form_10ksb-063003

10KSB 1 form_10ksb-063003.htm form_10ksb-063003

U.S. 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, 2003

[ ] 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 (I.R.S. Employer
of incorporation or organization Identification No.)

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

Issuer's telephone number:
(206) 297-6151
-------------------------------------
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: $10,916,272

The aggregate market value of the voting and non-voting common equity held
by non-affiliates at September 17, 2003, computed by reference to the last sale
price of $.53 per share on the OTC Bulletin Board, was $3,841,478.

The number of shares outstanding of each of the issuer's classes of common
equity on September 17, 2003, was 9,553,972.

Documents Incorporated by Reference
The information required by Items 9 through 12 and Item 14 is incorporated
by reference to our definitive proxy statement or definitive information
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 or definitive information statement with the Commission on or
before October 28, 2003.

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 Operations
Item 7. Financial Statements
Item 8. Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 8A. Controls and Procedures

PART III

Item 13. Exhibits and Reports on Form 8-K

* The information required by Items 9 through 12 and Item 14 is incorporated by
reference to our definitive proxy statement or definitive information 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 or definitive information statement with the Securities and Exchange
Commission on or before October 28, 2003.

PART I

Forward Looking Statements.

The discussion in this report contains forward looking statements,
including, without limitation, statements relating to us and our wholly-owned
subsidiary. 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 three divisions. The first two divisions consist of
direct and indirect sales of telecommunications and personal technology
services. The third division is our service delivery division. The first two
divisions are multifaceted sales and marketing organizations, which utilize 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 independent agents, we have sold directly or facilitated the sale of third
party products and services to customers and subscribers worldwide. Domestic and
international long distance services make up a major portion of our sales with
prepaid calling cards and paging, wireless communications, computers and
Internet-based telecommunications products and other significant products in our
sales mix. 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, UUNet, Global
Crossing, Sprint, Verizon, TalkAmerica and Speakeasy. Our operations are
dependent on our affiliations with third party providers of the products and
services that our agents sell. These third party providers own the rights to
sell these products and services. Our ability to offer these products and
services is dependent on our agreements with providers being renewed and not
terminated. The non-renewal or termination of a substantial number of these
agreements would have a material adverse effect on our financial condition and
results of operations. 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. A key market
differentiator is our ability to private-label the service delivery components,
enabling our partners to build their brand. This self-replicating capability
enables our partners to expand their service offering, while outsourcing the
infrastructure to us. The third division is our wholly owned subsidiary,
Cognigen Switching Technologies, Inc., or 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 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 creates 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 3,000 to 4,000 agents each
month. Our revenue is dependent on sales by our independent agents. The failure
of these agents to achieve sustained sales will materially adversely affect our
financial condition and results of operations.

We use self replicating web page technology to run our web-based
operations. If another technology becomes the preferred industry standard, we
may be at a competitive disadvantage which, in turn, may require us to make
changes at substantially increased costs. If our technology becomes obsolete at
some time in the future and we are unable to change to an alternate technology
in a cost effective manner it could materially adversely affect our financial
conditions and results of operations.

In April 2003, we agreed to provide up to $448,093 in a series of loans
over a period of nine months to InTandem Communications, Corp. Each loan is to
bear interest at the rate of 7.5% per annum and the loans are to be secured by a
pledge of the outstanding InTandem common stock. After providing the first four
loans, on 30 days written notice, we may cancel our obligation to provide
further loans should InTandem fail to attain a performance level of at least 75%
of certain revenue and profit and loss projections.

If we make all of the loans, we have the option to convert the loans into
49% of InTandem's outstanding common stock at any time not later than 12 months
after the last payment on all loans has been received by us. If we do not
convert the promissory notes into InTandem common stock, InTandem's obligation
to repay the promissory notes will be discounted by a value equal to 25% of the
net income realized by us from the sale of our services through the 1+ long
distance Cognigen Resale Division ("CRD"). Further, if we discontinue further
lending due to InTandem's failure to meet 75% of InTandem's revenue and profit
and loss projections, then the principal and interest of each promissory note
will be due from InTandem in 12 equal monthly installments (discounted by the
formula above) commencing one year after the last promissory note is issued.
During the time that we are the (i) holder of an unpaid InTandem promissory
note, (ii) an InTandem shareholder or (iii) have the right to acquire InTandem's
common stock, we have the right to designate two of the five directors on
InTandem's Board of Directors. Further, the InTandem Board of Directors has to
approve every transaction by a vote of not less than 80% of InTandem's directors
and a quorum of the InTandem Board of Directors has been established as four.

