form10ksb-0106

10KSB 1 form10ksb-0106.htm form10ksb-0106

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-KSB

[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.

For the fiscal year ended June 30, 2001

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.

For the transition period from _____________ to _____________

Commission file number 0-11730

COGNIGEN NETWORKS, INC.
(Name of small business issuer in its charter)

COLORADO 84-1089377
---------- ------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

7001 Seaview Avenue, N.W., Suite 210
Seattle, Washington 98117
------------------- -----
(Address of principal executive offices) (Zip Code)

(206) 297-6151
--------------
(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

(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 the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB. _____

State issuer's revenue for its most recent fiscal year: $6,759,918

The aggregate market value of the voting and non-voting common
equity held by non-affiliates at September 26, 2001, computed by
reference to the closing price on the OTC Bulletin Board was $4,833,094.

The number of shares outstanding of each of the issuer's classes of
common equity on September 26, 2001, was 86,500,991.

Documents Incorporated by Reference
The information required by Items 9 through 12 is incorporated by
reference to the issuer's definitive proxy statement that the issuer
plans to file in connection with its next Annual Meeting of Shareholders
involving the election of directors. The issuer plans to file the
definitive proxy statement with the Commission on or before October 28,
2001.

Transitional Small Business Disclosure Format Yes ____ No |X|
---

===========================================================================

TABLE OF CONTENTS

PART I

Item 1. Description of Business

Item 2. Description of Property

Item 3. Legal Proceedings

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

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

Item 6. Management's Discussion and Analysis or Plan of Operation

Item 7. Financial Statements

Item 8. Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure

PART III

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

Item 10 Executive Compensation*

Item 11 Security Ownership of Certain Beneficial Owners and
Management*

Item 12 Certain Relationships and Related Transactions*

Item 13 Exhibits and Reports on Form 8-K*

* The information required by Items 9 through 12 is incorporated by
reference to the issuer's definitive proxy statement that the issuer
plans to file in connection with its next Annual Meeting of Shareholders
involving the election of directors. The issuer plans to file the
definitive proxy statement with the Commission on or before October 28,
2001.

PART I

Forward Looking Statements.

The discussion in this report contains forward looking statements,
including, without limitation, statements relating to Cognigen Networks,
Inc. and its wholly-owned subsidiary, Cognigen Switching Technologies,
Inc. ("CST"). Although we believe that the expectations reflected in the
forward looking statements are reasonable, we can give no assurance that
such expectations will prove to be correct. The forward looking
statements involve risks and uncertainties that affect our business,
financial condition and results of operations, including without
limitation, our possible inability to obtain additional financing, lack
of agent growth, the possible loss of key personnel, rate changes, fee
policy or application changes, technological changes and increased
competition. Many of these risks are beyond our control. We are not
entitled to rely on the safe harbor provisions of Section 27A of the
Securities Act of 1933, as amended, or Section 21E of the Securities
Exchange Act of 1934, as amended, when making forward looking statements.

Item 1. Description of Business.

BUSINESS

We were incorporated in May 1983 in Colorado to engage in the
cellular radio and broadcasting business. In June 1988, we changed our
name to Silverthorne Production Company and commenced operations in
the oil and gas industry. These operations were discontinued in 1989.
From 1989 to 1999, we attempted to locate acquisition prospects and
negotiate an acquisition. Our pursuit of an acquisition did not
materialize until August 1999 when we acquired the assets of
Inter-American Telecommunications Holding Corporation ("ITHC"). The
acquisition was accounted for as a reverse acquisition.

We currently operate in two divisions. The first division consists
of direct and indirect sales of telecommunications and personal
technology services. The second division is our carrier division. The
first division is a multifaceted network marketing organization which
utilizes the Internet as a platform to provide customers and subscribers
with a variety of telecommunications and technology based products and
services. Through a network of more than 135,000 independent agents, we
have sold directly or facilitated the sale of third party products and
services to more than 550,000 customers and subscribers worldwide.
Products such as discount domestic and international long distance
services, prepaid calling cards and paging, wireless communications,
computers and Internet-based telecommunications products make up a major
portion of our products. We have contractual agreements with a variety
of product and service vendors that provide us with a commission
percentage of any sale made through one of our supported web sites. Our
web-based marketing division sells the products and services of industry
leaders such as AT&T Wireless, WorldCom, Sprint, Verizon, Global
Crossing, DISH Network and Qwest. Our marketing engine is fueled by
distribution channels through an Internet presence and through our corps
of independent agents and affiliate groups each with their own customized
Web site. The other division is our wholly owned subsidiary, Cognigen
Switching Technologies, Inc. (CST), which is discussed in more detail
below.

In the mid 1990's, operating as Cognigen Communications, we
recognized the marketing potential of the Internet and formed what we
believe is one of the first companies to create a marketing operation
based exclusively on the Internet. The initial concept, which remains
the foundation of our growth, was to expand marketing potential by
increasing the number of independent agents working within our corporate
network while at the same time continuing to increase the number of
products and services that these agents could provide to our worldwide
customer base. To facilitate the manageable growth of this network and
to be able to provide the agents with the support and marketing edge
necessary for success, we developed and deployed the "self replicating"
web page. This proprietary technology automatically created a high
content, personalized set of e-commerce web pages for each new agent, at
the time the agent becomes a member of our network. Additionally, an
Internet accessible "private site" is instantly created for the new
agent. Each agent can view the agent's records, activity and account
status on which the agent is working. The private site also contains
customer detail status, recommended training sources, frequently asked
questions and agent benefits. We also adopted a strategy of enabling
each agent to sell telecommunications services and to recruit new
agents. The original agent receives a sales commission override on sales
generated by the agents thus recruited. Our commission structure and
plan enables our agents to earn money without the necessity of developing
a subordinate agent base. Lately, we have been adding 5,000 to 6,000
agents each month. Over the past 24 months, we have observed a positive
contribution correlation between the number of our agents and our
revenue.

In addition to the Internet-based agent network and CST's direct
sales efforts, we are engaged in an effort to develop and support a
variety of affiliate program offerings. In these programs, large
affiliate organizations such as industry service providers and a variety
of membership or club related businesses can be utilized for commission
sharing. We currently have contracts for these programs that represent
affiliate/affinity populations in excess of 600,000 potential buyers. As
in any program of this nature, actual participation and buying rates will
be a small subset of the target audience, but higher than non-affiliated
web surfers.

CST is licensed by the Federal Communications Commission ("FCC") as
a global facilities-based/global resale services national and
international carrier. CST provides our customer base and other direct
clients with a wide variety of discount international, phone card and
private switching telephonic services. CST, through its multi-mode
enhanced services platform, provides its customers with discounted
domestic and international long distance voice and fax service,
international direct dialing, domestic and international prepaid calling
cards and international toll-free access. CST provides these services to
our proprietary customer base of approximately 19,000 individual
accounts. CST has three fully programmable Cisco-VLO4K multi-protocol
circuit switches, with a combined capability of more than 60 million
minutes of traffic per month, at its headquarters in San Luis Obispo,
California. With additional modest enhancement and CST's incumbent
technology, we are well positioned to deliver the next generation of
enhanced packet telephony services to both individual subscribers and
enterprise clients. Targeted functionalities would include services such
as: VOIP, unified messaging, voice, video and data conferencing and
integrated wireless applications.

