ------------    ------------
Cash Flows from Investing Activities:
  Purchase of furniture and equipment ...................       (265,921)       (472,738)
                                                            ------------    ------------
Cash Flows from Financing Activities:
  Net (repayments) borrowings under line of credit ......       (100,000)        350,000
  Borrowings under notes payable ........................        488,000         871,786
  Principle repayments of notes payable .................     (1,026,072)       (261,786)
  Issuance of convertible debenture, net ................      6,903,391              --
  Increase in restricted cash, net ......................     (4,504,164)             --
  Sale of stock, net of expenses ........................        925,290       2,063,349
                                                            ------------    ------------
          Net cash provided by financing activities .....      2,686,445       3,023,349
                                                            ------------    ------------
Net decrease in cash ....................................        (25,369)       (392,285)
Cash, beginning of year .................................         76,366         468,651
                                                            ------------    ------------
Cash, end of year .......................................   $     50,997    $     76,366
                                                            ============    ============
Supplemental Disclosures of Cash Flow Information:
  Cash paid during the year for interest ................   $    251,635    $    108,765
Supplemental Disclosure of Noncash Financing Activities:
  Issuance of common stock for services, assets and
    interest ............................................   $  1,362,641    $    218,751
  Dividends accrued on preferred stock ..................        104,089          32,432
  Deemed dividend on preferred stock for beneficial
    conversion feature ..................................             --          44,625
  Issuance of warrants for consulting services ..........        199,185              --
  Issuance of warrants to debenture holder ..............        796,219              --
  Conversion of debt and related interest to common stock        577,503              --
  Issuance of common stock for business acquisition .....        700,000              --
</TABLE>

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

                                       55
<PAGE>
                             EBIZ ENTERPRISES, INC.

                          NOTES TO FINANCIAL STATEMENTS
                             JUNE 30, 2000 AND 1999

1. ORGANIZATION AND OPERATIONS

a. Nature of the Business

Ebiz Enterprises, Inc. (Company) is a designer and operator of Internet
e-commerce Web sites and a developer and distributor of computer systems,
components and accessories for personal and business computing. During the
second quarter of fiscal 2000, management decided to concentrate the Company's
strategic focus on the Linux segment of the computer market, which was believed
to offer stronger growth and profitability opportunities than the market for low
price, conventional computer systems. The Company de-emphasized programs for the
mass merchant and brokerage channels of distribution and restructured its
organization to implement Linux development and marketing programs. The results
of operations for the second quarter included restructuring charges for
inventory, collection and other costs resulting from this change in strategic
direction.

On October 5, 2000, the Company completed the acquisition of LinuxMall.com, Inc.
(LinuxMall) by the merger of LinuxMall into a newly formed wholly owned
subsidiary of the Company. Under the terms of the final transaction, the Company
paid $14.7 million comprised of 7.4 million shares of the Company's common stock
valued at $9.6 million, options for 0.9 million shares of the Company's common
stock valued at $0.9 million, warrants for 4.6 million shares of the Company's
common stock valued at $4.1 million and related transaction costs totaling $0.1
million. The fair value of all shares to be issued to acquire LinuxMall equals
approximately $9.6 million or $1.30 per share. In addition, the Company assumed
$5.7 million in net liabilities for total consideration of $20.5 million. In
January 2001, an additional 2.5 million shares will be issued upon conversion of
the remaining outstanding preferred convertible debentures. The amendments to
the original purchase agreement were not significant, except for a change in the
conversion ratio, reduced from 2.2 to 1 for all shares to a ratio of 2.0 to 1
for preferred stock and 1.8 to 1 for common stock, which triggered a new change
in the measurement date for the purchase price determination. The transaction
will be accounted for under the purchase method of accounting in accordance with
APB 16. The Company engaged a third party to determine the purchase price
allocation of the intangible assets acquired. The allocation of the total
purchase price is as follows:

                                                                     PERIOD OF
                                                                    AMORTIZATION
                                                       AMOUNT         IN YEARS
                                                     -----------    ------------
ALLOCATION:
Current assets....................................   $   722,071
Other non-current assets..........................       461,163
Current liabilities...............................    (4,387,921)
Long-term debt....................................    (2,526,270)
Assembled workforce...............................       330,000         3
Technology........................................     1,310,000         3
Customer List.....................................       770,000         2
Trademarks........................................     4,210,000         5
Goodwill..........................................    13,845,771         5
                                                     -----------
                                                     $14,734,814
                                                     ===========

The liabilities assumed were comprised of convertible debt, trade accounts
payable and accrued expenses.

The Company was originally incorporated in Colorado in May 1984, as VDG Capital
Corporation. Following a reorganization, the Company's name was changed to
Vinculum Incorporated (Vinculum) in August 1994. In June 1998, the Company
acquired the operating assets and liabilities of Genras, Inc.

                                       56

                                       2
<PAGE>
                             EBIZ ENTERPRISES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(an Arizona corporation) and reincorporated in Nevada as CPU Micromart, Inc. In
May 1999, the Company changed its name to Ebiz Enterprises, Inc.

b. Management Plans

The Company has directed its primary strategic thrust towards the Linux
operating system segment of the market. Management believes that the demand for
Linux-based products and services represent a rapidly growing business
opportunity for the Company. The completion of the acquisition of LinuxMall was
a major step in the implementation of this strategy.

On August 7, 2000, the Company entered into an Agreement and Plan of Merger with
LinuxMall. The agreement was amended on October 3, 2000 and became effective
October 5, 2000. Under the terms of the agreement, the Company acquired all of
the outstanding stock and assumed outstanding convertible debentures of
LinuxMall. The current Ebiz stockholders will own approximately 56% of the
resulting company which will retain the Ebiz Enterprises, Inc. name. The
agreement specifies the conditions for the closing of the merger which included
a fairness opinion evaluation by an independent investment banker. The agreement
identified the principal officers and certain persons to be appointed to the
Company's Board of Directors, which will be headquartered in Scottsdale,
Arizona, and defines the basic steps for combining the operations of the two
companies. The acquisition was effective October 5, 2000.

In addition to anticipated strategic synergies, management believes that the
business logic of the combination and the strength of the proposed business plan
will help attract new investor interest to help generate the funding required to
implement the Company's strategies. The first such investment was the $6.4
million equity purchase by Caldera Systems, Inc. (Caldera) that was announced on
September 19, 2000. The purchase price included $3.0 million of cash and a
business concept and certain fixed and intangible assets valued at $3.4 million.
Under the terms of this agreement, the Company will use the proceeds to create
and fund a new, wholly-owned subsidiary, partnerAxis Inc., which will receive
the assets and personnel of an existing division of Caldera. The new subsidiary
will be a Web-based B2B entity providing knowledge exchange, Linux product
sales, advertising and a vehicle for facilitating Linux product development that
it believes will strengthen the Company's overall marketing program. Caldera is
based in Utah and is a provider of Linux e-business internet solutions including
its OpenLinux, NetWare for Linux, Linux technical training, certification and
support. Under the agreement, Caldera will have the right to appoint a member to
the Company's Board of Directors.

Management believes that additional funding will likely be available to meet the
Company's growth needs through 2001. In addition, management believes that the
holder of the $7.1 million convertible debenture that was placed in August 1999
will expand its conversion to common stock and thus provide additional working
capital to the Company (see Note 7). Without additional capital, the Company may
not be able to fully implement its business or operating and development plans.
No assurance can be given that any such financing, if obtained, will be adequate
to meet its ultimate capital needs. If adequate capital cannot be obtained or
obtained on satisfactory terms, operations could be negatively impacted.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company incurred losses and had
negative cash flows from operations in 2000 and 1999 and does not have
sufficient capital needed to support its operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be unable
to continue as a going concern.

                                       57
<PAGE>
                             EBIZ ENTERPRISES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

c. Industry Environment

Successful future operations are subject to certain risks and uncertainties
including, among others, actual and potential competition by entities with
larger customer bases, greater financial resources, longer operating histories,
greater name recognition and more established relationships in the industry than
the Company. The Company's future success will greatly depend on its ability to
timely and effectively address the rapid changes in the computer product
industry and customers' acceptance of the Linux system in general and the
Company's products and services in particular. As a result, certain of these
competitors may be able to develop and expand their network infrastructures more
quickly, and take advantage of acquisitions more readily than can the Company.
The Company's future operating results will depend substantially on the ability
of its officers and key employees to manage changing business conditions.
Further risks and uncertainties relate to technological advancements, the
regulatory environment and the ability of the Company to generate sufficient
revenue and obtain additional financing to fund current operating losses.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Cash and Cash Equivalents

For purposes of the statements of cash flows, all highly liquid investments with
a maturity of three months or less at the time of purchase are considered to be
cash equivalents.

b. Inventory

Inventory is stated at the lower of cost (first-in, first-out) or net realizable
value. Reserves and writedowns are established against Company-owned inventory
for excess, slow-moving, and obsolete items and for items where the estimated
net realizable value is less than cost.

