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

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

                                 FORM 10-KSB/A

                               (AMENDMENT NO. 2)


(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, 2000

     [ ]       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)

<TABLE>
<S>                                              <C>
                    NEVADA                                         84-1075269
        (State or other jurisdiction of                           (IRS Employer
        incorporation or organization)                         Identification No.)

             15695 NORTH 83RD WAY
              SCOTTSDALE, ARIZONA                                     85260
   (Address of principal executive offices)                        (Zip Code)
</TABLE>

                                 (480) 778-1000
                          (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 $11,900,667.

     The aggregate market value of the common stock held by non-affiliates
computed based on the closing price of such stock on June 30, 2000 was
approximately $8,590,000.

     The number of shares outstanding of the registrant's classes of common
stock, as of June 30, 2000 was 8,497,566.

     Documents incorporated by reference: NONE

     Transitional Small Business Disclosure Format (check one):  Yes [ ]  No [X]

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                                     PART I

EXPLANATORY NOTE

     This Amendment No. 1 is being filed to amend Ebiz's Form 10-KSB for fiscal
year ended June 30, 2000 filed with the Securities and Exchange Commission on
October 13, 2000 for the purpose of reporting Ebiz's restated financial
statements for the period ended June 30, 2000. Unless otherwise indicated, all
information set forth in this Amendment No. 1 is as of the original filing date
or such earlier date as specified.

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

     Except for historical information contained herein, this Form 10-KSB/A
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

     Ebiz Enterprises, Inc. is 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. Since July 2000 we have increased our
corporate sales force from nine to 32 and intend to emphasize this form of
direct sales efforts in the future.

     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. In March 2000, we acquired InfoMagic, Inc., primarily an open source
software distribution company. More recently we have acquired a division from
Caldera Systems, Inc. which we will operate under the name partnerAxis, Inc. and
have completed our acquisition of LinuxMall.com, Inc.

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("LinuxMall"). We believe that our acquisition of LinuxMall creates one of the
most Linux-centric companies in the computer world.

     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 and TheLinuxStore.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. The acquisition of LinuxMall will also result in our
ownership of the LinuxNews.com and LinuxGuru.com Web sites. These sites, along
with our other sites, including TheLinuxLab.com, create a family of sites that
we believe will combine the Linux community interests with commercial
opportunities.

     We participate as an active member of the Linux community and aggressively
support open source development projects. We are corporate sponsors of Linux
International and are contributors to various open source projects, most notably
the Stampede Linux Development Project.

     While we believe we have the capability to succeed with our business plan,
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 e-commerce strategies. We are limiting our
operations with respect to systems not utilizing the Linux operating system to
legacy customers. As a result, our gross revenues have decreased from the prior
fiscal year. We anticipate our revenue reduction to be short-term and, due to
focusing on Linux based products, that our gross margins will increase and our
operating expenses 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.

     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 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 it name to Ebiz Enterprises, Inc. in May 1999. In August
1998 Vinculum merged into Ebiz solely to change its domicile to Nevada. All
information in this Form 10-KSB/A for the periods prior to June, 1998 reflects
the operations of Ebiz's predecessor, Genras.

THE LINUX MARKET

     Overview.  Linux is a free Unix-type-computer operating system originally
created by Linus Torvalds at the University of Helsinki in Finland. He 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,

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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.

     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.

     Our Target Markets.  As the Linux 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 solutions directly to the end user while
focusing 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 acquisition of
LinuxMall. 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 solutions to the corporate business environment -- both
       directly and indirectly through Value Added Resellers (VARs).

     - Wholesale distribution to retail outlets.  Through the direct sales
       effort in our FKA Division (formerly known as Frank Kasper and
       Associates) we deliver packaged Linux products to retail stores. FKA was

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       the first software distributor specializing in Linux-based products and
       has achieved significant market share.

     - E-commerce.  Our flagship Web sites are TheLinuxStore.com and
       LinuxMall.com. These sites provide marketing and distribution
       opportunities for providers of Linux products and services and
       advertisers to Linux users. These sites also serve the Linux 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 community interests such as news, resources, links pre- and
       post-sales technical support, hardware service and customer service;

     - Utilize our Linux 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 Ebiz as an active member of the Linux 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 expect to add to our sales, engineering, Linux consulting and service staff
with the intent of increasing customer satisfaction. We also intend to enhance
the performance capabilities of our products to produce competitive advantages.

     We believe that our distribution 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 and open source buying experience, which is a
significant element of our business plan. We believe the key elements to
implement our plan include:

     - Providing a meaningful virtual community destination on the Internet with
       our Web sites.  By providing the broadest spectrum of Linux solutions to
       serve the needs of the Linux 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.

     - Offering value-added services.  These services include e-mail forwarding,
       message boards, job and resume postings, home page redirects and other
       services. By providing services with value to the Linux community, we
       believe we will develop goodwill and enhance both our Web traffic and
       visibility. By capturing customer information in our database in the
       course of providing these services, we are able to manage and track
       customer trends and preferences, which we believe will enhance our
       ability to respond quickly to consumer preferences.

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     - 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.

     - Supplying an extensive selection of high quality products.  We intend for
       our customers to have a large selection of nationally known, as well as
       our own branded Linux solutions backed with warranty and support
       services.

     - 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. We intend to enhance and develop our Linux product
offerings, but focus our near-term efforts on developing partnerships and
relationships with manufacturers and suppliers of other Linux products and to
distribute 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.

          TheLinuxStore.com.  The vision for TheLinuxStore.com is to be the
     definitive source for "Everything Linux," by offering a large selection of
     compatible products and related items, including servers, work stations,
     notebook and desktop computer systems, software, books, and resource
     material.

          LinuxNews.com.  This site provides content that we believe to be
     relevant, dynamic and timely, and that is designed to engage our customers
     and facilitate an ongoing relationship. This site will not only provide
     customers with original content but also inform them where they can obtain
     additional news and information, purchase products, download software or
     graphics and participate in messaging forums and other community-related
     interaction. We attempt to motivate customers to return often by providing
     new and different content.

          TheLinuxLab.com.  This site is intended to be the industry recognized
     source for reporting the compatibility of products and services as Linux
     compatible. In addition, TheLinuxLab.com is an interactive online market
     destination that provides technical support and knowledge exchange to Linux
     users. TheLinuxLab.com offers manufacturers of technical products and
     solutions an independent testing center to determine if their products
     operate in the Linux environment. TheLinuxLab.com brings a new focus to the
     testing of both hardware and software under the Linux operating system. Our
     vendor neutral environment facilitates a true Linux compatibility testing
     program without the demand for specific Linux distribution requirements.
     Products to be approved include complete systems to specific peripherals
     and software applications. We intend to brand "TheLinuxLab" logo as an
     industry recognized standard for Linux system compatibility of products and
     application.

          partnerAxis.com.  This concept was formerly known as "Electronic Linux
     Marketplace" and is to be an electronic information exchange. This concept
     was recently acquired from Caldera Systems, Inc.