During the year ended June 30, 2001, two customers accounted for
15% and 10%, respectively, of our revenue.

Competition

We compete with all of the companies for whom we sell products as
an agent, a number of companies that are network marketed
telecommunication companies, switching companies and with all providers
who retail telecommunications and personal communications products over
the Internet. Many of our competitors are larger and have greater
capital resources than do we.

Regulation

We are not currently subject to any governmental regulations as an
Internet marketer of telecommunications and technology based products
and services. CST is regulated by the FCC as a Section 214, domestic and
international facilities based carrier.

Employees

As of June 30, 2001, we had 21 full time employees and three part
time employees based in our offices and facilities in Seattle,
Washington, San Luis Obispo, California and Albuquerque, New Mexico. We
also had three consultants.

Item 2. Description of Property.

We lease approximately 3,457 square feet of office space at 7001
Seaview Avenue, N.W., Suite 210, Seattle, Washington 98117, pursuant to
a lease that will terminate in December 2001 and that currently requires
monthly rental payments of approximately $3,025. We also lease
approximately 1,007 square feet of office space at 6751 Academy Road, NE,
Suite B, Albuquerque, New Mexico 87109, pursuant to a lease that will
terminate in March 2003 and that currently requires monthly rental
payments of $1,390.49. CST leases approximately 3,218 square feet of
office space at 3220 South Higuera Street, Suite 103, San Luis Obispo,
California 93401, pursuant to a lease that will terminate in April 2002
and that currently requires monthly rental payments of $5,934.

Item 3. Legal Proceedings.

We are the plaintiff in a civil action entitled Cognigen Networks,
Inc. v. Robert Scott Haas; File No. 00-21209-NZ, Circuit Court for the
County of Grand Traverse, State of Michigan. We filed a Motion for a
Temporary Restraining Order, a Preliminary Injunction and a Conversion to
a Permanent Injunction against Mr. Haas. We sought to restrain and
prohibit Mr. Haas from contacting our affiliates and customers and other
third parties doing business with us; to cease utilizing our agent and
customer data bases, and to cease converting our confidential information
for the defendant's use. Both the Preliminary and Permanent Injunctions
were granted by the court in May 2001.

We were joined as a defendant along with several other telecom
companies in a patent infringement case filed by Cygnus
Telecommunications Technology, LLC in February 2001. The plaintiff
alleges that we and others used its patented technology to operate a
callback system for long distance calls and claims damages in an
unspecified amount. The original case was filed in the US District Court
for the Northern District of California, subsequently moved to the US
District Court in Illinois, and is presently assigned to the US District
Court for the Central District of California, West Los Angeles Division
under case number 01-05943-DT-AIJX (C.D. CA). We have filed responsive
pleadings and a motion to dismiss the case upon the grounds that the
wrong party was joined in the action. The case is still in the discovery
phase. We believe the plaintiff's claims are without merit and that we
will prevail.

In August 2001, we filed a civil action in the US District Court
for the Western District of Washington against Pharmaceutical Outcomes
Research, A/K/A in 2001 claiming unfair trademark competition and
trademark dilution. The defendant has accepted service and we are
awaiting defendant's responsive pleadings. Concurrently, a Petition for
Dispute Resolution No. WIPO D-2001-1094, was filed by us against this
same defendant with the World Intellectual Property Organization in
Geneva, Switzerland. That petition alleges a disputed domain
registration. We believe we will prevail in both cases bases on the
priority of registration and the worldwide public use the defendant has
made of our trademarks.

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

No matter was submitted to a vote of our security holders during
our fourth fiscal quarter ended June 30, 2001.

PART II

Item 5. Market for Common Equity and Related Stockholders Matters.

Our common stock is quoted on the NASD OTC Bulletin Board under the
symbol "CGNT." The following table sets forth, for the periods
indicated, the high and low closing bid price quotations for the common
stock as reported by the National Quotation Bureau, LLC. Such quotations
reflect inter-dealer prices, but do not include retail mark-ups,
mark-downs or commissions and may not necessarily represent actual
transactions.

High Closing Bid Low Closing Bid
---------------- ---------------

Quarter ended June 30, 2001 $0.30 $0.15
Quarter ended March 31, 2001 $0.52 $0.0782
Quarter ended December 31, 2000 $0.2812 $0.1875
Quarter ended September 30, 2000 $1.00 $0.625

Quarter ended June 30, 2000 $1.28125 $0.75
Quarter ended March 31, 2000 2.625 1.25
Quarter ended December 31, 1999 3.625 0.8125
Quarter ended September 30, 1999: 1.00 0.1875

As a result of our common stock not being quoted on Nasdaq or
listed on the exchange, an investor may find it more difficult to dispose
of or to obtain accurate quotations as to the market value of our common
stock. In addition, we are subject to a rule promulgated by the
Securities and Exchange Commission. The rule provides that various sales
practice requirements are imposed on broker/dealers who sell our common
stock to persons other than established customers and accredited
investors. For these types of transactions, the broker/dealer has to
make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transactions prior to
sale. Consequently, the rule may have an adverse effect on the ability
of broker/dealers to sell our common stock, which may affect the ability
of purchasers to sell our common stock in the open market.

As of June 30, 2001, there were approximately 1,342 holders of
record of our common stock. The number of holders of record does not
include holders whose securities are held in street name.

We have never paid and do not anticipate paying any cash dividends
on our common stock in the foreseeable future. We intend to retain any
earnings for use in our business operations and in the expansion of our
business.

On August 20, 1999, we completed the first closing of the
acquisition of all of the assets of ITHC in exchange for 29,242,953
shares of our common stock. On December 27, 1999, we agreed with ITHC
that the total number of shares of our common stock that were to be
issued at the first closing was 11,742,953 shares rather than 29,242,953
shares and that the total number of shares to be issued by us to ITHC at
the second closing is 37,298,444 shares. We issued 2,200,000 shares of
our common stock as finders' fees in connection with the second closing
of this transaction. The 37,298,444 shares and the 2,200,000 shares were
issued in June 2001, after we amended our Articles of Incorporation to
increase our authorized shares of common stock. The 37,298,444 shares
were issued in reliance upon the exemption from registration contained in
Section 4(2) of the Securities Act of 1933, as amended ("Securities
Act"). ITHC and the finders had available to them full information
concerning us and the certificates representing the shares have a legend
prohibiting transfer unless the shares are registered under the
Securities Act or the transfer is exempt from the registration
requirements thereof. No underwriter was involved in the transaction.

In August 2000, we issued 22,000 shares of our common stock to one
employee (20,000 shares) and one agent (2,000 shares) for services
rendered. The 22,000 shares were issued in reliance upon the exemption
from registration contained in Section 4(2) of the Securities Act. The
two persons had available to them full information concerning us and the
certificates representing the shares have a legend prohibiting transfer
unless the shares are registered under the Securities Act or the transfer
is exempt from the registration requirements thereof. No underwriter was
involved in this transaction.

Item 6. Management's Discussion and Analysis or Plan of Operations.

Overview

We are an Internet enabled marketer of long distance telephone and
personal communication services and a licensed, facilities based
interstate and international long distance carrier. We receive
commissions from sales of these services through agents, affiliates and
affinity groups, from telecommunications sales of prepaid calling cards
and from the sale of call switching services.