Inventory consists of the following:

                                                            JUNE 30,
                                                 -------------------------------
                                                    2000                 1999
                                                 ----------           ----------
Components ...........................           $  578,649           $1,155,981
  Work-in-process ....................                8,008               44,947
  Finished goods .....................              160,888              367,220
                                                 ----------           ----------
                                                 $  747,545           $1,568,148
                                                 ==========           ==========

c. Furniture and Equipment

Furniture and equipment consists primarily of computer equipment and office
furniture. Furniture and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets.

Furniture and equipment at June 30 consists of the following:

                                                USEFUL
                                                 LIFE        2000        1999
                                                -------    --------    --------
Furniture, fixtures and office equipment.....   3 years    $562,487    $295,566
Software.....................................   3 years     188,981     200,495
Leasehold improvements.......................   2 years      63,807      53,293
                                                -------    --------    --------
                                                            815,275     549,354
Less -- Accumulated depreciation.............              (282,379)    (74,576)
                                                           --------    --------
                                                           $532,896    $474,778
                                                           ========    ========

                                       58
<PAGE>
                             EBIZ ENTERPRISES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

d. Goodwill

During March 2000, the Company recorded goodwill as part of the InfoMagic
acquisition (see Note 9). This is being amortized using the straight-line method
over three years and is net of $57,197 of accumulated amortization at June 30,
2000.

e. Impairment of Long-Lived Assets

The Company periodically evaluates the carrying value of long-lived assets in
accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. Under SFAS No. 121, long-lived assets and certain identifiable
intangible assets to be held and used in operations are reviewed for impairment
whenever events or circumstances indicate that the carrying amount of an asset
may not be fully recoverable. An impairment loss is recognized if the sum of the
expected long-term undiscounted cash flows is less than the carrying amount of
the long-lived assets being evaluated. In management's opinion, no such amounts
or changes in circumstances have occurred.

f. Accounts Payable

Included in accounts payable is approximately $169,000 of bank overdraft at June
30, 2000.

g. Accrued Expenses

Accrued expenses consist primarily of amounts accrued for employee compensation,
customer deposits, professional fees, interest and advertising.

h. Revenue Recognition

Sales revenue is recognized at the date of shipment to customers. Provision is
made for an estimate of doubtful accounts and is based on historical experience.
Revenue from separately priced service and extended warranty programs is
deferred and recognized over the respective service or extended warranty period.
System component and replacement costs are generally covered under the
third-party manufacturer's warranty. The Company had an allowance for warranty
repair costs of approximately $6,000 and $8,000 at June 30, 2000 and 1999,
respectively, related to the sales of its M2 system and Linux computers.

The Securities and Exchange Commission (SEC) released Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements, on December 3, 1999.
On June 26, 2000 the SEC staff announced that they are delaying the required
implementation date for SAB No. 101 with the issuance of SAB No. 101B. The SAB
provides additional guidance on the accounting for revenue recognition,
including both broad conceptual discussions as well as certain industry-specific
guidance. The new guidance concerning customer acceptance and installation terms
may have a significant impact on the timing of the Company's revenue
recognition. The Company does not anticipate any material impact from the
adoption of SAB No. 101 on its future results of operations and financial
position. The SEC guidance will be adopted in the fourth quarter of fiscal year
2001 by recording the effect of any prior revenue transaction affected as a
cumulative effect of change in accounting principle as of April 1, 2001.

i. Research and Development

In accordance with SFAS No. 86, Accounting for the costs of computer software to
be sold, leased or otherwise marketed, the Company expenses the research and
development costs incurred until technological feasibility is attained. The
Company would consider technological feasibility upon the completion of a
working model.

                                       59
<PAGE>
                             EBIZ ENTERPRISES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

j. Advertising Costs

Advertising costs are expensed as incurred and are included in sales and
marketing expenses in the accompanying statements of operations. Advertising
expense was approximately $1,970,000 and $100,000 for the years ended June 30,
2000 and 1999, respectively. As part of the CNET Agreement, the Company incurred
approximately $1,700,000 of integration and advertising fees to CNET in exchange
for a direct link from CNET's Web site to the Company's Web site.

k. Restructuring Expense

In November 1999, the Company implemented a change in its strategic business
plan to concentrate its focus on the Linux market and to de-emphasize the sales
of low-priced Windows-based systems. Consequently, the Company incurred a
restructuring charge of $26,500 for asset revaluation and $125,430 for markdown
of inventory that was directly related to the business being de-emphasized. As
of June 30, 2000, approximately $150,200 in charges have been made against these
reserves.

l. Use of Estimates

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

m. Loss Per Share

No outstanding options or warrants were assumed to be exercised for purposes of
calculating diluted earnings per share for the years ended June 30, 2000 and
1999, as their effect was anti-dilutive.

n. Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 required a change from the deferred
method of accounting for income taxes to the asset and liability method of
accounting for income taxes. Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.

o. Concentrations of Credit Risk

Financial instruments which potentially expose the Company to concentrations of
credit risk, as defined by SFAS No. 105, Disclosure of Information About
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, consist primarily of trade accounts receivable.

The Company does not require collateral upon delivery of its products or
services. The Company derives a significant portion of its total revenue from
relatively few customers. The Company's business is moving

                                       60
<PAGE>
                             EBIZ ENTERPRISES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

towards a more diversified customer base. The percentage of total revenue of
customers to whom sales exceed 10% of total revenue for the years ended June 30
were as follows:

                                             ACCOUNTS RECEIVABLE
                                               OUTSTANDING AT
                                                  JUNE 30,             SALES
                                             -------------------    -----------
                                              2000       1999       2000   1999
                                             ------   ----------    ----   ----
Customer #1...............................    $ --     $441,000      14%    26%
Customer #2...............................      --           --       2%    19%
Customer #3...............................      --      930,000       2%    15%

p. Fair Value of Financial Instruments

At June 30, 2000 and 1999, the carrying value of cash, accounts receivable,
accounts payable and accrued expenses approximate fair values since they are
short-term in nature or payable upon demand. Notes payable approximate fair
value as they are short-term in nature or have stated interest rates based on
current market rates. It is not practical to estimate fair value of the notes
payable to related parties as the agreements are between related parties.

The Company estimates fair values of financial instruments by using available
market information. Considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates may not
be indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions or valuation methodologies
could have a material effect on the estimate fair value amounts.

q. Recently Adopted Accounting Pronouncement

Effective July 1, 1999, the Company adopted SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, which established revised
standards for the reporting of financial and descriptive information about
operating segments in financial statements. The Company has determined that it
has one reportable operating segment. Accordingly, the Company's financial
statements present its one reportable segment.

r. Recently Issued Accounting Pronouncement

In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, (as amended by SFAS No. 137 and SFAS No. 138), Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. The statement, as
amended, is effective for the Company's year ending June 30, 2001. The Company
does not anticipate any material impact from the adoption of SFAS No. 133, as
amended, on its future results of operations and financial position.

In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation -- An interpretation of APB Opinion No. 25 (FIN 44). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The

                                       61
<PAGE>
                             EBIZ ENTERPRISES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Company does not expect the application of FIN 44 to have a material impact on
the Company's financial position or results of operations.

s. Website Development Costs.

On March 16, 2000 the Emerging Issues Task Force released EITF 00-02 Accounting
for Website Development Costs effective for website development costs incurred
for fiscal quarters beginning after June 30, 2000, earlier application is
acceptable. The Company adopted EITF 00-2 effective upon its release. EITF 00-2
requires certain website development costs to be expensed and others to be
capitalized. The Company capitalized website development costs of $12,000 and
$68,000 and expensed $223,000 and $152,000 during the years ended June 30, 2000
and 1999, respectively, in accordance with EITF 00-2. The Company amortizes
website development costs that have been capitalized over 3 years.

t. Restatement.

The Company has restated it's financial statements for the 12 month period ended
June 30, 2000. The restatement relates to the recording of a beneficial
conversion feature of the Debenture issued on August 25, 1999 (see Note 7) and
the additional issuance costs related to subsequent amendments that were made to
the Debenture. The effect of the restatement did not have an impact on cash flow
or net equity of the Company. However, it resulted in a non-cash charge recorded
as additional interest expense.

A beneficial conversion feature was incurred when the Company issued the
Debenture with a non-detachable conversion feature allowing the holder to
convert at a price less than the current fair market value of the Company's
stock. The Company's stock is highly volatile as a result of low volumes of
trades and large spread in bid and ask prices quoted by market makers. As a
result of the volatility, the Company believes that an average of closing trade
prices over a short period prior to issuance of the Debenture is more
representative of fair market value. The Company's interpretation of the fair
market value of its common stock on the date of issuance of the Debenture was
different than the position taken by the SEC during a recent review. The Company
has chosen to accept the SEC's interpretation and restate its financial
statements for fiscal year 2000 and the related interim quarterly results.

The effect on net loss attributable to common stockholders for the 12 months
ended June 30, 2000, was an increase of $2,156,818. The increase in net loss
attributable to common stockholders by quarter was $236,534 for the three months
ended September 30, 1999, $594,532 for the three months ended December 31, 1999,
$696,542 for the three months ended March 31, 2000 and $629,210 for the three
months ended June 30, 2000.