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     and is still in the design and implementation phase. This site is intend to
     provide both buyers and sellers a Web enabled forum for exchanging
     information about Linux products and services. partnerAxis.com intends to
     introduce innovative Linux-based technology to the market through an
     Internet-based channel infrastructure. This system will be a
     first-of-its-kind Internet site that contains a comprehensive database of
     Linux-based solutions and services. This infrastructure will not only
     provide access to vast quantities of Linux solutions, but will facilitate
     communication between visionary manufacturers, solutions providers and
     end-users of Linux-based systems. partnerAxis.com will also provide on
     demand, customized services for those needing assistance in building their
     own Linux distribution channel, or that simply need assistance in
     connecting into existing channels.

PRODUCTS AND SERVICES

     In addition to our ability to integrate unique Linux solutions from other
suppliers for delivery to the corporate business environment, we have developed
our own line of branded products and services. These include:

     - L-Server(TM)  L-Server(TM) are a high-end Linux server specifically
       designed for the corporate business world. The L-Server(TM) line provide
       scalability, ease of use and low cost of ownership. Its primary
       popularity with MIS directors stems from its reputation for its ease of
       customization to the individual needs of each corporate user.

     - DuOs(TM)  The first dual boot workstation designed for the corporate
       workspace, DuOS(TM) is ready to use out of the box. Pre-installed with
       Corel Linux and Microsoft Windows 98, each time the system powers up
       DuOS(TM) allows the user to decide which operating environment to use.
       Corel WordPerfect Office 2000 is also pre-installed. DuOS(TM) allows
       users to exchange files easily between both operating systems and their
       respective applications.

     - PIA(TM)  In December, 1999, we launched the PIA(TM) (Personal Internet
       Appliance), which targets consumers and institutions such as schools and
       libraries seeking a full-service Internet access device. The PIA(TM) has
       also been reconfigured for business users to serve as a thin client,
       firewall and Web surfing appliance. The PIA(TM) is a highly stylized
       fully-configured desktop computer that utilizes the Linux operating
       system. The PIA(TM) is designed to enable users to surf the Web quickly,
       easily and affordably, exchange e-mail, play games, chat online and
       perform basic computing functions, such as word processing and
       spreadsheets. Because of the flexibility of the Linux operating system,
       the software pre-loaded on the PIA(TM) provides compatibility with
       Microsoft Word, Excel and PowerPoint documents. The retail price for the
       basic product is under $300, placing the device well within the reach of
       most consumers and institutions. The PIA(TM) product line extensions
       include additional configurations, upgrades and peripherals and can be
       configured to dual-boot and also utilize the Windows operating system.

     - The Linux Lab(TM)  Services offered by the Linux Lab(TM) represent the
       bridge between the open source developer community and the corporate
       business world. Linux Lab(TM) offers assistance to developers to deliver
       their products to the market. Examples of these services include
       packaging advice, technical review and targeted market distribution.

     - InfoMagic  InfoMagic was founded at the inception of the first launch of
       the Linux operating system as an open-source software developer.
       InfoMagic offers a variety of branded open-source software applications
       and has developed a customer base in excess of 100,000 Linux community
       users. Our InfoMagic line currently includes numerous Linux-based
       software programs, including Linux toolbox, Linux Sampler, Linux
       Developers Resource and Toolbox for Linux.

     - Penguin Power(TM)  Penguin Power(TM) products are the specialty items
       that have captured the spirit of the Linux revolution. Adopted by the
       community as the symbol of Linux, Penguin Power(TM) products are some of
       the most successful and high-margin items in our product line. From
       simple stuffed penguins to branded, high-tech, error-free CD
       distributions of Linux, Penguin Power(TM) products are intended to
       promote our image as one of the highest profile Linux companies in the
       industry.

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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/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.

     - Leverage our strategic partnerships with vendors, industry experts and
       distribution 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

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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.

     Internet Marketing.  To direct traffic to our sites, we have created
inbound links that connect directly to our Web sites from search engines and
other sites. Potential customers can click on these links to become connected to
our sites from search engines and community and affinity sites. In addition, in
order to increase exposure on the Internet and directly generate sales, we
intend to develop an affiliates program, whereby we compensate our registered
affiliates for any sales generated via their link to our Web site.

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. Mountain 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 provide 24-hour-a-day, seven-day-a-week availability.
Our system hardware is located in both our Scottsdale, Arizona and Aurora,
Colorado facilities.

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.

     We have entered into an exclusive marketing alliance with UserFriendly.org
commencing September, 2000. Under this alliance we will create a branded
UserFriendly Web site, to be known as ufiemall.com, through which our products
and services will be marketed. We believe that this alliance will enhance our
exposure to the Linux community and developers and will be complimentary to our
marketing and revenue generating efforts.

                                        8
<PAGE>   10

COMPETITION

     Several companies are building business models around Linux by selling
customer service, technical support and applications with the system. These
include Red Hat, Inc. and VA Linux Systems, Inc. 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.
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, VAlinux.com and
penguin.com.

INTELLECTUAL PROPERTY

     We rely primarily on trademark and copyright laws to protect our
intellectual property. We also enter into confidentiality and nondisclosure
agreements with our employees and others and generally control access to our
proprietary information. We have also 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.

     We have received registration or filed with the United States Patent and
Trademark Office for trademark/service mark registration of "EbizMart," "CPU
MicroMart," "Element-L Systems," "TheLinuxStore.com," "PIA," "PlanetPIA.com,"
"Accelerating the Alternatives," "Performance to the Next Power,"
"LinuxMall.com," "Discover Linux," "We're Open," "Partner Axis,"
"TheLinuxLab.com," and other trademarks/service marks used or anticipated to be
used in our business. Additional filings and domain registrations are
anticipated, including variations of the above marks and names.

EMPLOYEES

     We currently have approximately 90 full-time employees. Our employees are
not covered by any collective bargaining agreements.

FACTORS AFFECTING FUTURE PERFORMANCE

     We are an early stage company with limited operating history making it
difficult to evaluate our future prospects.  We have just 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 system. We are devoting considerable resources to the development of
these lines and our family of sites marketed under the name LinuxMall.com. See
"OUR BUSINESS -- Our Web Sites."

     We have acquired other businesses in the Linux industry. In March, 2000, we
acquired InfoMagic, Inc. and in September, 2000, we acquired a division from
Caldera, Inc. which we operate under the name partnerAxis. We also acquired
LinuxMall in October, 2000. 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.