If we have exercised our conversion rights on or before April 1, 2005, or
the date our conversion rights expire, whichever is later, but no earlier than
April 1, 2004, we shall have the right to acquire all the outstanding common
stock of InTandem. The price that we are required to pay for such common stock
is equal to four times the gross revenue generated by InTandem for the last
three months prior to the acquisition of the InTandem common stock by us,
multiplied by 51%.

As a part of the transaction, we organized CRD. CRD is under the managerial
authority and guidance of Anthony T. Sgroi, who is the President of CRD and our
Chief Operating Officer. Mr. Sgroi reports directly to our Chief Executive
Officer and Board of Directors. In addition, InTandem has agreed to provide
consulting services at all levels to assist the CRD to fulfill its mission and
responsibilities through the overall transition of a substantial part of our
sales production from master agency status to proprietary resale revenue. In
this regard, we have become, have applied or are in the process of applying to
become licensed as a reseller in 47 states. Additionally, we are certified as a
local provider in three states, and have applied for local certification in six
additional states as well as for our class B license in Canada.

If a third party introduces a large affiliated group of subscribers to us
that requires the specialized product and service management of InTandem and we
agree to pay a gross revenue commission to that party and its sponsoring entity
at the level of a super-agency, we have agreed to pay InTandem a bonus of a 15%
share of the total commission payable to the super-agency and sponsoring entity.

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
7,000,000 potential buyers. As in any program of this nature, actual
participation and buying rates will be a small subset of the target audience,
but should be higher than non-affiliated web surfers.

CST is licensed by the Federal Communications Commission, or FCC, as a
global facilities-based/global resale services national and international
carrier. CST provides our customer base and other direct clients with a 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 52,000 individual accounts as of June
30, 2003. CST, at its headquarters in San Luis Obispo, California, has three
fully programmable Cisco-VCO-4K multi-protocol circuit switches, with a combined
capability of more than 60 million minutes of traffic per month. 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.

The Company had commissions from two customers that generated 22% of total
revenue for the year ended June 30, 2003.

Competition

We compete with all of the companies for whom we sell products as an agent,
with a number of companies that are network marketing telecommunication
companies, with switching companies and with all providers who retail
telecommunications and personal communications products over the Internet.

The markets in which we compete are characterized by increasing
consolidation. We cannot predict how industry consolidation will affect our
competitors and we may not be able to compete successfully in an increasingly
consolidated industry. Additionally, because we may be dependent on strategic
relationships with third parties in our industry, any consolidation involving
these parties could reduce the demand for our products and otherwise harm our
business prospects. Our competitors that have large market capitalizations or
cash reserves are also better positioned than we are to acquire other companies,
including our competitors, thereby obtaining new technologies or products that
may displace our product lines. Any of these acquisitions could give our
competitors a strategic advantage that would materially and adversely affect our
business, financial condition and results of operations.

In addition, many of our competitors have much greater name recognition and
have a more extensive customer base, broader customer relationships, significant
financing programs, and broader product offerings than we do. These companies
can adopt aggressive pricing policies and leverage their customer bases and
broader product offerings to gain market share.

We expect that competitive pressures could result in price reductions,
reduced margin and loss of market share, which could materially and adversely
affect our business, financial condition and results of operations.

The industries in which our agents resell have severally experienced a
higher rate of customer turnover. The rate of customer turnover is attributable
to several factors including, the non-use of customer contracts, affordability,
customer care concerns and other competitive factors. Our strategy to address
customer turnover may not be successful or the rate of customer turnover may be
unacceptable. Price competition and other competitive factors could also cause
increased customer turnover. A high rate of customer turnover could have a
material adverse affect on our competitive position and results of operations.