The effect on net loss per common share, basic and diluted, for the 12 months
ended June 30, 2000, was an increase of $0.28. The increase in net loss per
common share by quarter was $0.03 for the three months ended September 30, 1999,
$0.08 for the three months ended December 31, 1999, $0.09 for the three months
ended March 31, 2000 and $0.08 for the three months ended June 30, 2000.

3. RELATED PARTY TRANSACTIONS

a. Consulting Services

During fiscal year 1999, the Company contracted with a consulting company,
controlled by an outside director of the Company, to supply financial consulting
services related to accounting and financial systems. This agreement ended
February 1999 and, as of June 30, 1999, the Company had paid an aggregate of
$22,700 and issued 31,325 common shares of common stock for services rendered.
There were no transactions with this company during fiscal year 2000.

                                       62
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                             EBIZ ENTERPRISES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

b. Exodus Group, LLC

During 1999, certain of the Company's employees and officers purchased a total
of 65% of the available membership units in The Exodus Group, LLC, a franchisee
that purchases products from the Company. Sales to this customer were
approximately $67,000 and $36,000 for the years ended June 30, 2000 and 1999,
respectively.

4. INCOME TAXES

The Company has cumulative net operating losses as of June 30, 2000, in excess
of $12,400,000. The Company's ability to utilize its net operating losses to
offset future taxable income may be limited under the Internal Revenue Code
Section 382 change in ownership rules. The Company has established a valuation
reserve as it has not determined that it is more likely than not that the
deferred tax asset is realizable.

The components of the provision for (benefit from) income taxes consist of the
following:

                                                                  2000     1999
                                                                  ----     ----
Current income taxes:
  Federal.....................................................    $ --     $ --
  State.......................................................      --       --
Deferred income taxes:
  Federal.....................................................      --       --
  State.......................................................      --       --
                                                                  ----     ----
          Total provision for (benefit from) income taxes.....    $ --     $ --
                                                                  ====     ====

The components of the deferred tax accounts as of June 30, 2000 and 1999,
consist of the following:

                                                       2000            1999
                                                    -----------     -----------
Current deferred tax assets (liabilities):
Reserves and other accruals ....................    $    32,809     $    19,305
Valuation Allowance ............................        (32,809)        (19,305)
                                                    -----------     -----------
     Total current deferred tax assets
       (liabilities) ...........................             --              --
                                                    -----------     -----------
Long-term deferred tax assets (liabilities):
Amortization of goodwill .......................          9,152              --
Net operating loss carry forward ...............      4,960,000       1,400,000
Valuation allowance ............................     (4,969,152)     (1,400,000)
                                                    -----------     -----------
     Total non-current deferred tax assets
       (liabilities) ...........................             --              --
                                                    -----------     -----------
Net deferred tax asset (liability) .............    $        --     $        --
                                                    ===========     ===========

A reconciliation of the federal statutory rate to the Company's effective tax
rate for the years ended June 30 are as follows:

                                                                2000      1999
                                                                ----      ----
Statutory federal rate.......................................    (34)%     (34)%
State taxes, net of federal benefit..........................     (6)       (6)
Change in valuation allowance................................     40        40
                                                                ----      ----
          Total..............................................     --%       --%
                                                                ====      ====

                                       63
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                             EBIZ ENTERPRISES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

5. BANK LINE OF CREDIT

The Company had borrowings under its line of credit of $350,000 as of June 30,
1999. During August 1999, the Company used proceeds from the $7.1 million
Debenture (see Note 7) to repay the outstanding balance on the line of credit.

In December 1999, the Company obtained a line of credit from a bank for
borrowings up to $250,000. Interest accrues at prime (9.50% at June 30, 2000)
plus 1.5% and is payable monthly. Principal is due at maturity. The line of
credit is guaranteed by the Company's two largest stockholders and is secured by
the Company's accounts receivable and inventory. The line was fully borrowed at
June 30, 2000. The weighted average interest rate on amounts outstanding was
10.6% during the year ended June 30, 2000.

6. NOTES PAYABLE

Notes payable at June 30 consist of the following:

                                                               2000       1999
                                                              -------   --------
Note payable to a stockholder, fixed interest amount, due on
  demand, unsecured.........................................  $71,928   $     --
Note payable to a stockholder, interest at 10%, due on
  demand, unsecured. Paid July, 1999........................       --     30,000
Note payable to a stockholder, interest at 10%, due on
  demand, unsecured. Paid July, 1999........................       --     30,000
Note payable to related party, interest at 10%, principal
  and interest, due April 19, 2000, secured by the Company's
  assets, convertible into shares of common stock at a rate
  of one share per $6.00 of note principal converted. Paid
  August, 1999..............................................       --    500,000
Note payable to an individual, interest at 10%, principal
  and interest due September 25, 1999, secured by the
  Company's assets. Paid August, 1999.......................              50,000
                                                              -------   --------
                                                              $71,928   $610,000
                                                              =======   ========

In connection with the $500,000 note above, the Company issued warrants to
purchase 250,000 common shares, at an exercise price of $100 per share. The fair
value of each warrant as estimated using the Black-Scholes option pricing model,
was estimated using the following assumptions: stock price of $7.50, risk free
interest rate at 5.26%, expected life of 1 year, a volatility factor of 80% and
a dividend yield of 0%. Since the exercise price was substantially in excess of
the then fair value of the common stock at the date of grant, the fair value of
each warrant was nominal. These warrants are exercisable at any time during the
term of the warrants and expire two years from the note repayment date.

7. CONVERTIBLE DEBENTURE

In August, 1999 the Company completed a private placement of a $7.1 million
convertible debt facility (the Debenture). In conjunction with the Debenture,
the Company issued warrants to acquire 245,000 shares of common stock at a
market-based exercise price as defined by the Debenture agreement. The warrants
are exercisable for the purchase of shares of common stock of 60,000 at $7.4723
per share, 60,000 at $8.6219 per share and 125,000 at $6.3227 per share. The
fair value of these warrants, as calculated by using the Black-Scholes pricing
model, was estimated to be approximately $796,000 using the following weighted
average assumptions: stock price of $7.625, risk free interest rate at 5.63%,
expected life of 2 years, a volatility factor of 80% and a dividend yield of 0%
and is recorded as a debt discount in the accompanying financial statements.
Additional issuance costs of approximately $197,000 were paid and recorded as
deferred loan fees in the accompanying financial statements. Discounts and
deferred loan fees are amortized using the straight-

                                       64
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                             EBIZ ENTERPRISES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

line method which approximates the effective interest method as additional
interest expense over the term of the loan.

The Company received an initial infusion of $2.1 million from the Debenture,
which was utilized to repay the Company's outstanding debt at June 30, 1999 and
to provide working capital. The remaining $5.0 million was deposited with a bank
as collateral for the Debenture. In February 2000, $500,000 of the cash
collateral was released by the holder. The net cash collateral is reflected as
restricted cash in the accompanying financial statements. The Debenture is
convertible, at the holder's option, into shares of the Company's common stock
over an 18 month period at approximately $394,000 per month. The Company's
ability to reduce the cash collateral and to have these amounts available for
working capital is contingent upon the holder converting the Debenture or the
Company's ability to pay down the Debenture with cash from other sources. If the
holder, at its discretion, converts the Debenture, the Company can draw
approximately $.70 for each $1 of Debenture principal converted to fund
operations. The unconverted balance, if any, of the Debenture and the
unconverted accrued interest is due February 24, 2002.

The per share conversion price was initially equal to the lesser of (a) $7.4953
or (b) the average of the three lowest closing bid prices of the Company's
common stock for the 15 consecutive trading days ending on the trading day
immediately preceding submission of a notice to convert by the holder. In the
event the closing bid price of the Company's common stock is less than $7.4953
at any time during the five trading days preceding a due date, the Company has
the right to redeem for cash the monthly conversion amount of the Debenture at
premiums ranging from 105% to 108%.

The Company recorded a beneficial conversion feature of approximately $3.6
million related to the Debenture. The beneficial conversion feature was based on
the difference between the closing trade price and the conversion price on the
date of issuance on the portion of the Debenture that was convertible, net of
the proceeds allocated to the Warrant. For the portion of the Debenture not
convertible upon issuance, the holder accrues the right to convert it over a
period of 18 months. However, until the restricted cash is released to the
Company, there can be no conversion.

In February 2000, the Debenture was amended to reduce the conversion price on
accrued principal of $2,761,108 and interest of $140,203 to equal the lesser of
(a) $3.84 or (b) the average of the three lowest closing bid prices of the
Company's common stock for the 15 consecutive trading days ending on the trading
day immediately preceding submission of a notice to convert by the holder. In
March 2000, the Debenture was amended to change the formula on the variable
conversion price from the three lowest closing bid prices to the three lowest
trading prices in the 15 consecutive trading days ending on the trading day
immediately preceding submission of a notice to convert by the holder. In
connection with the amendments to the Debenture, the Company recorded additional
deferred loan fees of approximately $140,000, which will be amortized over the
remaining term of the Debenture that the holder accrues the right to convert.