                                        9
<PAGE>   11

     We have a history of losses and anticipate future losses.  For the fiscal
years ended June 30, 1999 and 2000, we sustained net losses attributable to
common shareholders of approximately $1,954,000 and $9,201,000, 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.  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. Under the terms of the Debenture and related agreements, we are able to
access limited capital upon conversions of the Debenture into common stock.
However, the timing of the access to or amount of this capital is not assured
because the Debenture is convertible solely at the discretion of its holder. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources" for more information concerning
the Debenture. 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 can not 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
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 have experienced rapid growth and cannot guarantee that we will be able
to manage future growth. Due to both acquisitions and expansion of our business
operations, we have recently experienced rapid growth in employees, sales,
customers and operations. We are just beginning to integrate the operations of
our recently acquired Partner Axis division and LinuxMall. This growth has
brought many challenges and placed

                                        10
<PAGE>   12

additional pressure on our already limited resources and infrastructure. No
assurances can be given that we will be able to effectively manage this or
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.

     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;

                                        11
<PAGE>   13

     - 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;

     - 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.

     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.

                                        12
<PAGE>   14

     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.

     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 Ebiz is concentrated in the existing management which limits the
ability of other shareholders to influence corporate decisions.  Control of Ebiz
is concentrated within a small number of stockholders, who compromise our
executive management. Such management, when acting in concert, can effectively
control

                                        13
<PAGE>   15

the election of our Board of Directors. As a practical matter, current
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.  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
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.

     Management has indicated its willingness to cause the common stock to be
listed on the NASDAQ SmallCap Market and National Market when qualified.
However, no assurance can be given that any such listing will occur or that an
active market in our common stock will develop or be sustained. If an active
market does not develop, holders of our 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 currently lease approximately 19,000 square feet of office and warehouse
facilities located in Scottsdale, Arizona. Approximately 7,000 square feet of
the facility are utilized for administrative and sales offices and the remaining
12,000 square feet are utilized for warehouse and manufacturing. The lease on
the facility is for a term through April 2001, with a current annual rental
payment of approximately $189,000.

     As a result of our acquisition of LinuxMall, we also currently lease
approximately 6,000 square feet of office space in Aurora, Colorado through
March 2004 at an approximate annual rental rate of $77,100. LinuxMall is also
obligated under certain leases of office/warehouse 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. We intend to sublease or negotiate the termination of these leases due to
consolidation of our operations with LinuxMall.

ITEM 3. LEGAL PROCEEDINGS

     Miscellaneous claims, including vendor collection suits, a claim from a
former service provider and certain trademark infringements are outstanding.
Additionally, LinuxMall and a former LinuxMall officer are in litigation
involving that officer's employment contract. Management believes that all such
matters are routine litigation incidental to its business and within ordinary
levels for an organization of our size and nature. Management believes that
these disputes will be resolved without material adverse consequences to our
operations.

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

     None.

                                        14
<PAGE>   16

                                    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 Ebiz's
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.

<TABLE>
<CAPTION>
FISCAL 1999                                                     HIGH       LOW
-----------                                                   --------   -------
<S>                                                           <C>        <C>
First Quarter ended September 30, 1998......................  $ 2.1250   $0.7500
Second Quarter ended December 31, 1998......................   11.6250    0.5000
Third Quarter ended March 31, 1999..........................   10.5000    4.5000
Fourth Quarter ended June 30, 1999..........................    9.9375    3.3125
</TABLE>

<TABLE>
<CAPTION>
FISCAL 2000                                                     HIGH       LOW
-----------                                                   --------   -------
<S>                                                           <C>        <C>
First Quarter ended September 30, 1999......................  $ 9.5000   $3.4375
Second Quarter ended December 31, 1999......................    7.0310    2.1250
Third Quarter ended March 31, 2000..........................    9.3750    3.0310
Fourth Quarter ended June 30, 2000..........................    3.5000    1.6875
</TABLE>

HOLDERS

     As of June 30, 2000, there were approximately 460 owners of record of
Ebiz's 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. We are also subject to restrictions on the payment of dividends
under the terms of our outstanding Debenture held by JEM Ventures EBIZ, LLC.

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. We have agreed to deliver 584,415
shares in consideration for the cash payments received.

                                        15
<PAGE>   17

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 Ebiz's results of operations and financial
condition for the fiscal years ended June 30, 2000 and 1999. 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.

OVERVIEW

     During fiscal 2000, Ebiz accelerated its evolution from a manufacturer and
distributor of high-value, low cost computer systems to a designer and operator
of e-commerce Web sites and a distributor and developer of Linux based and
custom built computer systems and related products for the business market. In
the second quarter of the fiscal 2000, we concentrated our strategic focus on
the Linux segment of the computer market and de-emphasized low price,
conventional computer systems and sales through the mass merchant and brokerage
channels of distribution. Concurrently, we structured our operations to
implement our Linux development and marketing programs. We incurred
restructuring charges for asset revaluation and markdown of inventory that was
directly related to the business being de-emphasized in fiscal 2000 as a result
of these strategic changes.

     In the third quarter of fiscal 2000, we substantially upgraded our
principal Web site, TheLinuxStore.com, and introduced TheLinuxLab.com, a new
technical resource site for the Linux community, and LinuxWired.net, the first
"pure Linux" Internet Service Provider. In tandem, we developed and introduced
two new Linux product lines: the L-Server(TM) line of scalable network file
servers, and the duOS(TM) line of dual boot workstations that features Corel
Linux OS and Windows 98 to enable users to continue use of their favorite
Windows applications while enjoying the stability of a Linux network. In March,
2000, we acquired InfoMagic, Inc., an established open source software
distribution company with its primary emphasis on Linux software.

     During the fourth quarter of fiscal 2000, we continued the implementation
of our expanded set of Linux programs and enhanced our "vendor neutral" product
offering with the addition of solution oriented products such as storage
controllers, remote access servers, routers and firewalls. In May and June 2000,
we completed our first two distributions of new InfoMagic software releases.

     To continue the execution of our strategies, including the development of
our products and Web sites, we completed the placement of a $7.1 million
convertible debt facility (the "Debenture") in August, 1999. We received an
initial infusion of $2.1 million from the Debenture which was utilized to repay
outstanding debt and provide working capital. The remaining $5.0 million was
deposited to secure a letter of credit to serve as collateral for the Debenture.
The Debenture holder has the option to convert the Debenture's principal and
accrued interest to shares of our common stock. As these conversions occur, the
required collateral balance is reduced and cash securing the letter of credit is
released and available for our operations.