Year Ended June 30, 2001 Compared to Year Ended June 30, 2000

Total revenue for the fiscal year ended June 30, 2001, was
$6,759,918 compared to $3,799,713 for the fiscal year ended June 30,
2000, an increase of $2,960,205, or 78%. Commission revenue increased to
$4,256,073 for fiscal 2001 compared to $2,589,008 for fiscal 2000, an
increase of $1,667,065, or 64%. This increase was partially the result
of adding 63,336 agents in fiscal 2001, to 113,789 on June 30, 2001 from
50,453 on June 30, 2000. In addition, we added our first five (5)
affiliate and affinity programs in fiscal 2001. Telecommunications
revenue increased to $2,141,322 for fiscal 2001 compared to $1,138,165
for fiscal 2000, an increase of $1,003,157, or 88%. This increase was
generated by new product offerings including Cognidial and Cognitalk and
an increase in active telecommunications customers, to 18,810 on June 30,
2001 from 2,983 on June 30, 2000. The increase of 15,827 represented a
530% increase. Other revenue and allowances increased to $362,523 in
fiscal 2001 from $63,540 in fiscal 2000 as a result of revenue generated
primarily by payments from our agents for advertising and specialized web
services.

Operating expenses related to commission revenue in the fiscal year
ended June 30, 2001, increased to $2,704,894 from $1,657,195 in the
fiscal year ended June 30, 2000, an increase of $1,047,699, or 63%.
During the same period we realized a 64% increase in commission revenue.
Telecommunications services operating expenses increased in fiscal 2001
to $1,539,813 from $950,727 in fiscal 2000, an increase of $589,086, or
62%. During the same period, we realized an 88% increase in
telecommunications revenue. Selling, general and administrative (SG&A)
expenses decreased in fiscal 2001 to $3,792,762, from $8,734,444 in
fiscal 2000, a decrease of $4,941,682, or 56%. This decrease resulted
primarily from a fiscal 2000 charge to income of $6,052,004 for certain
stock based compensation. With this item removed from fiscal 2000, SG&A
expenses for fiscal 2000 would have been $2,682,440, resulting in an
increase of only $1,110,322 in fiscal 2001, or 41%, compared to a total
revenue increase of 78% in fiscal 2001. Depreciation and amortization
increased for fiscal 2001 to $1,219,984, from $561,510 in fiscal 2000, or
by $658,474. This increase was due to the increased amortization of
goodwill from the purchase of CST in April 2000 and increased
depreciation for the switches acquired.

The loss from operations decreased for the fiscal year ended June
30, 2001, to a loss of $2,497,535 as compared to a loss of $8,104,163 for
the fiscal year ended June 30, 2000, a decrease of $5,606,628. This
decrease was primarily the result of the $6,052,004 of stock based
compensation recorded in fiscal 2000. Without this compensation item,
the operating loss in fiscal 2000 would have been $2,052,159. Thus, the
loss from operations was higher in fiscal 2001 by $445,376. As a percent
of revenues, the loss declined in fiscal 2001 to 37% from 54% in fiscal
2000. In addition, in fiscal 2001, we increased revenue by 78% to
approximately $6.8 million from approximately $3.8 million in fiscal 2000
with an increase in operating costs of only 22% over fiscal 2000,
excluding the stock based compensation expense of fiscal 2000.

Interest expense decreased in the fiscal year ended June 30, 2001,
to $67,847, from $144,492 in the fiscal year ended June 30, 2000, or by
$76,645. This decrease resulted from the return of a customer list in
consideration for the cancellation of a note and accrued interest.

Our net loss after taxes for fiscal 2001 was $2,602,407 compared to
$8,265,186 in fiscal 2000, a decrease of $5,662,779. This decrease was
primarily the result of $6,052,004 of stock based compensation recorded
in fiscal 2000 as compared to $22,000 recorded in fiscal 2001. The net
loss per share decreased in fiscal 2001 to $.03 per share from a net loss
of $.11 per share in fiscal 2000. There was a relatively small increase
in outstanding stock to 84,939,908 average shares in fiscal 2001 compared
to 78,549,437 average shares in fiscal 2000.

The loss before interest, taxes, depreciation and amortization
(EBITDA) improved in the fiscal year ended June 30, 2001 to a loss of
$1,277,551 from a loss of $7,542,653 in the fiscal year ended June 30,
2000. The improvement in EBITDA is primarily due to less stock based
compensation recorded in fiscal 2001.

Liquidity and Capital Resources

We have funded our operations primarily from stock subscriptions
received and operations. At June 30, 2001, we had cash and cash
equivalents of $296,947 and negative working capital of $405,115. There
was an improvement in cash and cash equivalents of $91,597 in the fourth
quarter compared to the third quarter of fiscal 2001.

Cash used by us for operating activities during the year ended June
30, 2001, was $179,963. The major contributor to this use was the net
loss for the fiscal year of $2,602,407 before adjustments for non-cash
items of depreciation and amortization of $1,220,539 and stock based
compensation to employees of $22,000. Additional uses of cash for the
fiscal year include increases in accounts receivable of $238,308 and
commissions receivable of $308,749. The uses in cash were partially
offset by cash provided by decreases in other current assets of $209,986,
increased accounts payable of $567,508, increased commissions payable of
$611,242, and increases of inventory, deposits, other accrued expenses,
deferred revenue and a note receivable of $89,623, $46,096, $92,172,
$60,519 and $50,000 respectively. Cash used for investing activities was
$38,563 used in the purchase of capital assets. Additional reductions in
cash during the fiscal year included the payment of capital leases of
$106,871 and payments of notes payable of $95,000.

At June 30, 2001, we have a note payable in the amount of $301,499
that currently is in default and capital leases of $11,832 which will
have to be paid during the next 12 months.

Cash generated from operations was not sufficient to meet our
working capital requirements for the fiscal year ended June 30, 2001, and
may not be sufficient to meet our working capital requirements for the
foreseeable future. However, we realized cash generated from operations
in the fourth quarter of fiscal 2001 of $291,597 compared to $471,560 of
net cash used for the nine months ended March 31, 2001. These positive
trends are continuing into the first quarter of fiscal 2002.
Nevertheless, we are looking at various financing and equity
opportunities to meet current operating and capital requirements until we
can be sustained by cash flow from its operations. There can be no
assurance that we will be able to secure additional debt or equity
financing or that operations will produce adequate cash flows to allow us
to meet all of its future obligations. However, management believes that
we will be successful in producing sufficient cash flow from all sources
to continue for the next 12 months.

Company Formation

We were incorporated on May 6, 1983, in Colorado. On August 20,
1999, we completed the acquisition of all of the net assets of ITHC in
exchange for an aggregate of 49,041,397 shares of our common stock. For
financial statement purposes, this business combination was accounted for
as an additional capitalization of ITHC (a reverse acquisition in which
ITHC was the accounting acquirer). For accounting purposes, ITHC is
considered the surviving entity and the historical financial statements
prior to the acquisition are those of ITHC.

On April 15, 2000, we acquired the outstanding stock of CST for
2,041,445 shares and $590,000 in previous cash advances to CST for a
total purchase price of $3,287,397. This transaction was accounted for
as a purchase. Intangible assets acquired are being amortized over five
years.