The Debenture required that the related shares of the Company's common stock be
registered under the Securities Act of 1933 and the regulations of the
Securities and Exchange Commission (SEC) before the holder could begin to
convert the Debenture to common stock. The necessary registration was initiated
by the Company in October 1999 and became effective in February 2000. The holder
began accruing rights to convert the Debenture upon its signing and as of June
30, 2000 the holder had accrued the rights to convert approximately $4,334,000
of the principal of the Debenture into shares of the Company's common stock,
however, only $2.1 million was convertible because the holder of the debenture
had not released the restricted cash. Interest payable to the holder has been
accrued monthly since September 1999 with approximately $150,000 paid in cash,
as required by the terms of the Debenture, prior to the completion of the
registration process. During February 2000, approximately $140,500 of interest
was converted into 36,546 shares of common stock. An additional $8,200 of
interest converted into 4,799 shares of common stock during March through June
2000. The fair value of the Company's common stock ranged from $6.90 to $1.92 on
the dates of the interest conversions during the period from February to June
2000. The Company recorded a beneficial

                                       65
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                             EBIZ ENTERPRISES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

conversion feature on the conversion of interest of approximately $86,000, which
is reflected as additional interest expense during the twelve months ending June
30, 2000. As of June 30, 2000 the remaining balance of accrued interest payable
was approximately $236,000. During February through June 2000, approximately
$429,000 of principal was converted to 222,683 shares.

8. STOCKHOLDERS' EQUITY

a. Reverse Stock Split

Share amounts in the accompanying financial statements and notes to the
financial statements give retroactive effect to a one-for-ten reverse stock
split effective June 1998.

b. Capitalization

The Company amended its Articles of Incorporation in 1999 to authorize the
issuance of up to 70,000,000 shares of Class A common stock. In addition, the
Articles of Incorporation authorize the issuance of up to 5,000,000 shares of
preferred stock. The Board of Directors of the Company, at its sole discretion,
may establish par value, divide the shares of preferred stock into series, and
fix and determine the dividend rate, designations, preferences, privileges,
ratify powers, if any, and determine the restrictions and qualifications of the
shares of each series of preferred stock as established.

c. Preferred Stock

The Board of Directors has designated 100,000 shares of Series A Convertible
Preferred Stock, (Preferred Stock) and during fiscal 1999, the Company issued
10,895 shares of Preferred Stock, at $100 per share. Net proceeds from the
issuance of Preferred Stock was approximately $869,000. These shares have a
liquidation preference of $100 per share, and are entitled to a $10 per share
cumulative, annual dividend, accrued quarterly commencing April 1, 1999, and
payable at the discretion of the Company. The Company, at its discretion, may
redeem the Preferred Stock whenever the price of its common stock is equal to or
greater than $9.00 per share 20 out of 30 consecutive trading days. Each share
of Preferred Stock may be converted, at the option of the holder into common
stock at a conversion rate of one share for every $6.00 of principal converted.
In addition, the Preferred Stock automatically converts into common stock
whenever the price of the Company's common stock is equal to or greater than
$13.50 per share 20 out of 30 consecutive trading days.

During March through May 2000, shareholders converted 3,305 shares of Preferred
Stock to 55,086 shares of the Company's common stock.

d. Warrants to Purchase Common Stock

The Company had outstanding warrants, issued in connection with financing
transactions, to purchase 86,644 shares of common stock through December 2000.

As of June 30, 2000 the following groups of warrants were outstanding:

EXPIRATION DATE                                   EXERCISE PRICE   COMMON SHARES
---------------                                   --------------   -------------
December 10, 2000..............................    $2.10-$3.00         86,664
February 28, 2002..............................       $7.20             9,086
December 1, 2003...............................    $3.00-$8.25        230,000
August 22, 2004................................    $6.32-$8.62        250,000

                                       66
<PAGE>
                             EBIZ ENTERPRISES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

e. Warrants Issued for Consulting Services

The Company records equity instruments that are issued for goods and services at
the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more readably determinable. The Company utilizes
the Black-Scholes model to determine fair value.

In November 1998, the Company issued 30,000 options to a director and 20,000
options to an outside consultant for consulting services for the period of
November through February 1999. The fair value of the options using the
Black-Scholes model was nominal, using the following assumptions: stock price of
$1.00, risk free rate of 5.26%, expected life of two years, a volatility factor
of 80% and a dividend yield of 0%. The options vested 100% upon issuance and had
an exercise price of $1.00.

In October, 1999 the Company engaged a consulting firm to assist with its
strategic planning and corporate development programs. In conjunction with the
engagement, the Company issued warrants to purchase 220,000 shares of common
stock at a market-based exercise price. The warrants are exercisable for the
purchase of shares of common stock of 55,000 at $4.54 per share, 55,000 at $5.16
per share, 55,000 at $6.19 per share, and 55,000 at $8.25 per share. The fair
value of these warrants, as calculated by using the Black-Scholes pricing model,
was estimated to be approximately $199,000, using the following weighted average
assumptions: stock price of $4.13, risk free interest rate of 5.49%, expected
life of one year, a volatility factor of 80% and a dividend yield of 0%, and is
recorded as an expense in selling, general and administration expenses in the
accompanying financial statements. All warrants are 100% vested upon issuance.

f. Common Stock Issued for Advertising

In January, 2000 the Company entered into a Premier Advertiser Agreement with
CNET, Inc. Under the agreement, the Company became a part of CNET's Premier
Advertiser program for CNET's Linux Center and received advertising for, and
links to, the Company's Web site, TheLinuxStore.com. The term of the agreement
is through February 2001, subject to earlier termination. The Company is
required to purchase a minimum of $2 million of advertising under the agreement
during its stated term. Additionally, the Company paid an integration fee equal
to $1.2 million by issuing 240,000 shares of its common stock to CNET, Inc.
valued at the fair value of $5.00 per share on the date of the agreement. This
integration fee has been recorded as prepaid advertising and is being amortized
over the term of the agreement. The advertising on the CNET Linux Center began
in February, 2000. The 240,000 shares of common stock issued are redeemable at
the discretion of the holder within one year of the signing of the agreement
which is reflected in the accompanying balance sheet as redeemable common stock.

In May 2000, the Company negotiated the termination of the agreement. Under the
terms of the termination agreement, CNET is to release the Company from its
liabilities under the agreement upon the Company's registration of the 240,000
shares of common stock. Accordingly, the remaining balance of the integration
fee, $1,050,000, was expensed in the fourth quarter of fiscal 2000 and $501,000
was recorded as a liability for unpaid promotions pending release upon the
registration of the common stock.

g. Private Placement of Common Stock

On March 31, 2000, the Company entered into a Securities Purchase Agreement with
two persons, who had no prior relationship with the Company (the Purchasers).
The agreement provided for the purchase of 2.5 million shares of the Company's
common stock at a price of $2.00 per share (subject to adjustment as described
in the Securities Purchase Agreement). The $2.00 per share price was based on
numerous factors including the size of the investment, the restrictions on the
resale of the stock, the current status of the Company's financing requirements
and the Company's prospects at the time of the issuance. An additional factor
related to the agreement and the pricing of the stock was that the Purchasers
were to also facilitate a strategic relationship with an approved Asian
manufacturer on behalf of the Company. The purchase

                                       67
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                             EBIZ ENTERPRISES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

agreement provided that the price of the stock be adjusted to $3.00 per share in
the event the note (described below) was not timely paid or if a manufacturing
agreement acceptable to the Company was not consummated.

At the closing, the Purchasers paid $500,000 in cash and executed a promissory
note, due May 5, 2000, for $4.5 million. The due date of the note was later
extended to June 23, 2000 and the price of the common stock was adjusted to
$1.54, based upon arms-length negotiations to induce additional cash investment
into the Company. No further extensions of the note due date have been granted.
No strategic manufacturing agreement with Company was consummated. During May
and June 2000, the Purchasers paid an additional $400,000 in cash for the
additional stock issued. A total of 584,415 shares of common stock were issued.
The $900,000 aggregate cash received was recorded as common stock and additional
paid-in capital. The remainder of the $4.1 million due on the note was forgiven.

h. Stock Option Plan

In November 1998, the Company adopted the CPU MicroMart 1998 Equity Incentive
Plan (Plan). The Plan will terminate 10 years after the effective date. The Plan
authorizes awards of incentive stock options to employees and non-qualified
stock options to officers, directors, employees, and consultants of the Company.
A total of 1,000,000 shares of common stock was reserved for issuance under the
Plan. The Plan is administered by a committee appointed by the Board who have
the exclusive authority to administer and interpret the Plan. The committee has
the power to, among other things, designate participants, determine types of
awards to be granted and the price, timing, terms and duration of awards.

The Company accounts for its stock option plan under APB Opinion No. 25, under
which no compensation cost has been recognized in fiscal 2000 and 1999,
respectively.