     In May, 2000, Ebiz executed a letter of intent to acquire LinuxMall.com,
Inc ("LinuxMall") through a stock exchange. LinuxMall's principal Web site,
LinuxMall.com, is a leading Linux e-commerce site and has been serving the Linux
community since 1993 with news, information and a broad offering of Linux
products. The two companies held extensive integration planning sessions and in
August, 2000, Ebiz and LinuxMall signed an Agreement and Plan of Merger
("Acquisition Agreement"). Under the terms of the Acquisition Agreement, the
current Ebiz equity holders would own approximately 56%, on a fully diluted
basis, of the combined company which will retain the Ebiz name. The strategies
of the resulting company are to focus on combining the e-commerce and Linux
community presence of LinuxMall with the product and distribution expertise of
Ebiz. The acquisition was effective October 5, 2000.

                                        16
<PAGE>   18

QUARTERLY OPERATING RESULTS (AS RESTATED)

     The following is a summary of quarterly operating results for our 2000 and
1999 fiscal years.


<TABLE>
<CAPTION>
                                     SEPTEMBER 30,   DECEMBER 31,    MARCH 31,     JUNE 30,
                                         1999            1999          2000          2000
                                     -------------   ------------   -----------   -----------
<S>                                  <C>             <C>            <C>           <C>
Sales..............................   $ 5,638,628    $ 2,264,949    $ 2,223,655   $ 1,773,435
Gross Profit.......................       292,023         27,419        242,497       251,660
Gross Profit % of sales............           5.2%           1.2%          10.9%         14.2%
Selling, General & Administrative
  Expense..........................     1,236,978      1,475,431      1,512,701     3,087,149
Loss from Operations...............    (1,017,513)    (1,682,096)    (1,335,382)   (3,029,243)
Net Loss...........................    (1,476,823)    (2,522,801)    (2,239,448)   (3,882,232)
Loss per Share, Basic & Diluted....   $     (0.20)   $     (0.34)   $     (0.29)  $     (0.49)
</TABLE>


<TABLE>
<CAPTION>
                                     SEPTEMBER 30,   DECEMBER 31,    MARCH 31,     JUNE 30,
                                         1998            1998          1999          1999
                                     -------------   ------------   -----------   -----------
<S>                                  <C>             <C>            <C>           <C>
Sales..............................   $ 4,586,753    $ 2,375,289    $ 4,062,451   $ 4,265,709
Gross Profit.......................        11,033        259,255        311,728       349,414
Gross Profit % of sales............           0.2%          10.9%           7.7%          8.2%
Selling, General & Administrative
  Expense..........................       410,188        478,746        536,242     1,000,720
Loss from Operations...............      (415,304)      (251,459)      (244,387)     (738,319)
Net Loss...........................      (463,371)      (291,409)      (248,069)     (874,275)
Loss per Share, Basic & Diluted....   $     (0.07)   $     (0.05)   $     (0.03)  $     (0.13)
</TABLE>

RESULTS OF OPERATIONS

     Year Ended June 30, 2000 (As Restated) Compared to Year Ended June 30,
1999.  Net revenue was $11,900,667 for the year ended June 30, 2000 compared to
$15,290,202 for the year ended June 30, 1999. The decrease of $3,389,535, or
22.2%, was due to our strategic decision in the second quarter of fiscal 2000 to
concentrate on the Linux segment of the market and to de-emphasize activities in
the brokerage sales channel and to phase out sales of low priced, conventional
computer systems to mass merchants. As a result of this decision, our sales to
these two channels of distribution decreased to approximately 27% of total sales
in fiscal 2000 from approximately 63% of our total sales in fiscal 1999.
Conversely, our sales through our sales force to all other channels of
distribution grew by over 50% in fiscal 2000 as the direct result of the
implementation of our refined strategies. In fiscal 2000, Ebiz's sales were
approximately 27% computer systems, 72% components and accessories and 1%
advertising compared to 55% computer systems, 45% components and accessories and
0% advertising in fiscal 1999.

     Our cost of sales was $11,087,068, including a second quarter charge of
$125,430 for the write-off of inventory related to our exit from the brokerage
sales channel, for the year ended June 30, 2000 as compared to $14,358,772 for
the year ended June 30, 1999. The decrease of $3,271,704, or 22.8%, was the
result of lower sales volume and the change in strategic emphasis towards higher
margin products and sales channels. Gross profit margins increased to 6.8% in
fiscal 2000 from 6.1% for the prior year. Excluding the restructuring charge
mentioned above, the fiscal 2000 gross profit margin was 7.9%. During the third
and fourth quarters of the year ended June 30, 2000, the gross profit margin was
10.9% and 14.2%, respectively, as compared to 7.7% and 8.2% in the third and
fourth quarters of the year ended June 30, 1999 and to 5.2% and 1.2% in the
first and second quarters of fiscal 2000, respectively. This improvement in our
gross profit margins is due to our redirected focus on products and services for
the Linux market, sales to businesses through value-added resellers and our
internal sales force, the development of advertising revenues and the sales
generated by the acquisition of the InfoMagic product line of software.

     Selling, general and administrative expenses were $7,312,259, or 61.4% of
sales, for fiscal 2000 as compared to $2,425,895, or 15.9% of sales, for the
prior year. The increase of $4,886,364 was principally due to

                                        17
<PAGE>   19

higher expenses for advertising and marketing, consulting and legal expenses for
strategy development, the expansion of our Linux engineering, sales and
marketing organizations and the introduction of our new Web sites,
TheLinuxLab.com and LinuxWired.net. Our advertising and marketing expense
increased by approximately $2,377,000 due to expanded print advertising,
substantially increased trade show participation and the CNET advertising
program. A non-recurring, non-cash expense of $199,185 that was recorded for
warrants issued for consulting services during the second quarter of fiscal 2000
was also a component of the increase. Depreciation and amortization expense for
the year ended June 30, 2000 was $265,000 as compared to $68,483 for the year
ended June 30, 1999. The $196,517 increase was due to higher levels of
investment in equipment for administrative functions and Web site operation and
the amortization of the goodwill recorded for the InfoMagic acquisition.
Provision for doubtful accounts was $274,074 for fiscal 2000, $187,554 higher
than fiscal 1999. This increase was primarily due to collection disputes with
customers who represented the majority of our low-end system business that was
de-emphasized in the second quarter of fiscal 2000 as we concentrated our
strategic focus on the Linux market.


     Interest expense was $3,188,415 for the twelve months ended June 30, 2000
as compared to $119,291 in the same period in 1999. The increase was due to the
beneficial conversion feature non-cash interest and the amortization of debt
issuance costs related to the Debenture issued in August 1999 (see Financing
Activities below for further discussion). Interest and other income was $235,434
for fiscal year 2000 compared to $2,538 in fiscal 1999. This increase was the
result of interest earned by the restricted cash related to the Debenture and
the third quarter sale of marketable securities acquired in 1998.



     The preceding operational factors resulted in a net loss attributable to
common stockholders of $10,121,304 or $1.32 per diluted share, for the fiscal
year ended June 30, 2000 as compared to a net loss of $1,954,181 or $0.29 per
diluted share, for the fiscal year ended June 30, 1999.