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 Federal Communications Commission ("FCC") as a Section 214,
domestic and international facilities based carrier. In addition, we are
regulated by 12 state commissions as a "Competitive Local Exchange Carrier."

The markets for the products and services that we sell are characterized by
a significant number of laws, regulations and standards, including those
promulgated by the FCC. While we believe that our services comply with all
current governmental laws, regulations and standards, we cannot assure you that
we will be able to continue to do so in the future.

Our customers may also require, or we may otherwise deem it necessary or
advisable, that we modify our services to address anticipated changes in the
regulatory environment. Failure of our services to comply, or if we experience
delays in compliance, with the various existing, anticipated, and evolving
industry regulations and standards could adversely affect sales of our existing
and future products. Moreover, the enactment of new laws or regulations, changes
in the interpretation of existing laws or regulations or a reversal of the trend
toward deregulation in the telecommunications industry, could have a material
adverse affect on our business, financial condition and results of operations.

Employees

As of June 30, 2003, we had 31 employees, all of whom are full-time, based
in our offices and facilities in Seattle, Washington, Rochester, New York and
San Luis Obispo, California.

Item 2. Description of Property

We lease approximately 3,457 square feet of office space at 7001 Seaview
Avenue, N.W., Suite 210, Seattle, WA 98117, pursuant to a month-to-month lease
that currently requires monthly rental payments of approximately $4,810. We also
lease approximately 1,287 square feet of office space at 3495 Winton Place,
Building E, Suite 270, Rochester, New York 14623, pursuant to a lease that will
terminate on June 30, 2005, and that currently requires monthly rental payments
of approximately $1,180. CST leases approximately 3,218 square feet of office
space at 3220 South Higuera Street, Suite 103, San Luis Obispo, CA 93401,
pursuant to a lease that will terminate May 31, 2004, and that currently
requires monthly rental payments of approximately $6,582.

Item 3. Legal Proceedings.

On December 17, 2002, we filed a lawsuit in the Superior Court for the
State of Washington, King County, WA (Case No. 02-2-35718-1 SEA) against
eMaxDirect LLC, Troy D. Carl and William A. Bergfeld III, to obtain an
injunction to prevent them from violating certain provisions of the Training
Services Framework Agreement with us that we had previously terminated.

On December 17, 2002, we also filed a lawsuit in the District Court, City
and County of Denver, Colorado (Case No. 02CV8684) against Messrs. Carl,
Bergfeld, Mark Cranfill, Kris Wilson and Pam Lawson, to obtain injunctions
restraining them from violating certain provisions of the Independent
Representative Agreement with us that we had previously terminated.

On January 28, 2003, Messrs. Carl, Bergfeld, Cranfill and Wilson, Ms.
Lawson and eMaxDirect LLC filed counterclaims in the lawsuit that we had filed
in the District Court, City and County of Denver, Colorado, requesting
injunctive relief preventing us from misappropriations and use of eMaxDirect
LLC's trade secrets and business values; requesting injunctive relief enjoining
us from allegedly breaching the no hire clause of the agreement with eMaxDirect
LLC; alleging breach of the agreements that we had with Messrs. Carl, Bergfeld,
Cranfill and Wilson and Ms. Lawson; alleging breach by us of the covenant of
good faith and fair dealing; alleging wrongful termination of our employment of
Mr. Carl; alleging breach by us of the Colorado Wage Act by failing to pay
commissions to Messrs. Bergfeld, Cranfill and Wilson and Ms. Lawson; alleging
unjust enrichment on behalf of individual counterclaimants against us; alleging
aiding and abetting breach of fiduciary duty on behalf of eMaxDirect, LLC
against us; alleging promissory estoppel on behalf of Mr. Carl against us;
alleging fraud on behalf of us in connection with the termination of Mr. Carl as
our employee; alleging conversion and/or aiding or abetting conversion on behalf
of eMaxDirect LLC against us and requesting declatory judgment as to the
applicable agreements between us and the individual defendants.

In March 2003, the Superior Court for the State of Washington, King County
issued a preliminary injunction enjoining eMaxDirect from using any of our
source codes it may have acquired, any "Best Rate Calculator" or agent
compensation calculation formula, any web-page technology, or any agent data it
may have obtained, collected or stored in any medium, during the term of the
eMaxDirect contract, including such information collected by the principals of
eMaxDirect before or during the term of the contract.