Forward-Looking Statements

Certain of the information discussed herein, and in particular in
this section entitled "Management's Discussion and Analysis," contains
forward-looking statements that involve risks and uncertainties that
might adversely affect the operating results of us in the future in a
material way. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, no assurance can be given that
such expectations will prove to be correct. The forward-looking
statements involve risks and uncertainties that affect our business,
financial condition and results of operations, including without
limitation, our possible inability to obtain additional financing, lack
of agent growth, the possible loss of key personnel, rate changes, fee
policy or application changes, technological changes and increased
competition. Many of these risks are beyond our control. We are not
entitled to rely on the safe harbor provisions of Section 27A of the
Securities Act of 1933, as amended, or Section 21E of the Securities
Exchange Act of 1934, as amended, when making forward-looking statements.

Item 7. Financial Statements.

Reference is made to the financial statements, the reports thereon
and the notes thereto included as a part of this Annual Report on Form
10-KSB, which financial statements, reports and notes are incorporated
herein by reference.

COGNIGEN NETWORKS, INC.

Consolidated Financial Statements
June 30, 2001 and 2000

COGNIGEN NETWORKS, INC.

Table of Contents

Independent Auditors' Reports

Consolidated Financial Statements

Consolidated Balance Sheet

Consolidated Statements of Operations

Consolidated Statements of Stockholders' Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
Cognigen Networks, Inc.
Seattle, Washington

We have audited the accompanying consolidated balance sheet of Cognigen
Networks, Inc. and subsidiaries as of June 30, 2001, and the related
consolidated statements of operations, stockholders' equity and cash
flows for the two years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Cognigen Networks, Inc. and subsidiaries as of June 30, 2001, and the
results of their operations and their cash flows for the two years then
ended, in conformity with accounting principles generally accepted in the
United States of America.

/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC

August 16, 2001
Denver, Colorado

COGNIGEN NETWORKS, INC.

Consolidated Balance Sheet

June 30, 2001

Assets
Current assets
Cash ......................................................... $ 296,947
Accounts receivable, net of allowance for doubtful
accounts of $65,219 ......................................... 299,354
Commissions receivable, net of allowance for doubtful
accounts of $57,000 ......................................... 846,912
Employee receivable .......................................... 38,870
Note receivable - related party .............................. 35,803
Inventory, net of allowance of $30,000 ....................... 43,863
Other current assets ......................................... 207,042
------------
Total current assets ....................................... 1,768,791
------------

Property, plant and equipment, net of accumulated depreciation
of $596,671 .................................................... 291,303
------------

Other assets
Deposits and other assets .................................... 42,456
Goodwill, net of amortization of $916,905 .................... 2,893,029
------------
Total other assets ......................................... 2,935,485
------------

Total assets .................................................... $ 4,995,579
============

Liabilities and Stockholders' Equity
Current liabilities
Accounts payable ............................................. $ 664,928
Accrued liabilities .......................................... 195,090
Commissions payable .......................................... 937,923
Deferred revenue ............................................. 65,829
Current portion of capital leases ............................ 8,637
Current portion of notes payable ............................. 301,499
------------
Total current liabilities .................................. 2,173,906

Long-term portion of capital leases ............................. 3,195
Deferred tax liability .......................................... 37,025
------------
Total liabilities .......................................... 2,214,126

Commitments and contingencies

Stockholders' equity
Common stock $.001 par value, 300,000,000 shares authorized;
86,500,991 issued and outstanding at June 30, 2001 .......... 86,500
Additional paid-in capital ................................... 13,613,829
Accumulated deficit .......................................... (10,918,876)
------------
Total stockholders' equity ................................. 2,781,453
------------

Total liabilities and stockholders' equity ...................... $ 4,995,579
============

See notes to consolidated financial statements.

COGNIGEN NETWORKS, INC.

Consolidated Statements of Operations

For the Years Ended
June 30,
------------------------------
2000 2001
------------ ------------
(Restated)
Revenue
Marketing commissions ............................. $ 2,598,008 $ 4,580,651
Telecommunications ................................ 1,138,165 2,141,322
Other ............................................. 63,540 37,945
------------ ------------
Total revenue ................................... 3,799,713 6,759,918
------------ ------------

Operating expenses
Marketing commissions ............................. 1,657,195 2,704,894
Telecommunications ................................ 950,727 1,539,813
Selling, general and administrative ............... 8,734,444 3,792,207
Depreciation and amortization ..................... 561,510 1,220,539
------------ ------------
Total operating expenses ........................ 11,903,876 9,257,453
------------ ------------

Loss from operations ................................. (8,104,163) (2,497,535)

Interest expense ..................................... 144,492 67,847
------------ ------------

Loss before income taxes ............................. (8,248,655) (2,565,382)

Income taxes ......................................... (16,531) (37,025)
------------ ------------

Net loss ............................................. $ (8,265,186) $ (2,602,407)
============ ============

Loss per common share - basic and diluted ............ $ (0.11) $ (0.03)
============ ============

Weighted average number of common shares outstanding -
basic and diluted ................................... 78,549,437 84,939,908
============ ============

See notes to consolidated financial statements.

COGNIGEN NETWORKS, INC.

Consolidated Statements of Stockholders' Equity

June 30, 2001 and 2000

Total
Common Stock Additional Stockholders'
------------------------------ Paid-in Accumulated (Deficit)
Shares Amount Capital Deficit Equity
------------ ------------ ------------ ------------ ------------

Balance June 30, 1999 .................................. 11,377,137 $ 20 $ -- $ (51,283) $ (51,263)

Stock issued in connection with Cognigen acquisition
and employment agreements ............................. 42,664,260 55 30,000 -- 30,055

Reverse acquisition .................................... 15,757,047 69,723 (261,957) -- (192,234)

Common stock issued for cash net of $727,474 in expenses 12,489,102 12,489 5,127,598 -- 5,140,087

Value of options issued for services ................... -- -- 6,022,004 -- 6,022,004

Retirement of stock at cost ............................ (50,000) (50) (18,950) (19,000)

Stock issued in connection with acquisition of Cognigen
Switching ............................................. 2,041,445 2,041 2,695,356 -- 2,697,397

Net loss ............................................... -- -- -- (8,265,186) (8,265,186)
------------ ------------ ------------ ------------ ------------

Balance at June 30, 2000 ............................... 84,278,991 84,278 13,594,051 (8,316,469) 5,361,860

Common stock issued to employee ........................ 22,000 22 21,978 -- 22,000

Stock issued for finders' fee related to work completed
on the reverse acquisition ............................ 2,200,000 2,200 (2,200) -- --

Net loss ............................................... -- -- -- (2,602,407) (2,602,407)
------------ ------------ ------------ ------------ ------------

Balance at June 30, 2001 ............................... 86,500,991 $ 86,500 $ 13,613,829 $(10,918,876) $ 2,781,453
============ ============ ============ ============ ============

See notes to consolidated financial statements.

COGNIGEN NETWORKS, INC.