LIQUIDITY AND CAPITAL RESOURCES

     At June 30, 2000, we had cash of $50,997 which was a $25,369 decrease from
the total of $76,366 at June 30, 1999. This decrease was primarily due to the
net loss we incurred which utilized the cash realized from the placement of the
convertible Debenture in August, 1999 and the private placement of common stock.

     Operating Activities.  Our net cash used in operating activities was
$2,445,893 for the fiscal year ended June 30, 2000. The major sources were
reductions in accounts receivable and inventory and increases in accounts
payable and accrued expenses. The cash generated by these working capital
improvements and our financing activities was used for the increases in our
sales, advertising/marketing, administration and development expenses required
to implement our strategic programs. The majority of the CNET advertising
expense and our consulting services expense was paid through the issuance of
common stock and, therefore, had no effect on cash flow

     Investing Activities.  The net cash used in investing activities was
$265,921 and $472,738 for the twelve months periods ending June 30, 2000 and
June 30, 1999, respectively. In fiscal year 2000, these activities included the
acquisition and configuration of equipment for our Web sites, our internal data
networks and communications systems. The acquisition of InfoMagic, Inc. was
completed through the issuance of shares of Ebiz common stock and had no effect
on cash flow during fiscal 2000.

     Financing Activities.  During the year ended June 30, 2000, the net cash
provided by financing activities was $2,686,445. The Debenture provided
$6,903,391 of which approximately $4,500,000 is held in restricted bank accounts
as collateral that is to be accessed through the conversion of the Debenture to
common stock. We also received $900,000 from the private placement of common
stock during March through June 2000. We repaid $350,000 of our line of credit
and $887,900 of the principal of notes payable during the first quarter of
fiscal 2000. Our line of credit was reopened in December, 1999 and $250,000 was
outstanding at June 30, 2000. Additional notes payable of $488,000 were
initiated during fiscal 2000 and $71,928 were outstanding at the end of the
period.

     On August 25, 1999 we issued the Debenture and Warrant for a total of
$7,100,000. The Debenture is due February 24, 2002. The principal of the
Debenture was initially convertible into a minimum of

                                        18
<PAGE>   20


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 deposits at Bank One Arizona, NA in the
initial amount of $5,000,000 less $500,000 released during February, 2000. The
required amount of the letter of credit decreases by $0.7042 for every $1 of
principal reduction of the Debenture whether the reduction occurs by conversion
or redemption. We recorded a beneficial conversion feature of approximately $3.6
million related to the Debenture as non-cash additional interest expense. The
recorded value of beneficial conversion feature was on the difference between
the closing trade price and the conversion price on date of issuance. The
beneficial conversion feature was recorded on the portion of the debenture that
was convertible, net of the proceeds allocated to the Warrant.



     On February 8, 2000, Ebiz and the holder of the Debenture agreed to modify
the terms of conversion of the Debenture. The 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. As modified, the principal of the Debenture was convertible into a
minimum of 1,826,831 shares.


     The Debenture holder agreed to immediately convert all accrued interest of
$140,203 into 36,511 shares of our common stock and to reduce our cash
collateral requirements by $500,000 until a total of $710,026 in principal of
the Debenture is converted. The accrued interested was converted to common stock
on February 8, 2000. During February and March, 2000, an additional $462 of
accrued interest and $103,838 in principal were converted into 28,001 shares of
common stock.

     On March 31, 2000 Ebiz and 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.

     The Warrant is 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 Warrant is exercisable at any time prior to August 22,
2004. As of June 30, 2000, no exercise of any portion of the Warrant had
occurred.

     From time to time during fiscal 2000, we borrowed amounts from individuals,
including Jeffrey I. Rassas, the Chief Executive Officer, and Stephen C. Herman,
the President. The loans from Mr. Rassas and Mr. Herman were used primarily for
working capital and did not exceed $200,000 from each at any time during this
period.

     Net Operating Loss Carryforwards.  We have a net operating loss carry
forward of approximately $12.4 million, over $2 million of which pertains to
operations of Vinculum prior to the acquisition via reverse merger with Ebiz in
June 1998. The utilization of the net operating loss incurred prior to June 1998
is subject to limitations, however, and the net operating loss may not be fully
usable prior to its expiration. No deferred tax asset has been recognized in the
Financial Statements due to the uncertainty of utilization.

     Fiscal 2001 Liquidity.  We anticipate that the sales volume corrections
that we have experienced as the result of our change in strategic focus will be
completed early in fiscal 2001 and that we will begin to realize

                                        19
<PAGE>   21

stable, and more predictable sales growth. We expect that our acquisition of
LinuxMall will add to our growth and profitability and that the resulting
company will require additional resources for operating expenses and working
capital. Without additional capital we may not be able to fully implement our
business or operational and development plans We expect to finance these
requirements through cash made available as the Debenture is converted and from
other capital raising activities. We believe that the merger will greatly
facilitate our ability to raise additional capital. For example, in September
2000, a $3.0 million investment was made by Caldera Systems, Inc. to fund a new
Ebiz subsidiary. We intend to take all additional actions necessary to manage
our liquidity requirements. However, there is no assurance that we will be
successful due to our dependence upon the timely conversion of the Debenture
(which is at the holder's discretion) and our need for additional sources of
capital. There is also no assurance that any additional financing, if obtained,
will be adequate to meet our ultimate capital needs. If adequate capital can not
be obtained or obtained on satisfactory terms, our operations could be
negatively impacted.

     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.

                                        20
<PAGE>   22

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Public Accountants....................   22
Balance Sheets at June 30, 2000 and 1999....................   23
Statements of Operations for the Years Ended June 30, 2000
  and 1999..................................................   24
Statements of Stockholders' Equity (Deficit) for the Years
  Ended June 30, 2000 and 1999..............................   25
Statements of Cash Flows for the Years Ended June 30, 2000
  and 1999..................................................   26
Notes to Financial Statements June 30, 2000 and 1999........   27
</TABLE>

                                        21
<PAGE>   23

                    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, (2000 Restated -- see Note 2). 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 -- Restatement,

as to which the date is March 23, 2001)


                                        22
<PAGE>   24


                             EBIZ ENTERPRISES, INC.


                                 BALANCE SHEETS
                             JUNE 30, 2000 AND 1999


<TABLE>
<CAPTION>
                                                                  2000          1999
                                                              ------------   -----------
                                                               (RESTATED)
<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.

                                        23
<PAGE>   25

                             EBIZ ENTERPRISES, INC.

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


<TABLE>
<CAPTION>
                                                                  2000          1999
                                                              ------------   -----------
                                                               (RESTATED)
<S>                                                           <C>            <C>
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
                                                              ============   ===========
</TABLE>


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

                                        24
<PAGE>   26

                             EBIZ ENTERPRISES, INC.