Also, in March 2003, Messrs. Carl, Bergfeld, Cranfill and Wilson and Ms.
Lawson filed a Motion for Joinder and we filed Motions to Compel Arbitration of
Counterclaims and against the Motion for Joinder in the District Court, City and
County of Denver, Colorado. On May 29, 2003, the District Court, City and County
of Denver denied the Motion filed by Messrs. Carl, Bergfeld, Cranfill and Wilson
and Ms. Lawson and granted our Motions. The District Court, City and County of
Denver, Colorado also set a hearing date on the Company's injunction for June 12
and 13, 2003.

On June 12, 2003, Messrs. Carl, Bergfeld, Cranfill and Wilson and Ms.
Lawson entered into a Stipulation with us pursuant to which they agreed to all
we had requested in the lawsuit that we had filed in the District Court, City
and County of Denver, Colorado.

In the lawsuit in the District Court, City and County of Denver, Colorado,
the Court ordered injunctive relief stands against the Defendants and no claims
are asserted or pending against us in the proceeding.

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, 2003.

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
"CGNW." The following table sets forth, for the periods indicated, the high and
low bid price quotations for the common stock as reported by the National
Quotation Bureau, LLC and or other market resources. Such quotations reflect
inter-dealer prices, but do not include retail mark-ups, mark-downs or
commissions and may not necessarily represent actual transactions. On October
15, 2001, each share of our outstanding common stock was reverse split on a one
for eight basis.

High Bid Low Bid
------------------- ----------------------
Quarter ended June 30, 2003 $0.51 $0.36
Quarter ended March 31, 2003 0.51 0.36
Quarter ended December 31, 2002 0.68 0.19
Quarter ended September 30, 2002 0.43 0.32
Quarter ended June 30, 2002 0.40 0.40
Quarter ended March 31, 2002 0.62 0.62
Quarter ended December 31, 2001 0.91 0.76
Quarter ended September 30, 2001 0.15 0.09

As a result of our common stock not being quoted on a national 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.

Historically, our common stock has not traded in high volumes. An active or
liquid trading market in our common stock may not develop or, if it does
develop, it may not continue.

The market price for our common stock could be subject to significant
fluctuations in response to variations in quarterly operating results,
announcements of technological innovations or new products and services by us or
our competitors, and our failure to achieve operating results consistent with
securities analysts' projections of our performance.

The stock markets have experienced extreme price and volume fluctuations
and volatility that have particularly affected the market price of many emerging
growth and development stage companies. Such fluctuations and volatility have
often been unrelated or disproportionate to the operating performance of such
companies. Factors such as announcements of the introduction of new or enhanced
services or related products by us or our competition, announcements of joint
development efforts or corporate partnerships in the telecommunications market,
market conditions in the technology, telecommunications and other emerging
growth sectors, and rumors relating to us or our competitors may have a
significant impact on the market price of our common stock.

As of August 30, 2003, there were approximately 1,323 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.

The following is a table with information regarding our equity compensation
plans as of June 30, 2003:

Plan category Number of Weighted-average Number of
securities to be exercise price of securities
issued upon outstanding remaining
exercise of options, warrants available for
outstanding and rights future issuance
options, warrants (b) under equity
and rights compensation plans
(a) (excluding
securities
reflected in
column (a))
(c)
-----------------------------------------------------------------------------------
Equity compensation 366,000 $0.40 259,000
plans approved by
security holders
-----------------------------------------------------------------------------------
Equity compensation 2,630,000 $1.83 -
plans not approved
by security holders
-----------------------------------------------------------------------------------
Total 2,996,000 $1.66 259,000
-----------------------------------------------------------------------------------

On February 5, 2003, we issued 400,000 shares of our common stock, two year
warrants to purchase 150,000 shares of our common stock at an exercise price of
$.50 per share and five year warrants to purchase 350,000 shares of our common
stock at an exercise price of $.75 per share to Stanford Financial Group
Company, Inc. ("Stanford Financial") in exchange for Stanford Financial's
approximate 32% interest in American Internet Communications.