Consolidated Statements of Cash Flows

For the Years Ended
June 30,
----------------------------
2000 2001
----------- -----------

Cash flows from operating activities
Net loss ............................................ $(8,265,186) $(2,602,407)
----------- -----------
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization ...................... 561,510 1,220,539
Stock options granted to non-employees and stock
issued to employees for services .................. 6,052,004 22,000
Deferred taxes ..................................... 16,531 37,025
Changes in assets and liabilities
Accounts receivable .............................. 218,461 (238,308)
Commissions receivable ........................... (484,149) (308,749)
Employee receivable .............................. -- (37,209)
Note receivable - related party .................. -- 50,000
Inventory ........................................ (108,410) 89,623
Other current assets ............................. (340,120) 209,986
Accounts payable ................................. 53,276 567,508
Commissions payable .............................. 326,681 611,242
Deferred revenue ................................. (66,453) 60,519
Other accrued expenses ........................... (41,309) 92,172
Other assets ..................................... (89,971) 46,096
----------- -----------
6,098,051 2,422,444
----------- -----------
Net cash used in operations ..................... (2,167,135) (179,963)
----------- -----------

Cash flows from investing activities
Capital expenditures ................................ (400,594) (38,563)
Cash paid in business acquisitions net of cash
acquired ........................................... (555,100) --
----------- -----------
Net cash used in investing activities ........... (955,694) (38,563)
----------- -----------

Cash flows from financing activities
Net proceeds from stock issuance .................... 5,140,087 --
Distribution related to reverse acquisition ......... (190,000) --
Payments on notes payable ........................... (1,090,000) (95,000)
Payment on capital leases ........................... (914) (106,871)
Retirement of stock ................................. (19,000) --
----------- -----------
Net cash provided by (used in) financing
activities ..................................... 3,840,173 (201,871)
----------- -----------

Net increase (decrease) in cash ....................... 717,344 (420,397)

Cash and cash equivalents - beginning of period ....... -- 717,344
----------- -----------

Cash and cash equivalents - end of period ............. $ 717,344 $ 296,947
=========== ===========

Cash paid for interest was $19,834 (2000) and $116,024 (2001).
Cash paid for income taxes was $0 in 2000 and 2001.

Non-cash investing and financing activities (Note 10).

See notes to consolidated financial statements.

COGNIGEN NETWORKS, INC.

Notes to Consolidated Financial Statements

Note 1 - Description of Business and Summary of Significant Accounting
Policies

The Company was incorporated in May 1983 in the State of Colorado to engage in
the cellular radio and broadcasting business and to engage in any other lawful
activity permitted under Colorado law. In June 1988, the Company changed its
name to Silverthorne Production Company (Silverthorne) and commenced operations
in the oil and gas industry. These operations were discontinued in 1989. Since
1989, Silverthorne has attempted to locate acquisition prospects and negotiate
an acquisition. Silverthorne's pursuit of an acquisition did not materialize
until August 20, 1999, with the acquisition of the assets of Inter-American
Telecommunications Holding Corporation (ITHC), which was accounted for as a
reverse acquisition. The surviving entity changed its name to Cognigen Networks,
Inc. on July 12, 2000.

Cognigen Networks, Inc. (the Company) is engaged in the business of providing
telecommunications products and services to worldwide markets. The Company's
activities include selling prepaid calling cards, providing call switching
services, and Internet marketing of telecommunications products and services,
pagers, and computers.

Principles of Consolidation

These consolidated financial statements include the accounts of ITHC, Cognigen
Corporation (Cognigen), Cognigen Switching Technologies, Inc. (Cognigen
Switching) and the Company. For the year ended June 30, 2000, the results of
operations of Cognigen Switching are included from April 15, 2000 through June
30, 2000. All significant intercompany balances and transactions have been
eliminated in consolidation.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and in checking and savings accounts at financial institutions. On occasion
these balances exceed federally insured limits. At June 30, 2000 and 2001, the
Company had approximately $709,000 and $223,000, respectively, in excess of
federally insured limits.

Inventories

Inventory consists of advertising supplies and prepaid calling cards held for
resale and is valued at the lower of cost or market. Calling cards are purchased
from a variety of vendors at a discount from the face value. Excise tax of 3% of
the face value is paid at the time of purchase. When the calling card is sold,
the excise tax is collected and offset against the prepaid excise tax.

Note 1 - Description of Business and Summary of Significant Accounting
Policies (continued)

Property and Equipment

Property and equipment are stated at cost. Depreciation is provided using the
straight-line method for financial reporting purposes at rates based on the
following estimated useful lives:

Years
-------

Furniture and fixtures 3 - 7
Computer equipment 3 - 5
Equipment 3 - 5
Leasehold improvements 3 - 5

Intangible Assets

Intangible assets are stated at cost and consist of goodwill and customer
databases. Goodwill is amortized using the straight-line method over five years.

Valuation of Long-Lived Assets

The Company assesses valuation 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. The Company
periodically evaluates the carrying value of long-lived assets to be held and
used, including goodwill and other intangible assets, when events and
circumstances warrant such a review. The carrying value of a long-lived asset is
considered impaired when the anticipated undiscounted cash flow from such asset
is separately identifiable and is less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the
fair market value of the long-lived asset. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate commensurate
with the risk involved.

Commissions Receivable

Commissions receivable represent amounts due from providers for
telecommunication services used by subscribers. Typically providers pay
commissions due to the Company sixty days after the usage month-end to allow for
billing and collection.

An allowance for doubtful accounts of $57,000 at June 30, 2001 has been
established by the Company to provide for potential uncollectible accounts and
is deemed to be adequate by management based on historical results.

The Company had commissions from two vendors that generated 15% and 10% of total
revenue and made up 26% and 23% of commissions receivable at June 30, 2001. The
Company had one vendor that generated 22% of total revenue for the year ended
June 30, 2000.

Note 1 - Description of Business and Summary of Significant Accounting
Policies (continued)

Commissions Payable

Commissions payable represent amounts due to agents as commission related to the
usage for which the Company is due commission income from its providers. It is
the Company's policy to pay commissions to its agents only after receiving
commissions due from its providers. This policy results in approximately two
months commission payable at any point in time.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, 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 basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to be recovered or settled. 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.

Revenue Recognition

The Company records commission income when the underlying telecommunication
service is rendered. Commission income does not include amounts paid separately
to carriers for telecommunication services provided.

Calling card revenue is recorded when the calling cards are shipped. The
Company's policy is to delay shipment of calling cards for a two-week period
after receipt of cash to allow for processing. This delay results in deferred
revenue, which is recorded as a liability until the calling cards are shipped.
Calling card revenue includes amounts paid for the cost of the
telecommunications services provided by third-party carriers.

Revenue from long distance phone services is recorded when services are
rendered.

Use of Estimates

The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

Loss Per Share

Loss per common share has been computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Shares
issued in the initial capitalization of the Company have been treated as
outstanding since inception.

Note 1 - Description of Business and Summary of Significant Accounting
Policies (continued)

Advertising Costs

Advertising costs are expensed as incurred. Total advertising costs for the
years ended June 30, 2000 and 2001, were $200,127 and $119,142, respectively.

Recently Issued Accounting Pronouncements

SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair market value. Gains or losses resulting from
changes in the values of those derivatives are accounted for depending on the
use of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows. Statement
133 is effective for fiscal years beginning after June 15, 2000. Management
believes that the adoption of SFAS 133 will have no material effect on the
Company's financial statements.