A summary of the status of all the Company's stock options at June 30, 2000 and
1999 and changes during the years then ended is presented in the following table
and narrative below:

                                             2000                   1999
                                      -------------------    -------------------
                                           WEIGHTED               WEIGHTED
                                       AVERAGE EXERCISE       AVERAGE EXERCISE
                                      -------------------    -------------------
                                      OPTIONS       PRICE    OPTIONS       PRICE
                                      --------      -----    --------      -----
Outstanding at beginning of year...    663,000      $1.96          --      $  --
  Granted..........................    533,000       2.77     663,000       1.96
  Exercised........................   (101,500)      1.00          --         --
  Canceled.........................   (347,500)      1.35          --         --
                                      --------      -----    --------      -----
Outstanding at end of year.........    747,000      $2.94     663,000      $1.96
                                      ========      =====    ========      =====
Exercisable at end of year.........    169,940      $3.59     140,000      $1.28
                                      ========      =====    ========      =====
Weighted average fair value per
  share of options granted.........                 $1.93                  $1.29
                                                    =====                  =====

                                       68
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                             EBIZ ENTERPRISES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Options outstanding and exercisable by price range as of June 30, 2000:

                               OPTIONS OUTSTANDING         OPTIONS EXERCISABLE
                   ------------------------------------   ----------------------
                                  WEIGHTED
                                   AVERAGE     WEIGHTED                 WEIGHTED
    RANGE OF                      REMAINING    AVERAGE                  AVERAGE
    EXERCISE         OPTIONS     CONTRACTUAL   EXERCISE     OPTIONS     EXERCISE
     PRICES        OUTSTANDING      LIFE        PRICE     EXERCISABLE    PRICE
-----------------  -----------   -----------   --------   -----------   --------
$2.25............    416,000         9.09       $1.76        78,220      $1.32
$3.00 -- 3.75....    298,000         9.33        3.63        61,000       3.69
$4.88 -- 5.50....     33,000         8.58        4.93        30,720       4.89
                     -------         ----       -----       -------      -----
                     747,000         9.16        2.94       169,940       3.57

The following pro forma disclosures of net loss are made assuming the Company
had accounted for the stock options pursuant to the provision of SFAS No. 123,
Accounting for Stock-Based Compensation.

                                                        JUNE 30,      JUNE 30,
                                                          2000          1999
                                                       ----------    ----------
Net loss:
  As reported ......................................   $  (10,121)   $   (1,954)
  Pro forma ........................................      (11,006)       (2,098)
Loss per common and common share equivalent:
  As reported -- basic and diluted .................        (1.32)         (.29)
  Pro forma -- basic and diluted ...................        (1.43)         (.31)

The fair value of each option is estimated on the date of grant using the
Black-Scholes options pricing model with the following weighted average
assumptions used for grants during fiscal 2000: risk-free interest rate of
6.48%, expected life of five years, and a volatility factor of 80%. The weighted
average assumptions used for grants during fiscal 1999 were as follows:
risk-free interest rate of 5.26%, expected lives of three to five years, and a
volatility factor of 80%. The assumed dividend yield is 0% for 2000 and 1999.

9. ACQUISITION OF INFOMAGIC, INC.

On March 31, 2000, the Company acquired all of the issued and outstanding common
stock of InfoMagic, Inc. (InfoMagic), which distributes open source and low cost
software products with its principal emphasis in Linux software through its
Website, www.InfoMagic.com and selected distributors. The Company issued 200,000
shares of its common stock valued at a fair market value of $3.50 per share to
the shareholders of InfoMagic, for total consideration of $700,000. In addition
to the acquisition of assets and the assumption of liabilities, the Company
acquired InfoMagic's customer base of clients. This acquisition has been
accounted for under the purchase method of accounting in accordance with APB16.
The purchase price in excess of the fair value of assets acquired and
liabilities assumed of InfoMagic of approximately $686,000 has been recorded as
goodwill and is being amortized over three years (see Note 2).

The fair value of the assets acquired was allocated as follows:

Net assets acquired.................................................   $ 13,641
Goodwill............................................................    686,359
                                                                       --------
                                                                       $700,000
                                                                       ========

                                       69
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                             EBIZ ENTERPRISES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The following table depicts, for the years ended June 30, 2000 and 1999,
unaudited pro forma consolidated information as if the acquisition of InfoMagic
took place on July 1, 1999 and 1998, respectively.

                                                        2000           1999
                                                    ------------    -----------
Net sales........................................   $ 12,888,966    $17,018,281
Net loss.........................................    (10,096,334)    (1,994,529)
Income per basic and diluted share...............          (1.28)         (0.28)

10. COMMITMENTS AND CONTINGENCIES

a. Operating Leases

The Company entered into a two-year lease in May, 1999 for its office and
warehouse facility in Scottsdale, Arizona. Rental expense related to this lease,
and the terminated lease for it previous facility amounted to approximately
$292,000 and $165,000 for the years ended June 30, 2000 and 1999, respectively.

Future minimum payments under the Company's current lease which expires in
April, 2001 are approximately $157,000.

b. Litigation

In the normal course of its business, the Company is subject to certain
contractual obligations and litigation. In management's opinion, upon
consultation with legal counsel, there is no current litigation which will
materially affect the Company's financial position or results of operations.

11. SUBSEQUENT EVENT

The Company entered into an exclusive marketing alliance with UserFriendly on
September 20, 2000 for a period of twelve months. Under the terms of the
agreement, UserFriendly provides advertising services on its website and a
direct link to Ebiz's website, TheLinuxStore.com, where all purchase
transactions are made by customers. Under the terms of the agreement, Ebiz is to
pay UserFriendly a fixed monthly advertising fee and a percentage of the gross
margin recorded by Ebiz for sales to customers coming through the direct
connection between the web sites. These payments will be recorded as advertising
and commission expenses, respectively. No revenue generating transactions or
advertising had occurred under the terms of the Agreement as of September 30,
2000.

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

On January 17, 2001 our principal independent accountant, Arthur Andersen (AA),
resigned. AA issued a qualified opinion for our fiscal year 2000 financial
statements, the last completed year for which AA rendered an opinion for us.
There was no disagreement with AA which precipitated its resignation, and AA
provided no reason or explanation for its resignation.

                                    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 directors and executive officers of Ebiz are:

NAME                      AGE     POSITION
----                      ---     --------
David S. Shaw             45      Director
Jeffrey I. Rassas         38      Director
Bruce Parsons             54      President and Chief Executive Officer
Mark Bolzern              42      Director
Ray Goshorn               42      Chief Financial Officer
Michael G. Colesante      34      Chief Operating Officer

DAVID S. SHAW, DIRECTOR. Mr. Shaw joined Ebiz's management team as part of the
LinuxMall.com, Inc. acquisition in October 2000 and served as Chief Executive
Officer of Ebiz until October 5, 2001. Mr. Shaw had been the Chief Executive
Officer of LinuxMall from February 2000 to October 2000 and its Chief Marketing
Officer from July 1999 to February 2000. Prior to joining LinuxMall, from 1995
to 1999, Mr. Shaw served as President and Chief Executive Officer of Focus on
Sales, Inc., a consulting firm with over 125 consultant offices around the world
assisting small to mid-size business owners develop and implement business plans
and strategies for controlled growth.

JEFFREY I. RASSAS, DIRECTOR. Mr. Rassas is the founder of Ebiz and served as its
Chief Executive Officer from its inception in 1995 until October 2000. Between
1989 and 1995, Mr. Rassas owned and operated The Wilsaac Group, Inc., d/b/a DLC
Consulting, an employee leasing and office services outsourcing firm.

                                       70
<PAGE>
Prior to DLC Consulting, from 1985 to 1989, Mr. Rassas co-founded ITS Travel
Group, Inc., which grew into the third largest travel agency in Arizona before
it was sold in 1989.

BRUCE PARSONS, PRESIDENT AND CHIEF EXECUTIVE OFFICER. Mr. Parsons joined Ebiz as
its President in January 2001 as a result of the acquisition of JBSI. In early
October 2001 he assumed the additional duties of Chief Executive Officer. He is
the former President of JBSI and has over 25 years of experience as an
entrepreneur and in sales, marketing and strategic management roles. He was an
original co-founder of JBSI in 1979, and co-managed the company through its
acquisition by Decision Data Services, Inc. in 1986. In 1988, he co-founded and
served as president of Prologue Technology, Inc., a UNIX Systems Integrator. In
1989, Mr. Parsons became General Manager and Vice President of the Western
Pacific Data Systems Distribution Division as a result of the acquisition of
Prologue Technology by Western Pacific Data Systems. Western Pacific Data
Systems was in turn acquired by Microware Distributors in 1992. Mr. Parsons
remained with Microware Distributors until 1993, when he returned to JBSI. Mr.
Parsons acted as JBSI President from 1993 to 1994, and from 1995 to 1999 as
Executive Vice President of Sales and Marketing.

MARK BOLZERN, DIRECTOR. Mr. Bolzern founded LinuxMall in 1993 and served as its
President and Chairman of the Board until its acquisition by Ebiz in October
2000. In November 2000 he became a director of Ebiz. He currently serves as a
director of Linux International, an advisory council member of both the Linux
Professional Institute and the Linux Business Expo.

RAY GOSHORN, CHIEF FINANCIAL OFFICER. Mr. Goshorn has served as Chief Financial
Officer of Ebiz since October 2000. Prior to his employment with Ebiz, he served
as LinuxMall's Chief Financial Officer from January 2000 until its acquisition
by Ebiz. Prior to that, from March 1995 to December 1999, he served as Chief
Financial Officer of Pak Mail Centers of America, a franchiser of packaging and
shipping convenience centers. Mr. Goshorn holds a Bachelor's Degree in
Accounting.