The shares of common stock and warrants were issued in reliance upon the
exemption from registration contained in Section 4(2) of the Securities Act of
1933, as amended. The holder of these shares and warrants had available to it
full information concerning us and the certificates representing the shares and
warrants have a legend prohibiting transfer unless the shares and warrants are
registered under the Securities Act, or the transfer is exempt from the
registration requirements thereof. No underwriters were involved in this
transaction.

On October 17, 2002 we issued 500,000 shares of our 8% Convertible Series A
Preferred Stock ("Preferred Stock") to Stanford Venture Capital Holdings, Inc.
for $500,000. Each share of the 8% Convertible Series A Preferred Stock is
convertible, at the option of the holder, into one share of our common stock for
a period of five years. At that time, the Preferred Stock is automatically
converted to common stock. The Preferred Stock does not have voting rights and
has a liquidation preference of $1.00 per share. In conjunction with the
issuance of the Preferred Stock, we issued 64,516 shares of our common stock to
unaffiliated third parties as a finders' fee valued at $20,000.

The shares of 8% Convertible Series A Preferred Stock and the shares of
common stock issued as a finder's fee were issued in reliance upon the exemption
from registration contained in Section 4(2) of the Securities Act. The holders
of these shares 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 underwriters were involved in
this transaction.

In December 2002, April 2003 and June 2003 we granted stock options to
purchase 30,000 shares, 25,000 shares and 30,000 shares of our common stock, at
$0.52, $0.38 and $0.39 per share, respectively, to our independent directors.
The options vest immediately, are exercisable at the market prices on the dates
of grant and expire in five years. We do not consider the grants of these
options to constitute sales.

During the year ended June 30, 2003, the Board of Directors granted options
to employees to purchase 281,000 shares of the Company's common stock that vest
at varying times between immediately and three years, are exercisable at between
$.36 to $.44 per share and expire in five years. We do not consider the grants
of these options to constitute sales.

In February 2003, we granted an option to purchase 25,000 shares of our
common stock at an exercise price of $0.48 per share to a consultant for prior
services rendered. The option vests over two years, is exercisable at the market
price on the date of grant and expires in five years.

The option was issued in reliance upon the exemption from registration
contained in Section 4(2) of the Securities Act. The holder of this option had
available to him full information concerning us and the certificate representing
the option has a legend prohibiting the transfer of the shares of common stock
underlying the option unless the transfer is registered under the Securities Act
or the transfer is exempt from the registration requirements thereof. No
underwriters were involved in this transaction.

In April 2003, we issued 35,000 shares of our common stock to one person in
connection with him becoming one of our directors. The shares of common stock
were issued in reliance upon the exemption from registration contained in
Section 4(2) of the Securities Act of 1933, as amended. The person to whom the
shares were issued had available to him full information concerning us and the
certificate representing the shares has a legend prohibiting transfer unless the
shares are registered under the Securities Act or the transfer is exempt from
the registration requirements thereof. No underwriters were involved in this
transaction.

In April 2003, we granted an option to purchase 25,000 shares of our common
stock at an exercise price of $0.40 per share to one person for prior services
rendered. The option vested immediately, is exercisable at the market price on
the date of grant, and expires in five years.

In April 2003, as part of the Funding Agreement with InTandem, we granted
to the principals of InTandem options to purchase up to 180,000 shares of our
common stock. The exercise price of the options is $0.36 per share, which was
the market price on the date of grant, and the options expire in five years. The
actual number of options to purchase our common stock is based on the
achievement of certain objectives outlined in the Funding Agreement and could be
as low as options to purchase zero shares and as high as options to purchase
180,000 shares. The vesting periods of these options ranges from one year to
three years.

These options were issued in reliance upon the exemption from registration
contained in Section 4(2) of the Securities Act. The holders of these options
had available to them full information concerning us and the certificates
representing the options have a legend prohibiting the transfer of the shares of
common stock underlying the option unless the transfer is registered under the
Securities Act or the transfer is exempt from the registration requirements
thereof. No underwriters were involved in this transaction.