In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"), which was
effective July 1, 2000, except that certain conclusions in this Interpretation,
which cover specific events that occur after either December 15, 1998 or January
12, 2000 are recognized on a prospective basis from July 1, 2000. This
Interpretation clarifies the application of APB Opinion 25 for certain issues
related to stock issued to employees. The Company believes its existing stock
based compensation policies and procedures are in compliance with FIN 44, and
therefore, the adoption of FIN 44 had no material impact on the Company's
financial condition, results of operations or cash flows.

In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") 101, which provides guidance on applying generally
accepted accounting principles to selected revenue recognition issues.
Management believes that the Company's revenue recognition policies are in
accordance with SAB 101.

In July 2001, the FASB issued SFAS Nos. 141 and 142 "Business Combinations" and
"Goodwill and other Intangible Assets". Statement 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. Under the guidance of Statement 142, goodwill is no longer
subject to amortization over its estimated useful life. Rather, goodwill will be
subject to at least an annual assessment for impairment by applying a fair value
base test. Statement 142 is effective for financial statement dates beginning
after January 1, 2001. The Company anticipates adoption of this statement
starting in the quarter ending September 30, 2001. As allowed under Statement
142, the Company will reclassify to goodwill certain recognized intangible
assets that do not meet the criteria for recognition apart from goodwill. The
Company also, as allowed under Statement 142, will no longer amortize goodwill.
Goodwill will be tested for impairment at the time of adoption and on an annual
basis. As allowed under Statement 142, the Company will complete its goodwill
impairment test within the first six months of the fiscal year. As a result of
Statement 142, the Company will no longer be recognizing approximately $916,000
in annual amortization expense related to goodwill.

Note 2 - Basis of Presentation

All common stock share amounts have been retroactively adjusted to reflect the
ratio of shares issued by the Company in connection with the reverse acquisition
of ITHC. The ratio of shares issued of 5,688.57 shares of the Company to each
share of ITHC stock represents 54,041,397 newly issued shares and shares to be
issued in exchange for 9,500 shares of ITHC common stock.

All per share amounts for June 30, 2000 reflect the 37,298,444 shares the
Company has a legal obligation to issue in the future in connection with the
reverse acquisition of ITHC, and have been treated as outstanding from the date
of acquisition. During the year ended June 30, 2001, the Company issued these
shares after the stockholders adopted an Amendment to the Articles of
Incorporation that increased the number of shares of common stock authorized
from 50,000,000 to 300,000,000 and authorized 20,000,000 shares of preferred
stock with no par value.

Note 3 - Property and Equipment

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

Furniture and fixtures $ 18,415
Computer equipment 172,965
Equipment 377,431
Leasehold Improvements 180,996
Software 138,167
----------
887,974
Less accumulated depreciation (596,671)
----------

Total $ 291,303
==========

Note 4 - Note Receivable - Related Party

As described in Note 8, the Company received an $85,803 note from a related
party in conjunction with the return of the customer lists to the related party.
The note has an 8.5% interest rate and is due on March 31, 2002. The balance at
June 30, 2001 is $35,803.

Note 5 - Notes Payable

Notes payable consist of the following at June 30, 2001:

12% secured promissory note payable, principal and
interest were due February 12, 2001. The Company is
currently in default on this note but making monthly
principal and interest payments in varying amounts. $ 301,499
----------
301,499

Less current portion (301,499)
----------

$ -
==========

Note 6 - Capital Lease Obligations

The Company leases certain equipment under non-cancelable lease agreements. The
monthly payments on these leases range from $332 to $7,227, including interest,
and these leases expire in various years through 2003. The property under
capital leases as of June 30, 2001, has a cost of $266,378 and accumulated
depreciation of $261,021.

The future minimum lease payments under capital leases and the net present
values of the future minimum lease payments are as follows:

Year Ending June 30, Amount
-------------------- -------------

2002 $ 20,337
2003 3,372
---------
Total 23,709
Less amount representing interest (11,877)
---------
Present value of minimum lease payments 11,832
Less current portion (8,637)
---------

Long-term capital lease obligation $ 3,195
=========

Note 7 - Income Taxes

Deferred tax liabilities and assets are determined based on the difference
between the financial statement assets and liabilities and tax basis assets and
liabilities using the tax rates in effect for the year in which the differences
occur. The measurement of deferred tax assets is reduced, if necessary, by the
amount of any tax benefits that, based on available evidence, are not expected
to be realized.

The components of the provision for income tax expense at June 30, 2001 are as
follows:

Current $ -
Deferred 37,025
---------

$ 37,025
=========

The deferred income tax assets and liabilities result primarily from differing
depreciation and amortization periods of certain assets, provision for doubtful
accounts, net operating loss carryforwards and the recognition of certain
expenses for financial statement purposes and not for tax purposes. The Company
has approximately $3,680,000 of net operating loss carryforwards, which expire
in varying amounts through 2021 if unused.

The net current and long-term deferred tax liabilities in the accompanying
balance sheet include the following items at June 30, 2001:

Current deferred tax asset $ 56,778
Current deferred tax liability -
Valuation allowance (56,778)
----------

$ -

Long-term deferred tax asset $1,375,762
Long-term deferred tax liability (1,412,787)
Valuation allowance -
---------

$ (37,025)
==========

Note 7 - Income Taxes (continued)

Rate Reconciliation

The reconciliation of income tax expense (benefit) by applying the Federal
statutory rates to the Company's effective income tax rate is as follows:

June 30,
-------------------------
2000 2001
----------- ---------

Federal statutory rate (34.0)% (34.0)%
State tax on income, net of federal income tax benefit (3.3) (3.3)
Nondeductible expenses 28.1 33.7
Valuation allowance 9.4 2.2
------- -------

0.2% (1.4)%
======= =======

Note 8 - Acquisition of Customer Databases

The Company maintained two customer databases. The customer databases were
originally recorded at their predecessor cost of $1,300,000, with the shares of
common stock issued being recorded at their nominal par value ($.001) of $20.
The Company intended to migrate these names into active long-distance customers
of Cognigen Switching, the Company's wholly owned subsidiary. In October 2000,
the Company also entered into an option agreement with an entity formed by the
entities that originally sold the Company's customer databases to the Company's
predecessor. The agreement provided that if the Company had not been able to
establish at least 5,000 active telecommunications subscribers from the combined
lists by March 30, 2001, the Company had the option to require the entity to
repurchase the customer lists from the Company to enable the Company to recover
its investment in these databases. The Company was not able to establish a 5,000
customer base from the lists by March 31, 2001 and, therefore, returned the
databases to the entity. For consideration, the remaining debt and accrued
interest associated with the lists was canceled and the Company received a note
receivable in the amount of $85,803, making up the difference between the
remaining value of the lists less the note payable and accrued interest.