MICHAEL G. COLESANTE, CHIEF OPERATING OFFICER. Mr. Colesante joined Ebiz as
Chief Operating Officer in January 2001 and is responsible for all company
facilities and operations functions. Prior to joining Ebiz, he served as
controller of JBSI beginning in January 1993 and as Chief Financial Officer from
1995 until early January 2001. Mr. Colesante holds a bachelor's degree in
Accounting from New York State University and is a Certified Public Accountant.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

The following information relates to reports under Section 16(a) of the Exchange
Act that were not timely filed by officers, directors and beneficial owners of
10% or more of Ebiz's common stock during the fiscal year ended June 30, 2001.
This information is based on a review of Section 16(a) reports furnished to
Ebiz.

Jeffrey I. Rassas and Hayjour Family Limited partnership, an entity controlled
by Mr. Rassas, failed to timely file three reports on Form 4 for two purchases
and eleven sales occurring from December 2000 through February 2001and
comprising a total of 39,500 shares of Ebiz common stock. A Form 4 which
reported these transactions was transmitted for filing on March 14, 2001. In
addition, a report on Form 5 was not timely filed to report sales from April
through June 2001 of a total of 14,450 shares of Ebiz common stock. The required
Form 5 report was transmitted for filing on November 16, 2001.

                                       71
<PAGE>
Stephen C. Herman and Kona Investments Limited Partnership, an entity controlled
by Mr. Herman, failed to timely file two reports on Form 4 related to fourteen
sales occurring from December 2000 through January 2001 and comprising a total
of 86,500 shares of Ebiz common stock. A Form 4 for these transactions was
transmitted for filing on February 13, 2001. In addition, Kona Investments
failed to timely file one report on Form 4 related to nineteen sales occurring
in February 2001 and comprising 75,000 shares of Ebiz common stock. A Form 4 for
these transactions was transmitted for filing on March 13, 2001. Finally a
report on Form 5 was not timely filed to report sales from May through July 2001
for a total of 330,000 shares of Ebiz common stock.

The Stephen P. and Roberta G. Shadle Trust, Stephen P. Shadle, Scott Shadle,
Nick Futter, Don Young and Dave Colesante each failed to timely file Form 3s for
acquisitions of shares of Ebiz common stock in January 2001. The Form 3s were
transmitted for filing on January 22, 2001.

ITEM 10. EXECUTIVE COMPENSATION

The following table is based upon compensation for the fiscal years ended June
30, 2001, 2000 and 1999 for those individuals who served as executive officers
during the last completed fiscal year ending June 30, 2001.

                           SUMMARY COMPENSATION TABLE

                                          ANNUAL COMPENSATION           AWARDS
                                         ----------------------       ----------
                                                                      SECURITIES
                           FISCAL                                     UNDERLYING
      NAME                  YEAR          SALARY         BONUS          OPTIONS
      ----                  ----         --------       -------       ----------
Jeffrey Rassas(1)           2001         $101,705          None         750,000
Chief Executive             2000         $123,281          None            None
Officer                     1999         $ 96,000       $ 9,000            None

Dave Shaw(2)                2001         $110,417       $ 6,563         758,500
Chief Executive
Officer

Bruce Parsons               2001         $ 69,250       $15,938         478,179
President

Stephen Herman              2001         $ 76,705          None         750,000
President                   2000         $123,281          None            None
                            1999         $ 96,000       $ 9,000            None

Ray Goshorn                 2001         $ 93,750       $13,125         871,000
Chief Financial
Officer

----------
(1)  Mr. Rassas served as CEO from 1999 until October 2000.
(2)  Mr. Shaw served as CEO from October 2000 until October 2001.

                                       72
<PAGE>
STOCK OPTION PLAN

Our Board of Directors adopted, and our shareholders approved, effective
December 1998, the 1998 Equity Incentive Plan (the PLAN). In December 2000, the
Board of Directors amended the Plan to increase the number of shares of our
common stock available under the Plan. The purpose of the Plan is to promote the
interests of our company and to motivate, attract and retain the services of
persons upon whose judgment, efforts and contributions the success of our
business depends. A further purpose of the Plan is to align the personal
interests of such persons with the interests of our shareholders through equity
participation in our growth and success. The Plan provides for granting options,
incentive stock options and restricted stock awards, or any combination of the
foregoing for up to 12,000,000 shares of our common stock. Our bankruptcy filing
has stayed the enforcement by an option holder of the terms of any unexercised
option grant. The effect of this is that no unexercised option can now be
exercised unless the bankruptcy court directs otherwise. As of June 30, 2001, a
total of 12,048,368 stock options were outstanding of which 8,250,353 were
vested under the Plan. A total of 101,500 options to purchase shares under the
Plan have been exercised.

EMPLOYMENT AGREEMENTS

As required by the acquisition agreement with JBSI, we entered into certain
employment agreements, effective January 2001, with Dave Shaw, Chief Executive
Officer, Bruce Parsons, President, Ray Goshorn, Chief Financial Officer and Mike
Colesante, Chief Operating Officer. Dave Shaw resigned as CEO as of October 5,
2001 and Ray Goshorn resigned as CFO as of November 15, 2001. The terms of the
employment agreements signed with each of these executive officers are uniform,
except for base salaries, bonuses and stock option grants which are as follows.

EXECUTIVE OFFICER          BASE SALARY         BONUS(1)         STOCK OPTIONS(2)
-----------------          -----------         --------         ----------------
Dave Shaw                   $175,000           $105,000             300,000
Bruce Parsons               $150,000           $ 85,000             200,000
Ray Goshorn                 $135,000           $ 70,000             200,000
Mike Colesante              $120,000           $ 20,000             100,000

----------
(1)  Each executive officer has two distinct performance levels. If both
     performance levels are achieved the executive officer would earn the total
     bonus amount indicated. One performance level may be achieved independent
     of the other and therefore the bonus paid to the executive officer may, in
     fact, be less than the total set forth.
(2)  The exercise price, duration, terms and conditions of each stock option
     grant is determined by the Board of Directors as set forth in the First
     Amended and Restated Ebiz 1998 Equity Incentive Plan

                                       73
<PAGE>
Absent a directive from the bankruptcy court to the contrary, our bankruptcy
filing has stayed the enforcement of these employment contracts, and those
executives who were parties to the employment agreements are now employed on an
at-will basis.

DIRECTOR COMPENSATION

All authorized out-of-pocket expenses incurred by a director on our behalf are
subject to reimbursement. We are currently negotiating compensation packages for
additional non-management directors to join the Board.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of October 31, 2001, the ownership of each
person we know to be the beneficial owner of five percent or more of our common
stock, each officer and director individually, and all officers and directors as
a group. We have been advised that each person has sole voting and investment
power over the shares listed below unless otherwise indicated. Because the
exercise of vested but unexercised stock options under the Plan and any
outstanding warrants we issued have been stayed as a result of our bankruptcy
filing unless otherwise directed by the bankruptcy court, the number of shares
of common stock represented by such stock options and warrants have been
excluded from the calculations.

                                                                     PERCENT OF
NAME AND ADDRESS                           AMOUNT AND NATURE OF      BENEFICIAL
OF BENEFICIAL OWNER                          BENEFICIAL OWNER       OWNERSHIP(1)
-------------------                          ----------------       ------------
Caldera Systems, Inc.*                         14,474,129(2)           42.49%
240 West Center Street
Orem, UT 84057

The Canopy Group, Inc.                          2,500,000               7.34%
333 South 520 West, Suite 300
Lindon, UT 84042

Mark Bolzern*                                  14,474,129(3)           42.49%
950 South Cherry, Ste. 620
Denver, CO 80246

Stephen P. Shadle*                             14,474,129(4)           42.49%
2260 S. 4th Ave., Ste. 2000
Yuma, AZ 85364

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<PAGE>
                                                                     PERCENT OF
NAME AND ADDRESS                           AMOUNT AND NATURE OF      BENEFICIAL
OF BENEFICIAL OWNER                          BENEFICIAL OWNER       OWNERSHIP(1)
-------------------                          ----------------       ------------
Jeffrey I. Rassas*                             14,474,129(5)           42.49%
10225 East Via Linda, Suite 300
Scottsdale, Arizona 85258

Debi S. Rassas*                                14,474,129(6)           42.49%
10225 East Via Linda, Suite 300
Scottsdale, Arizona 85258

Stephen C. Herman*                             14,474,129(7)           42.49%
10225 East Via Linda, Suite 300
Scottsdale, Arizona 85258

David S. Shaw*                                 14,474,129(8)           42.49%
10225 East Via Linda, Suite 300
Scottsdale, AZ 85258

Marian Shaw*                                   14,474,129(9)           42.49%
P.O. Box 460190
Aurora, CO 80046-1090

Bruce Parsons*                                 14,474,129(10)          42.49%
13715 Murphy Rd., Ste. D
Stafford, TX 77477

Scott Shadle*                                  14,474,129(11)          42.49%
757 N. Eldridge, 4th Floor
Houston, TX 77079

Nick Futter*                                   14,474,129(12)          42.49%
13715 Murphy Rd., Ste. D
Stafford, TX 77477