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


<TABLE>
<CAPTION>
                                                    ADDITIONAL COMMON
                                PREFERRED STOCK           STOCK                          TOTAL
                               ------------------   ------------------    PAID-IN     ACCUMULATED     STOCKHOLDERS'
                               SHARES    AMOUNT      SHARES     AMOUNT    CAPITAL       DEFICIT      EQUITY (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
  (Restated).................   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.

                                        25
<PAGE>   27

                             EBIZ ENTERPRISES, INC.

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


<TABLE>
<CAPTION>
                                                                  2000          1999
                                                              ------------   -----------
                                                               (RESTATED)
<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.

                                        26
<PAGE>   28

                             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:

<TABLE>
<CAPTION>
                                                                             PERIOD OF
                                                                            AMORTIZATION
                                                                AMOUNT        IN YEARS
                                                              -----------   ------------
<S>                                                           <C>           <C>
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
                                                              ===========
</TABLE>

     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.

                                        27
<PAGE>   29
                             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.

                                        28
<PAGE>   30
                             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:

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

  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:

<TABLE>
<CAPTION>
                                                         USEFUL
                                                          LIFE       2000       1999
                                                         -------   --------   --------
<S>                                                      <C>       <C>        <C>
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
                                                                   ========   ========
</TABLE>

                                        29
<PAGE>   31
                             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.


                                        30
<PAGE>   32
                             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

                                        31
<PAGE>   33
                             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:

<TABLE>
<CAPTION>
                                                          ACCOUNTS RECEIVABLE
                                                            OUTSTANDING AT
                                                               JUNE 30,            SALES
                                                          -------------------   -----------
                                                           2000       1999      2000   1999
                                                          ------   ----------   ----   ----
<S>                                                       <C>      <C>          <C>    <C>
Customer #1.............................................   $ --     $441,000     14%   26%
Customer #2.............................................     --           --      2%   19%
Customer #3.............................................     --      930,000      2%   15%
</TABLE>

  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

                                        32
<PAGE>   34
                             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.

                                        33
<PAGE>   35
                             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:

<TABLE>
<CAPTION>
                                                              2000   1999
                                                              ----   ----
<S>                                                           <C>    <C>
Current income taxes:
  Federal...................................................  $--    $--
  State.....................................................   --     --
Deferred income taxes:
  Federal...................................................   --     --
  State.....................................................   --     --
                                                              ---    ---
          Total provision for (benefit from) income taxes...  $--    $--
                                                              ===    ===
</TABLE>

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

<TABLE>
<CAPTION>
                                                                2000          1999
                                                             -----------   -----------
<S>                                                          <C>           <C>
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).........................  $        --   $        --
                                                             ===========   ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                              2000    1999
                                                              ----    ----
<S>                                                           <C>     <C>
Statutory federal rate......................................  (34)%   (34)%
State taxes, net of federal benefit.........................   (6)     (6)
Change in valuation allowance...............................   40      40
                                                              ---     ---
          Total.............................................   --%     --%
                                                              ===     ===
</TABLE>

                                        34
<PAGE>   36
                             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:

<TABLE>
<CAPTION>
                                                               2000       1999
                                                              -------   --------
<S>                                                           <C>       <C>
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
                                                              =======   ========
</TABLE>

     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-

                                        35
<PAGE>   37
                             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

                                        36
<PAGE>   38
                             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:

<TABLE>
<CAPTION>
EXPIRATION DATE                                             EXERCISE PRICE   COMMON SHARES
---------------                                             --------------   -------------
<S>                                                         <C>              <C>
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
</TABLE>

                                        37
<PAGE>   39
                             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

                                        38
<PAGE>   40
                             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:

<TABLE>
<CAPTION>
                                                 2000                     1999
                                          -------------------      -------------------
                                               WEIGHTED                 WEIGHTED
                                           AVERAGE EXERCISE         AVERAGE EXERCISE
                                          -------------------      -------------------
                                          OPTIONS       PRICE      OPTIONS       PRICE
                                          --------      -----      --------      -----
<S>                                       <C>           <C>        <C>           <C>
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
                                                        =====                    =====
</TABLE>

                                        39
<PAGE>   41
                             EBIZ ENTERPRISES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
                                          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
--------------------------------  -----------   -----------   --------   -----------   --------
<S>                               <C>           <C>           <C>        <C>           <C>
$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
</TABLE>

     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.


<TABLE>
<CAPTION>
                                                              JUNE 30,   JUNE 30,
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
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)
</TABLE>


     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:

<TABLE>
<S>                                                            <C>
Net assets acquired.........................................   $ 13,641
Goodwill....................................................    686,359
                                                               --------
                                                               $700,000
                                                               ========
</TABLE>

                                        40
<PAGE>   42
                             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.


<TABLE>
<CAPTION>
                                                                2000          1999
                                                            ------------   -----------
<S>                                                         <C>            <C>
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)
</TABLE>


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.

                                        41
<PAGE>   43

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

     None.

                                    PART III

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

DIRECTORS AND EXECUTIVE OFFICERS

     The directors and executive officers of Ebiz are:

<TABLE>
<CAPTION>
NAME                                           AGE                 POSITION
----                                           ---                 --------
<S>                                            <C>   <C>
Jeffrey I. Rassas............................  38    Director and Chief Executive Officer
Stephen C. Herman............................  46    Director and President
Donald B. Altvater...........................  55    Vice President and Controller
Larry Phillips...............................  34    Vice President, Sales
</TABLE>

     Jeffrey I. Rassas, Director and Chief Executive Officer, is the founder of
Ebiz and has been its Chief Executive Officer since its inception in 1995.
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
with offices in Phoenix, Tucson, Los Angeles, Century City and Irvine. He
arranged the sale of the Arizona offices to Dynamex, a division of Air Canada,
in 1993 and the California offices to another buyer in 1995. 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. From 1982 to 1985, Mr. Rassas held the position of Magnetics Engineer at
CTM Magnetics. Mr. Rassas holds an electrical engineering degree.

     Stephen C. Herman, Director and President, joined Ebiz in September of
1997. Mr. Herman has approximately 20 years of computer and electronics
distribution and sales experience. Between 1995 and 1997 he was a Vice President
and Divisional General Manager for Globelle Incorporated. From 1992 to 1995, he
was the Vice President of Sales for Insight Direct. His responsibilities
included three specialty divisions. Between 1989 and 1992, Mr. Herman was the
Director of Sales for Technology Marketing Group, a predecessor to Globelle.
Between 1987 and 1989, Mr. Herman also was President and founder of Computer
Solutions, Inc. ("CSI"), a five location corporate reseller servicing Fortune
1000 customers, which grew to $80 million in revenues by its second year. CSI
was sold to Valcom in 1989, and Mr. Herman became President of Valcom Southwest,
a wholly-owned subsidiary of Valcom.