Note 9 - Reverse Acquisition

On August 20, 1999, the Company completed the acquisition of all of the net
assets of ITHC in exchange for up to 49,041,397 shares of the Company's common
stock. For financial statement purposes, this business combination was accounted
for as an additional capitalization of ITHC (a reverse acquisition in which ITHC
was the accounting acquirer). ITHC is considered the surviving entity and the
historical financial statements prior to the acquisition are those of ITHC. The
15,757,047 shares reflected in the statement of stockholders' equity reflect
those shares of the Company's common stock outstanding immediately prior to the
reverse acquisition. The Company's net book value prior to the transaction was
$0. The issuance of the stock had to be completed in two closings due to the
limited amount of authorized stock available for issuance under the Company's
articles of incorporation. The first closing resulted in the issuance of
11,742,953 shares while the remaining 37,298,444 shares were to be issued after
the authorized number of shares was increased. The Company issued 5,000,000
shares of the Company's common stock as a first installment for finders' fees in
connection with the transaction to unrelated individuals. The shares were valued
at $1,900,000, or $.38 per share, and reported on a net basis in additional
paid-in-capital.

Additionally on August 20, 1999, ITHC purchased 12,602,431 shares of the
Company's common stock for a price of $190,000 from certain existing
shareholders of the Company. This was recorded as a charge to paid-in capital in
the amount of $190,000.

The Company is the legal survivor and changed its name to Cognigen Networks,
Inc. in July 2000.

During the year ended June 30, 2001, the Company issued the remaining 37,298,444
shares in connection with the second closing of ITHC when the Company amended
the Articles of Incorporation as described in Note 2.

Note 10 - Stockholders' Equity

Preferred Stock

On March 15, 2001, the stockholders adopted an Amendment to the Articles of
Incorporation that authorized 20,000,000 shares with no par value. As of June
30, 2001, no shares have been issued.

Common Stock Issuances

The Company issued 15,757,047 and 2,041,445 shares in connection with various
business acquisitions as described in Note 9.

In connection with certain ITHC executive employment agreements 11,377,366 as
adjusted shares of ITHC stock valued at $30,000 were issued in July 1999 for
services provided by those key employees. In addition, 31,286,894 shares of ITHC
stock were issued in connection with the acquisition of the assets of Cognigen.

Note 10 - Stockholders' Equity (continued)

Common Stock Issuances (continued)

During the 6 months ended December 31, 1999, the Company received subscriptions
for 12,489,102 shares of the Company's common stock at prices of $0.38 per share
(11,562,302 shares) and $1.60 per share (926,800 shares) from various persons.
These shares were issued by March 31, 2000. The Company agreed to pay a fee of
12% of the total proceeds received from the sale of the common stock to a
distributor and issue warrants to purchase up to a maximum of 1,500,000 shares
of the Company's common stock to various persons in connection with the sales.
These warrants were valued at $347,400 based on a value of $.23 per warrant.
This fee was accounted for as a cost of the sale of those common shares. The
Company paid a total of $727,474 related to the total fee due and other expenses
associated with the offering.

In December 2000, the Company issued 22,000 shares of common stock to employees
valued at $22,000 as stock-based compensation.

On March 15, 2001, the stockholders adopted an Amendment to the Articles of
Incorporation that increased the number of shares of common stock authorized
from 50,000,000 to 300,000,000.

In March 2001, the Company issued 2,200,000 shares of common stock as the final
installment of finders' fees related to work performed on the completion of the
reverse acquisition. These shares were valued at $286,000, or $0.13 per share,
and reported on a net basis in additional paid-in capital.

Stock Options

The Company has established the 2001 Incentive and Nonstatutory Stock Option
Plan, which authorizes the issuance of up to 5,000,000 shares of the Company's
common stock. The Plan will remain in effect until 2011 unless terminated
earlier by an action of the Board. All employees, board members and consultants
of the Company are eligible to receive options under the Plan at the discretion
of the Board. Options issued under the Plan vest according to the individual
option agreement for each grantee. No options were issued during the year ended
June 30, 2001.

In August 1999, the Company issued 32,400,000 options entitling the holders to
purchase the Company's common stock at $0.46 per share. The options vested
immediately and expire five years from the date issued. 26,000,000 of these
options were issued to non-employees for various professional services provided
(of which 12,000,000 were issued to a trust of which the founder is a
beneficiary) while the remaining options were issued to employees and directors.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock options
issued to employees and directors. $6,022,004 of compensation expense was
recorded in connection with the options granted to non-employees based on a
value of $.23 per option.

Note 10 - Stockholders' Equity (continued)

Stock Options (continued)

Assumptions used in the valuation of stock options include volatility of 109%,
3-year lives, dividend yield of 0% and a risk-free rate of 5.5%. The weighted
average remaining lives are 2.17 years with weighted average exercise prices of
$.46.

Had compensation cost for the Company's stock options issued been determined
based on the fair value at the grant date for awards consistent with the
provisions of Statement 123, the Company's net loss and loss per share would
have been increased to the pro forma amounts indicated below:

June 30,
-------------------------
2000 2001
----------- ---------

Net loss - as reported $(8,265,180) $ -
Net loss - pro forma $(9,777,529) $ -
Basic loss per share - as reported $ (0.11) $ -
Basic loss per share - pro forma $ (0.12) $ -

Note 11 - Non-Cash Investing and Financing Activities

During the year ended June 30, 2000:

The Company acquired net assets of $86,230 and recorded goodwill in the amount
of $213,770 by issuing a note for $300,000 in connection with a business
acquisition.

The Company acquired the outstanding common stock of a business by issuing
2,041,445 shares valued at $2,697,397 and having previously advanced cash of
$590,000.

During the year ended June 30, 2001:

The Company returned customer lists with a net value of $775,000 and received in
consideration the cancellation of debt of $510,000 and accrued interest of
$179,197 associated with the lists and received a note receivable of $85,803.

The Company converted $81,499 of accrued interest into the promissory note
payable.

Note 12 - Operating Leases

The Company leases office space under operating lease agreements, which provide
for aggregate monthly payments of $11,274 and expire through March 2003.

Year Ending June 30, Amount
-------------------- -----------

2002 $ 188,494
2003 117,548
----------

$ 306,042
==========

Rent expense under these operating leases totaled $69,229 and $139,321 during
the years ended June 30, 2000 and 2001, respectively.

Note 13 - Commitments and Contingencies

Commitments

Employment Agreements

During the year ended June 30, 2000, the Company entered into an employment
agreement with one key employee. This employment agreement runs over a
three-year period starting in October of 1999 and provides for an annual salary
of $125,000. If the Company terminates the agreement without cause it would be
obligated to pay all remaining amounts under the remaining terms of the
contract.

In August of 2000, the Company entered into additional employment agreements
with other key employees. Under these agreements, the employees are paid an
annual salary ranging from $100,000 to $120,000, receive bonuses of $100,000
each, which have been pre-paid and are earned prorata over the two-year terms of
the agreements, and the agreements are subject to termination with cause (as
defined). If the employee terminates the employee's agreement without cause or
if the Company terminates the agreement with cause, the employee would be
obligated to pay all remaining amounts due under the remaining terms of the
agreement, including a prorata share of the prepaid bonuses.

Consulting Agreements

The Company also has consulting agreements with two individuals, which provide
for annual compensation of $175,000 and $120,000 and have terms of four and
three years expiring in June 2003 and November 2001, respectively.