Don Young*                                     14,474,129(13)          42.49%
13715 Murphy Rd., Ste. D
Stafford, TX 77477

Dave Colesante*                                14,474,129(14)          42.49%
757 N. Eldridge, 4th Floor
Houston, TX 77079

                                       75
<PAGE>
                                                                     PERCENT OF
NAME AND ADDRESS                           AMOUNT AND NATURE OF      BENEFICIAL
OF BENEFICIAL OWNER                          BENEFICIAL OWNER       OWNERSHIP(1)
-------------------                          ----------------       ------------
Mike Colesante*                                14,474,129(15)          42.49%
13715 Murphy Rd., Ste. D
Stafford, TX 77477

Bomar Shaw Family Trust, LLC*                  14,474,129(16)          42.49%
PO Box 460190
Aurora, CO 80046-1090

MV3LP, LLLP*                                   14,474,129(17)          42.49%
950 South Cherry, Ste. 620
Denver, CO 80246

Hayjour Family Limited Partnership*            14,474,129(18)          42.49%
10225 East Via Linda, Suite 300
Scottsdale, AZ 85258

Kona Investments Limited Partnership*          14,474,129(19)          42.49%
10225 East Via Linda, Suite 300
Scottsdale, AZ 85258

Stephen P. and Roberta G. Shadle Trust*        14,474,129(20)          42.49%
2260 S. 4th Ave., Ste. 2000
Yuma, AZ 85364

Santa Cruz Operation, Inc.                      4,576,744(21)          13.44%
400 Encinal Street
Santa Cruz, CA 95061

Ray Goshorn                                        10,543(22)           0.03%
10225 East Via Linda, Suite 300
Scottsdale, AZ 85258

All Directors and Officers as a Group           5,851,522              17.18%
(persons)

                                       76
<PAGE>
----------
*    All shareholders who are shown to have aggregate beneficial ownership of
     14,474,129 shares of common stock are parties to that Shareholder Voting
     Agreement and Proxy dated December 28, 2000 (the Shareholder Agreement)
     through which each shareholder who is a party to the Shareholder Agreement
     has shared voting power of all shares owned by all other shareholders to
     such agreement. The Shareholder Agreement is effective for two years and
     Jeffrey Rassas, Dave Shaw, Bruce Parsons and Steve Shadle have been
     appointed proxies to vote the shares in accordance with provisions of the
     Shareholder Agreement. The total beneficial ownership represented by the
     Shareholder Agreement is 14,474,129 shares which is 42.49% of the
     outstanding shares of common stock.
(1)  Based upon 34,062,328 shares of common stock outstanding as of October 31,
     2001.
(2)  Includes 4,000,000 shares for which shareholder has sole dispositive power.
(3)  Includes, 22,025 shares for which shareholder has shared dispositive power,
     5,400 shares owned by spouse, Virginia Lane, and 2,176,000 shares held
     beneficially through MV3LP, LLLP.
(4)  Includes, 1,485,002 shares of which shareholder has sole dispositive power,
     110,443 shares held beneficially through the Stephen P. & Roberta G. Shadle
     Trust and 22,081 shares held beneficially through Westover 401(k).
(5)  Includes 1,628,212 shares held beneficially through Hayjour Family Limited
     Partnership.
(6)  Includes 1,628,212 shares held beneficially through Hayjour Family Limited
     Partnership.
(7)  Includes 1,018,212 shares held beneficially through Kona Investments
     Limited Partnership.
(8)  Includes 4,746 shares for which shareholder has shared dispositive power,
     3,476 shares owned by spouse, Marian Shaw, and 1,188,000 shares held
     beneficially through Bomar Shaw Family Trust.
(9)  Includes 1,676 shares received as compensation, 50,191 shares owned by
     spouse, David S. Shaw, and 1,188,000 shares held beneficially through Bomar
     Shaw Family Trust.
(10) Includes 722,903 shares for which shareholder has sole dispositive power.
(11) Includes 706,869 shares for which shareholder has sole dispositive power.
(12) Includes 639,021 shares for which shareholder has sole dispositive power.
(13) Includes 355,666 shares for which shareholder has sole dispositive power.
(14) Includes 288,780 shares for which shareholder has sole dispositive power.
(15) Includes 91,655 shares for which shareholder has sole dispositive power.
(16) Includes 1,188,000 shares for which shareholder has shared dispositive
     power.
(17) Includes 2,176,000 shares for which shareholder has shared dispositive
     power.
(18) Includes 1,628,212 shares for which shareholder has shared dispositive
     power.
(19) Includes 1,018,212 shares for which shareholder has shared dispositive
     power.
(20) Includes 110,443 shares for which shareholder has shared dispositive power.
(21) Includes 4,576,744 shares for which shareholder has sole dispositive power.
(22) Includes 10,543 shares for which shareholder has sole dispositive power.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

From time to time we have borrowed funds from Jeffrey I. Rassas and Stephen C.
Herman to meet working capital needs. These loans generally bear interest and
are payable on demand. At June 30, 2001 approximately $72,000 borrowed from Mr.
Rassas was outstanding.

                                       77
<PAGE>
LINUXMALL ACQUISITION. In October 2000 we acquired LinuxMall under an agreement
and plan of merger whereby LinuxMall merged into a newly created and
wholly-owned subsidiary that we created. By way of the agreement and plan of
merger, shareholders of LinuxMall and those with options to acquire shares of
LinuxMall common stock received shares of our common stock and options to
acquire shares of our common stock, respectively. In addition as part of the
agreement and plan of merger, options to purchase shares of our common stock
were granted to four members of the new executive team, two of which were
formerly with LinuxMall. Therefore, as a result of the agreement and plan of
merger, Dave Shaw, one of our directors , holds a beneficial interest in
1,188,000 shares of our common stock through a family trust which were received
under the agreement and plan of merger. Ray Goshorn, CFO, directly holds 10,543
shares of our common stock. Mark Bolzern, a director of Ebiz, holds a beneficial
interest in 2,176,000 shares of our common stock through a family limited
partnership . The unexercised options to acquire shares of our common stock
which were granted to Mr. Shaw, Mr. Goshorn, Mr. Bolzern and also to Jeffrey
Rassas and Stephen Herman as part of the management team no longer enforceable
under the terms as granted because of our bankruptcy filing unless otherwise
directed by the bankruptcy court.

THE CANOPY GROUP, INC. Canopy has participated in several transactions with us
and our subsidiaries during the past twelve months. In July 2000, Canopy made a
$500,000 loan to LinuxMall, and in August 2000 Canopy made a $500,000 loan
directly to us. Both loans were secured by assets of each respective company,
and the loan amounts were convertible into common stock of each respective
company. In late December 2000, these loans were combined into a single
six-month loan between Canopy and us in the amount of $1,041,780.82 which is
secured by our assets and is convertible into shares of our common stock. In
addition, a two-year warrant to purchase 1,230,769 shares of our common stock at
$.375 per share was issued to Canopy as part of the loan renewal.

In October 2000, we entered into a stock and warrant purchase agreement with
Canopy and the holder of the Debenture whereby Canopy purchased 2,500,000 shares
of our common stock from the Debenture holder obtained from conversion of a
portion of the Debenture into such shares of our common stock. In addition, we
issued to Canopy a five-year warrant to purchase 850,000 shares of our common
stock at $1.00 per share, and a five-year warrant to purchase 500,000 shares of
our common stock at $1.10 per share.

In late January 2001, we negotiated a loan with Canopy in the amount of
$1,000,000 with interest accruing at 10% per annum and a maturity of October 29,
2001. Interest is payable quarterly on April 29 and July 29, 2001. Proceeds were
used for our general working capital needs. Canopy may elect to convert all or a
portion of the outstanding balance into our common stock should we default under
the terms of the secured convertible note.

In early April 2001, we negotiated a revolving line of credit with Canopy in the
amount of $1,000,000 with interest accruing at 10% per annum and a maturity of
October 5, 2001. The purpose of the line of credit was to facilitate the
manufacture and assembly of computer clusters for LinuxNetworX, Inc. (LNXI)
customers pursuant to purchase orders received from LNXI. All of the balance has
been paid as of July 2001 from the proceeds of payments on invoices made by LNXI
customers and the line of credit has been terminated.