     Donald B. Altvater, Vice President and Controller, joined the Ebiz in
January 1999. Mr. Altvater has over 20 years of experience in financial,
operations and marketing management in the electronics and communications
industries with GTE and Fujitsu. He began his career with GTE International in
1971 and held a series of increasingly responsible positions with GTE companies
that culminated in his appointment in 1987 as Vice President -- Finance of
Fujitsu GTE Business Systems, a joint venture between those two corporations. In
1989, Mr. Altvater was named Vice President and Chief Financial Officer of
Federal Business Systems, a Fujitsu subsidiary. After electing early retirement
in 1992, he managed two private companies in which he had an ownership interest.
In 1996, Mr. Altvater became Controller of Refrac Systems, a privately held
metallurgical engineering company and continued in that position until joining
Ebiz in 1999. He holds a Bachelor of Science degree in Mathematics (magna cum
laude) and Economics (cum laude) from Tufts University and an M.B.A. from the
University of Chicago Graduate School of Business.

     Larry Phillips, Vice President, Sales, joined Ebiz in May 1999 and brings
over a decade of experience in developing sales teams as well as lucrative
business opportunities. He is responsible for developing and managing sales and
customer service operations. Mr. Phillips was the General Sales Manager of PC
Wholesale, Inc., a computer hardware and software distributor from 1997 until he
joined Ebiz. Mr. Phillips was responsible for over $60 million in revenue and
recruited, hired and trained staff and ran the day-to-day operations, including
product sourcing and P & L, for the Minneapolis office. From 1992 to 1997 he
served as

                                        42
<PAGE>   44

Director of Sales for Globelle Incorporated, where he was responsible for nearly
$170 million in sales and oversaw five branch offices. Mr. Phillips began his
career with Piper Jaffrey in 1989, where he was responsible for corporate
pension plans and individual investor portfolios. He holds a Bachelors of
Science Degree in Finance and Economics from St. Cloud State University in
Minnesota.

     partnerAxis Acquisition.  In connection with our acquisition of
partnerAxis, we have agreed to appoint a designee of Caldera Systems, Inc. to
our Board of Director. Ranson H. Love, the Chief Executive Officer of Caldera,
has initially been designated to be the appointee. Certain information regarding
Mr. Love follows:

     Ransom H. Love.  Mr. Love has served as President, Chief Executive Officer
and member of the Board of Directors of Caldera Systems, Inc. since August 1998.
Prior to that date, Mr. Love was a founder and served as Vice President of
Marketing and Sales, Vice President of Business Development and General Manager
of the OpenLinux division for Caldera, Inc., from January 1995 to September
1998. Prior to Caldera, Inc., Mr. Love held senior marketing positions at Novel
and Sanyo Icon. Mr. Love has been in various management positions in sales,
marketing, support, testing and education in the computer industry since 1982.
He holds a BA in international relations and an MBA from Brigham Young
University.

     LinuxMall Acquisition.  As a result of our acquisition of LinuxMall, former
management of LinuxMall will join our Board of Directors and our executive
officer team will be restructured. Mark Bolzern and David Shaw, formerly the
Chairman and Interim Chief Executive Officer, respectively, of LinuxMall, will
become members of our Board of Directors and Mr. Shaw will serve as Ebiz's Chief
Executive Officer. Mr. Rassas will become the Chairman of the Board of Directors
and also serve as the Chief Strategic Officer of Ebiz. Mr. Herman will become
the Chief Operations Officer. Ray Goshorn, also formerly of LinuxMall, will
become the Chief Financial Officer of Ebiz.

     Certain information regarding Mr. Bolzern, Mr. Shaw and Mr. Goshorn
follows:

     Mark Bolzern.  Mr. Bolzern founded LinuxMall in 1993 and served as its
President and Chairman of the Board. He currently serves as a director of Linux
International, an advisory council member of both the Linux Professional
Institute and the Linux Business Expo.

     David Shaw.  Mr. Shaw joined LinuxMall in September 1999 as Chief Marketing
Officer and was appointed its Interim Chief Executive Officer on March 14, 2000.
Prior to that, Mr. Shaw owned and operated an international consulting firm,
Focus On Sales, involved in the sales and marketing of small businesses.

     Ray Goshorn.  Mr. Goshorn served as LinuxMall's Chief Financial Officer
since January 2000. 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.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

     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
31, 2000. This information is based on a review of Section 16(a) reports
furnished to Ebiz.

     Mr. Rassas and Hayjour Family Limited partnership, an entity controlled by
Mr. Rassas, failed to timely file three reports on Form 4 related to sales of a
total of 26,500 shares of Ebiz stock and a report on Form 5 to report the
delinquent Form 4 filings. The required report was transmitted for filing on
October 13, 2000.

     Mr. Herman and Kona Investments Limited Partnership, an entity controlled
by Mr. Herman, failed to timely file four reports on Form 4 related to the sale
of a total of 59,700 shares of Ebiz stock and a report on Form 5 to report the
delinquent Form 4 filing. The required report was transmitted for filing on
October 13, 2000.

                                        43
<PAGE>   45

ITEM 10. EXECUTIVE COMPENSATION

     The following table is based upon compensation for the calendar years ended
December 31, 1999, 1998 and 1997.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                         ANNUAL
                                                                    COMPENSATION(1)
                                                                   ------------------
NAME                                                               SALARY      BONUS
----                                                               -------    -------
<S>                                                         <C>    <C>        <C>
Jeffrey Rassas............................................  1999   $96,000    $ 9,000
  Chief Executive                                           1998   $72,000    $10,000
  Officer                                                   1997   $72,000    $60,000
Stephen Herman............................................  1999   $96,000    $ 9,000
  President                                                 1998   $72,000    $10,000
                                                            1997   $12,000(2)      --
</TABLE>

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

(1) Excludes distributions for payment of personal income taxes resulting from
    Ebiz electing Subchapter S status, which election was terminated in June,
    1998.

(2) Based on employment from September through December 1997.

     Effective February 1, 2000, Mr. Rassas' and Mr. Herman's base salary was
increased to $124,000 on an annualized basis.

STOCK OPTION PLAN

     Ebiz's Board of Directors adopted, and its shareholders approved, effective
August 1998, the 1998 Equity Incentive Plan ("Plan"). The purpose of the Plan is
to promote the interests of Ebiz and to motivate, attract and retain the
services of persons upon whose judgment, efforts and contributions the success
of Ebiz's business depends. A further purpose of the Plan is to align the
personal interests of such persons with the interests of shareholders of Ebiz
through equity participation in its 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 1,000,000 shares of Ebiz's common stock.
As of June 30, 2000, a total of 652,000 stock options were outstanding of which
239,010 were vested under the Plan. A total of 101,500 options to purchase
shares under the Plan have been exercised.