Note 14 - Subsequent Events

Subsequent to year end, various individual and corporate stockholders of
Cognigen Networks, Inc. have voluntarily surrendered to the Company, stock
options to purchase 24.4 million shares of the Company's common stock. The
cancellation of these options reduces the Company's option overhang by 75.3%.
The surrendered options have an exercise price of $0.46 per share, and would not
expire until August 24, 2004. The Company originally granted a total of 32.4
million of these options in August 1999. With the surrender by these
stockholders, there remain outstanding options of 8.0 million shares at $0.46
that can be exercised until August 2004.

On March 15, 2001, the Company's stockholders voted to authorize the Board of
Directors, when it deemed appropriate, to effectuate a one-for-seven, a
one-for-eight or a one-for-nine reverse split of the Company's common stock. On
September 12, 2001, the Board of Directors followed the mandate of the
stockholders and determined that the exact reverse split should be one-for-eight
(1:8). The Board of Directors adopted the reverse split at this time as part of
a comprehensive plan that includes seeking increased equity investment, and a
future application for listing of the Company's securities on a major stock
exchange.

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

On March 17, 2000, we engaged Ehrhardt Keefe Steiner & Hottman,
P.C., as our principal independent accountants in place of Daniel
Jankowski. On March 17, 2000, we dismissed Daniel Jankowski. The
reports of Daniel Jankowski on our financial statements for the two
fiscal years ended June 30, 1999, contain no adverse opinion or
disclaimer of opinion, nor were such reports modified as to uncertainty,
audit scope or accounting principles. There were no disagreements during
our two fiscal years ended June 30, 1999, or any interim period
subsequent thereto between us and Daniel Jankowski on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which, if not resolved to the satisfaction of
Daniel Jankowski, would have caused Daniel Jankowski to make reference in
its reports to the subject matter of such disagreements. The decision to
change accountants was approved by our Board of Directors.

PART III

The information required by Items 9 through 12 is incorporated by
reference to our definitive proxy statement that we plan to file in
connection with our next Annual Meeting of Shareholders involving the
election of directors. We plan to file the definitive proxy statement
with the Commission on or before October 28, 2001.

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

(a) Exhibits and Index of Exhibits.

EXHIBIT NO. DESCRIPTION AND METHOD OF FILING
----------- --------------------------------

2.1 Stock Purchase and Asset Acquisition
Agreement by and among Inter-American
Telecommunications Holding Corporation,
Silverthorne Production Company, et al.
(incorporated by reference to Exhibit 2 to
our Current Report on Form 8-K/A dated
August 29, 1999).

2.2 Amendment dated December 27, 1999, to Stock
Purchase and Asset Acquisition Agreement by
and among Inter-American Telecommunications
Holding Corporation, Silverthorne
Production Company et al. (incorporated by
reference to Exhibit 2 to our Current
Report on Form 8-K dated March 6, 2000).

2.3 Stock for Stock Exchange Agreement dated
April 14, 2000, by and among the
shareholders of Aquila International
Telecommunications, Inc. and Silverthorne
Production Company (incorporated by
reference to Exhibit 2 to our Current
Report on Form 8-K, dated May 2, 2000).

3.1 Articles of Incorporation filed on May 6, 1983
(incorporated by reference to Exhibit 3.1 to our
Annual Report on Form 10-KSB for the year ended
June 30, 2000.)

3.2 Articles of Amendment to Articles of Incorporation
filed on June 23, 1988 (incorporated by reference to
Exhibit 3.2 to our Annual Report on Form
10-KSB for the year ended June 30, 2000.)

3.3 Articles of Amendment to the Articles of
Incorporation filed on July 12, 2000
(incorporated by reference to Exhibit 3.3
to our Annual Report on Form 10-KSB for the
year ended June 30, 2000.)

3.4 Articles of Amendment to the Articles of
Incorporation filed on March 16, 2001
(incorporated by reference to our Quarterly
Report on Form 10-QSB for the quarter ended
March 31, 2001.)

3.5 Bylaws as amended through December 8, 1999
(incorporated by reference to Exhibit 3.1
to our Form 10-Q for the quarter ended
December 31, 1999.)

10.1 Employment Agreement dated August 1, 2000,
between Cognigen Networks, Inc. and Jimmy L.
Boswell. (incorporated by reference to Exhibit 10.1
to our Annual Report on Form 10-KSB, for
the year ended June 30, 2000.)

10.2 Employment Agreement dated August 1, 2000,
between Cognigen Networks, Inc. and David
G. Lucas. (incorporated by reference to
Exhibit 10.2 to our Annual Report on Form
10-KSB for the year ended June 30, 2000.)

10.3 Employment Agreement dated October 5, 1999,
between Cognigen Networks, Inc. and Darrell
H. Hughes. (incorporated by reference to
Exhibit 10.3 to our Annual Report on Form
10-KSB for the year ended June 30, 2000.)

10.4 Option to Sell Accounts Agreement dated
October 6, 2000, between Cognigen Networks,
Inc. and JVTEL. (incorporated by reference
to Exhibit 10.4 to our Annual Report on
Form 10-KSB for the year ended June 30,
2000.)

10.5 Stock Purchase and Asset Sale Agreement
dated November 4, 1998, between
Inter-American Telecommunications
Corporation and Combined Telecommunications
Consultancy, Ltd. (incorporated by
reference to Exhibit 10.5 to our Annual
Report on Form 10-KSB for the year ended
June 30, 2000.)

10.6 Stock Purchase and Asset Sale Agreement
dated July 1, 1999, between Inter-American
Telecommunications Corporation and Cognigen
Corporation. (incorporated by reference to
Exhibit 10.6 to our Annual Report on Form
10-KSB for the year ended June 30, 2000.)

10.7 Form of Option to Purchase Common Stock
(incorporated by reference to Exhibit 10.7
to our Annual Report on Form 10-KSB for the
year ended June 30, 2000.)

10.8 2001 Incentive and Nonstatutory Stock
Option Plan (incorporated by reference to
Exhibit 10 to our Quarterly Report on Form
10-QSB for the quarter ended March 31,
2001.)

10.9 Promissory Note dated March 31, 2001 in the
amount of $85,803.00 from JVTEL to Cognigen
Networks, Inc.

16 Letter from Daniel Jankowski (incorporated by
reference to Exhibit 16.0 to our Current Report
on Form 8-K dated March 21, 2000)

21 Subsidiaries

(b) Reports on Form 8-K.

There were no Current Reports on Form 8-K filed by us during the
last quarter of the period covered by this report.

SIGNATURES

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

Dated: September 26, 2001
COGNIGEN NETWORKS, INC.

/s/ Darrell H. Hughes
----------------
Darrell H. Hughes, Chairman of
the Board, President, and Chief
Executive Officer

/s/ David G. Lucas
--------------
David G. Lucas
Treasurer, Chief Financial
Officer and Principal
Accounting Officer

In accordance with the Exchange Act, this report has been signed by
the following persons on behalf of the registrant and in the capacities
and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ Troy D. Carl
-----------------
Troy D. Carl Director September 26, 2001

/s/ Darrell H. Hughes
----------------------
Darrell H. Hughes Director September 26, 2001

/s/ David L. Jackson
---------------------
David L. Jackson Director September 26, 2001

/s/ David G. Lucas
-------------------
David G. Lucas Director September 26, 2001

/s/ Christopher R. Seelbach
----------------------------
Christopher R. Seelbach Director September 26, 2001