                                       78
<PAGE>
JBSI ACQUISITION. In January 2001 we acquired JBSI under an agreement and plan
of merger whereby a newly created and wholly-owned subsidiary of ours was merged
into JBSI. By way of the agreement and plan of merger, shareholders of JBSI and
those with options to acquire shares of JBSI common stock received shares of our
common stock and options to acquire shares of our common stock, respectively. In
addition, employment agreements were executed between us and several people in
the company, four of which were formerly with JBSI. Therefore, as a result of
the agreement and plan of merger Bruce Parsons, President and Chief Executive
Officer, holds a beneficial interest in 722,903 shares of our common stock which
were received under the agreement and plan of merger and options to purchase an
additional 478,178 shares of our common stock at various prices. The option to
purchase 278,178 shares of our common stock was obtained pursuant to the
agreement and plan of merger and the remaining option to purchase 200,000 shares
of our common stock was granted to Mr. Parsons per his employment agreement.
Mike Colesante, COO, directly holds 91,655 shares of our common stock and
options to acquire 378,250 shares of our common stock. The option to purchase
278,250 shares of our common stock was obtained pursuant to the agreement and
plan of merger and the remaining option to purchase 100,000 shares of our common
stock was granted to Mr. Colesante per his employment agreement. Don Young,
director of engineering, holds a direct interest in 355,666 shares of our common
stock and options to purchase 377,057 shares of our common stock. The option to
purchase 277,057 shares of our common stock was obtained pursuant to the
agreement and plan of merger and the remaining option to purchase 100,000 shares
of our common stock was granted to Mr. Young per his employment agreement. Nick
Futter, director of sales, holds a direct interest in 639,021 shares of our
common stock and options to purchase 378,072 shares of our common stock. The
option to purchase 278,072 shares of our common stock was obtained pursuant to
the agreement and plan of merger and the remaining option to purchase 100,000
shares of our common stock was granted to Mr. Futter per his employment
agreement. Stephen P. Shadle holds a direct interest in 1,485,002 shares of our
common stock and an option to purchase 267,000 shares of our common stock. The
Stephen P. and Roberta G. Shadle Trust holds a direct interest in 110,443 shares
of our common stock. The Steve Shadle Westover 401(k) holds a direct interest in
22,081 shares of our common stock. Scott Shadle holds a direct interest in
706,869 shares of our common stock and an option to purchase 270,507 shares of
our common stock. Dave Colesante holds a direct interest in 288,780 shares of
our common stock and an option to purchase 278,375 shares of our common stock.
As a result of our bankruptcy filing, the employment contracts may not be
enforced against us under their original terms. All of those individuals who
were parties to those employment contracts that are currently employed with us
are employed on an at-will basis. In addition, all unexercised options granted
to those individuals may no longer enforceable in accordance with their original
terms because of our bankruptcy, unless otherwise directed by the bankruptcy
court.

CALDERA TRANSACTION. In September 2000 we purchased assets of the Electronic
Linux Marketplace (ELM) from Caldera for 1 million shares of our common stock.
Immediately thereafter, we transferred the ELM assets into the newly formed and
wholly owned subsidiary partnerAxis. The ELM was to provide both buyers and
sellers a Web enabled forum for exchanging information about Linux products and
services. Through partnerAxis the intent is to introduce innovative Linux-based
technology to the market through an internet-based channel infrastructure. The
system is to be a first-of-its-kind internet site with a comprehensive database
of Linux-based solutions and services. As part of the transaction, Caldera also
purchased 3 million additional shares of our common stock for $3 million. The
proceeds of the stock sale were to be used for development of the ELM assets. In
April 2001, we sold partnerAxis to BySynergy.

                                       79
<PAGE>
Our general policy for entering into transactions with our directors, officers
and affiliates that have a financial interest in the transaction is to adhere to
Nevada corporate law regarding the approval of such transactions. In general, a
transaction between a Nevada corporation and a director, officer or affiliate of
the corporation in which such person has a financial interest is not void or
voidable if the interest is disclosed and approved by disinterested directors or
shareholders or if the transaction is otherwise fair to the corporation.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS

2.1(1)    Asset Exchange Agreement by and among Genras, Jeffrey I. Rassas,
          Vinculum and Aztore Holdings, dated as of March 18, 1998.

3.1(1)    Articles of Incorporation

3.2(1)    Certificate of Amendment to Articles of Incorporation

3.3(1)    Second Certificate of Amendment to the Articles of Incorporation

3.4(1)    Certificate of Designation / Resolution of Designation - Series A 10%
          convertible Preferred Stock

3.5(1)    Bylaws

10.1(1)   Office Building Lease, dated April 16, 1999, between Ebiz and Van
          Wagner Properties

10.2(1)   1998 Equity Incentive Plan, Effective December 23, 1998

10.3(1)   Securities Purchase Agreement dated as of August 25, 1999, by and
          between JEM Ventures Ebiz, LLC (JEM) and Ebiz.

10.4(1)   Subordinated Convertible Debenture, dated August 25, 1999, in the
          amount of $7,100,000, made by Ebiz in favor of JEM

10.5(1)   Warrant to Purchase Common Stock, dated August 25, 1999, issued by
          Ebiz to JEM, for 245,000 shares

10.6(1)   Registration Rights Agreement, dated as of August 25, 1999, by and
          between Ebiz and JEM, LLC

10.7(2)   OEM Agreement between Corel Corporation and Ebiz, dated September 13,
          1999

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<PAGE>
10.8(3)   Stock Exchange Agreement dated March 22, 2000, between Ebiz,
          InfoMagic, Inc. and Joel and Kim Goldberg

10.9(3)   Registration Rights Agreement dated March 22, 2000, between Ebiz and
          Joel and Kim Goldberg

10.10(3)  Purchase and Sale Agreement, dated September 15, 2000, between Ebiz
          and Caldera Systems, Inc. (CALDERA)

10.11(3)  Investor Rights Agreement, dated September 15, 2000, between Ebiz and
          Caldera

10.12(3)  Use Restriction Agreement, dated September 15, 2000, between Ebiz and
          Caldera

10.13(3)  Shareholder Voting Agreement and Proxy, dated September 15, 2000,
          between Ebiz and Caldera

10.14(3)  Agreement and Plan of Merger, dated August 7, 2000, between Ebiz,
          LinuxMall.com, Inc. (LINUXMALL) and LinuxMall Acquisition, Inc.
          (MERGER SUB)

10.15(3)  First Amendment to Agreement and Plan of Merger, dated October 3,
          2000, between Ebiz, LinuxMall and Merger Sub

10.16(3)  Registration Rights Agreement, dated October 5, 2000 between Ebiz,
          LinuxMall and Merger Sub

10.17(4)  Shareholder Voting Agreement and Proxy, dated October 5, 2000 by
          Jeffrey J. Rassas

10.18(4)  Shareholder Voting Agreement and Proxy, dated October 5, 2000 by
          Stephen C. Herman

10.19(4)  Compensation Agreement, dated October 5, 2000, between Ebiz and
          LinuxMall

10.20(5)  Agreement and Plan of Merger, dated November 17, 2000, between Ebiz,
          JBSI and JBSI Acquisition, Inc. (JBSI ACQUISITION)

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<PAGE>
10.21(5)  First Amendment to Agreement and Plan of Merger, dated December 22,
          2000, between Ebiz, JBSI and JBSI Acquisition

10.22(5)  Second Amendment to Agreement and Plan of Merger, dated January 3,
          2001, between Ebiz, JBSI and JBSI Acquisition

10.23(5)  Shareholder Voting Agreement and Proxy, dated December 28, 2000,
          between, Ebiz and Caldera, Hayjour Family Limited Partnership, Jeffrey
          I. Rassas, Kona Investments Limited Partnership, Stephen C. Herman,
          MV3LP, LLLP, Mark Bolzern, Bomar Shaw Family Trust, LLC, Dave Shaw,
          Bruce Parsons, the Stephen P. and Roberta G. Shadle Trust, Steve
          Shadle, Scott Shadle, Nick Futter, Don Young, Dave Colesante and Mike
          Colesante

10.24(5)  Registration Rights Agreement, dated January 4, 2001, between Ebiz and
          various former shareholders of JBSI

10.25(5)  Lock-Up Agreement, dated November 28, 2000, between Ebiz and various
          former shareholders of JBSI

21.1      Subsidiaries

----------
(1)  Incorporated by reference from Ebiz's Form 10-SB as filed with the
     Securities and Exchange Commission on October 19, 1999.
(2)  Incorporated by reference from Ebiz's Form 10-SB/A (Amendment No. 2) as
     filed with the Securities and Exchange Commission on November 30, 1999.
(3)  Incorporated by reference from Ebiz's Form 10-KSB as filed with the
     Securities and Exchange Commission on October 13, 2000.
(4)  Incorporated by reference from Ebiz's Form 8-K as filed with the Securities
     and Exchange Commission on October 20, 2000.
(5)  Incorporated by reference from Ebiz's Form 8-K as filed with the Securities
     and Exchange Commission on January 19, 2001.

REPORTS ON FORM 8-K

Form 8-K filed May 1, 2001 regarding the sale of partnerAxis to BySynergy, LLC.

Form 8-K Amendment No. 3 filed May 24, 2001 regarding the acquisition of
LinuxMall.

Form 8-K Amendment No. 1 filed May 31, 2001 regarding the acquisition of JBSI.

Form 8-K filed September 24, 2001 regarding the bankruptcy filing with the
Federal bankruptcy court in Phoenix, Arizona.

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

                                       EBIZ ENTERPRISES, INC.


Dated: April 5, 2002                   By /s/ Bruce Parsons
                                          --------------------------------------
                                          Bruce Parsons, Chief Executive Officer


                                       BOARD OF DIRECTORS


Dated: April 5, 2002                   By /s/ Jeffrey I. Rassas
                                          --------------------------------------
                                          Jeffrey I. Rassas


Dated: April 5, 2002                   By /s/ Dave Shaw
                                          --------------------------------------
                                          Dave Shaw


Dated: April 5, 2002                   By /s/ Mark Bolzern
                                          --------------------------------------
                                          Mark Bolzern

                                       83