EMPLOYMENT AGREEMENTS

     Ebiz had entered into certain employment agreements with Jeffrey I. Rassas
and Stephen C. Herman, the Chief Executive Officer and President, respectively.
The agreements have been rescinded in connection with the acquisition of
LinuxMall. In connection with the acquisition of LinuxMall, Ebiz agreed to enter
into employment agreements with each of its executive officers, the terms of
which, excluding compensation, will be uniform.

DIRECTOR COMPENSATION

     All authorized out-of-pocket expenses incurred by a director on behalf of
Ebiz are subject to reimbursement. Ebiz is 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 June 30, 2000, the ownership of each
person known by Ebiz to be the beneficial owner of five percent or more of
Ebiz's Common Stock, each officer and director individually, and

                                        44
<PAGE>   46

all officers and directors as a group. Ebiz has been advised that each person
has sole voting and investment power over the shares listed below unless
otherwise indicated.

<TABLE>
<CAPTION>
                                                                              PERCENT OF
                                                                              BENEFICIAL
NAME AND ADDRESS OF OWNER                                 NUMBER OF SHARES   OWNERSHIP(1)
-------------------------                                 ----------------   ------------
<S>                                                       <C>                <C>
Jeffrey I. Rassas(2)....................................     1,703,212          20.04%
  15695 North 83rd Way
  Scottsdale, Arizona 85260
Stephen C. Herman(3)....................................     1,704,212          20.06%
  15695 North 83rd Way
  Scottsdale, Arizona 85260
Shi-En Shiau(4)
  1295 West Washington Street, Suite 115
Tempe, Arizona 85281....................................       584,415           6.88%
All Directors and Officers as a Group (2 persons).......     3,407,424          40.10%
</TABLE>

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

(1) Based upon 8,497,566 shares of common stock outstanding as of June 30, 2000.

(2) Mr. Rassas holds his shares beneficially through Hayjour Family Limited
    Partnership.

(3) Mr. Herman holds his shares beneficially through Kona Investments Limited
    Partnership.

(4) Mr. Shiau holds legal title to the shares which are beneficially held by him
    and Prime Technology Holding Company, Ltd.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Effective as of June 1, 1998, Ebiz's predecessor, Vinculum, acquired
substantially all of the assets and assumed the liabilities of Genras in
exchange for 5,000,000 shares of its common stock. The 5,000,000 shares were
distributed by Genras to its shareholders as follows: Jeffrey I.
Rassas -- 2,250,000 shares, Stephen C. Herman -- 2,250,000 shares and Thomas A.
Cifelli - 500,000 shares. Ebiz also agreed to reimburse, on a net after-tax
basis, any income tax liability of the Genras shareholders related to the period
of January 1, 1998 through the date of acquisition. After the acquisition, Mr.
Cifelli was an officer and shareholder of Ebiz. Mr. Cifelli's relationship as an
officer of Ebiz was terminated in January, 1999. Fox & Company Investments,
Inc., a NASD registered broker-dealer with which Mr. Cifelli was affiliated,
received 187,500 shares of common stock in connection with this transaction for
investment banking advice and services related to the transaction. Aztore
Holdings, Inc., the majority shareholder of Vinculum prior to the acquisition,
entered into an agreement with Ebiz to be compensated in the event Ebiz obtains
benefit from a prior net operating loss of Vinculum.

     Michael S. Williams, then a director of Ebiz, and Lanny Lang provided
consulting services to Ebiz commencing in November, 1998. The consulting
services were performed by the individuals in their capacities as employees of
Aztore. Aztore was compensated $84,600 in cash and stock grants ($22,700 cash
and 31,325 shares) for these services and Mr. Williams and Mr. Lang were granted
options to purchase 30,000 and 20,000 shares, respectively, of Ebiz common stock
at $1.00 per share. The grant was made under the Ebiz 1998 Equity Incentive Plan
for consulting services performed.

     In April, 1999, Aztore, whose president, Michael S. Williams, was then a
director of Ebiz, loaned $500,000 to Ebiz, which was evidenced by a Secured
Convertible Subordinate Note ("Note").  The Note was issued at a 10% interest
rate, was secured by the grant of a security interest in certain of Ebiz's
assets and was convertible into shares of common stock at one share per $6.00
amount of principal obligation. Ebiz also issued Aztore a warrant certificate
which entitled Aztore to purchase 250,000 shares of Ebiz's common stock at $6.00
per share. In August 1999, Ebiz and Aztore agreed to cancel the warrant and to
full payment of the Note with interest for total consideration of $629,165.
Aztore also exercised the option, as assigned to it by Messrs. Williams and
Lang, to acquire 50,000 shares of Ebiz's common stock for $1.00 per share.

                                        45
<PAGE>   47

     From time to time Ebiz has 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, 2000, approximately $72,000
borrowed from Mr. Rassas was outstanding.

     Ebiz's general policy for entering into transactions with directors,
officers and affiliates of the Company 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.

                                        46
<PAGE>   48

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
        EXHIBITS
        --------
<C>                      <S>
          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
         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(3)        -- Shareholder Voting Agreement and Proxy, dated October 5,
                            2000 by Jeffrey J. Rassas
         10.18(3)        -- Shareholder Voting Agreement and Proxy, dated October 5,
                            2000 by Stephen C. Herman
         10.19(3)        -- Compensation Agreement, dated October 5, 2000, between
                            Ebiz and LinuxMall
         21.1(3)         -- Subsidiaries
</TABLE>

                                        47
<PAGE>   49

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

(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.

REPORTS ON FORM 8-K

     None.

                                        48
<PAGE>   50

     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.


<TABLE>
<S>                                                      <C>
                                                         EBIZ ENTERPRISES, INC.

Dated: March 23, 2001                                    By /s/ DAVE SHAW
                                                            -----------------------------------------
                                                            Dave Shaw, Chief Executive Officer

Dated: March 23, 2001                                    By /s/ RAY GOSHORN
                                                            -----------------------------------------
                                                            Ray Goshorn, Chief Financial Officer

                                                         BOARD OF DIRECTORS

Dated: March 23, 2001                                    By /s/ JEFFREY I. RASSAS
                                                            -----------------------------------------
                                                            Jeffrey I. Rassas

Dated: March 23, 2001                                    By /s/ DAVE SHAW
                                                            -----------------------------------------
                                                            Dave Shaw

Dated: March 23, 2001                                    By /s/ BRUCE PARSONS
                                                            -----------------------------------------
                                                            Bruce Parsons

Dated: March 23, 2001                                    By
                                                            -----------------------------------------
                                                            Mark Bolzern

Dated: March 23, 2001                                    By
                                                            -----------------------------------------
                                                            Alok Mohan
</TABLE>


                                        49