We also agreed to grant non-qualified stock options to the same persons to
purchase all or any part of an aggregate number of shares of our common stock
(up to a maximum of 90,000 shares each) that is determined (i) by deducting from
the total amount of our revenue derived for the period between April 1, 2003 and
April 1, 2004, from the sales of our 1+ resale products, the revenue we received
from the sales thereof as of April 1, 2003, (ii) multiplying that amount by 6%
(from sales of 1+ resale products attributable to us) and 12% (from sales of 1+
resale products attributable to InTandem), and (iii) dividing the total
percentage result by the last sale price of a share of our common stock as of
April 1, 2004. The exercise price will be equal to the last price of a share of
our common stock as of April 1, 2004. The options will terminate on March 31,
2009, and vest quarterly over a three-year period commencing April 1, 2004. If
an optionee terminates employment, that person's option may no longer be
exercised after 12 months after the optionee ceases to be employed by us.

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

Overview

We are an Internet and relationship enabled marketer of long distance
telephone and personal communications services and a licensed, facilities based
interstate and international long distance carrier. We earn revenue in two ways.
First, we earn commissions from approximately thirty vendors whom we represent
on our agent web sites via contractual agreements. Second, we earn revenue from
sales of telecommunications services used by our own customers.

The majority of our revenue is derived from vendors, agents and affinity
groups for sales of 1+ long distance, prepaid calling cards, customized
applications services, conference calling, dedicated high-speed connectivity,
and internet access.

We have made a major strategic transition in our business profile and
delivery of products and services over the past three months. In addition to
being historically successful at representing and selling the services and
products of agents and vendors, we are now selling multiple branded products
whereby the customer and account are owned by us. The most significant impact of
this strategic transition is that by billing our owned customer accounts, we
generate approximately five times as much revenue compared to commission revenue
from vendors. Since June 30, 2003, approximately 30% of our orders are from our
own accounts and 70% from commission dollars received from vendors versus
approximately 10% of the orders generated from our own accounts for the year
ended June 30, 2003.

Through the acquisition of multiple state licenses, billing capability, and
new distribution channels, we can now grow revenue, maintain closer contact to
our customers, and control bottom line retention and contribution to a greater
degree. At this time, we are adding to our proprietary account base at a rate of
approximately 3,000 per month. For each 1,000 new owned customer accounts, we
realize approximately $11,000 to $15,000 in billed revenue per month.

See additional discussion of liquidity and capital resuorces below.

Results of Operations

Year Ended June 30, 2003 Compared to Year Ended June 30, 2002

Total revenue for the year ended June 30, 2003 was $10,916,272 compared to
$11,075,261 for the year ended June 30, 2002. Commission revenue was $6,918,479
for 2003 compared to $7,089,784 for the prior year. Telecommunications revenue
was $3,988,343 for 2003 as compared to $3,984,973 for the prior year.

Commission revenue for 2003 is comparable to that of 2002 because of an
increase in the average revenue per account of products sold offset by a
decrease in active accounts and a decrease in revenue from the sales of
marketing products. Telecommunications revenue for 2003 is comparable to that of
2002 because of an increase in CST's switched customer accounts from 33,988 as
of June 30, 2002 to 52,115 as of June 30, 2003, a 53% increase, offset by an
average decrease in switched revenue per account of 46%. This decrease in
average switched revenue per account reflects downward market pressure in the
retail pricing of our switched telecommunications products, which CST is trying
to offset with increased activity and better pricing with its carriers.

Commission expense related to commission revenue decreased from $4,570,835
for the year ended June 30, 2002 to $3,903,093 for the year ended June 30, 2003,
a decrease of 15%. This decrease is primarily attributable to the decrease in
commission expense as a percentage of commission revenue, which decreased 8% to
56% for 2003 compared to 64% the prior year. This decrease results in large part
from the change in estimate related to our method of estimating commission
expense, which occurred in the third quarter of fiscal 2003. Had the payments to
a shareholder described in Note 7 to the Consolidated Financial Statements been
recorded as commission expense instead of a reduction of deferred commissions
payable on the balance sheet, commission expense would have been higher by
$535,402. We do not anticipate recording these payments as commission expense
until sometime in fiscal years 2006 or 2007.

Telecommunications operating expenses, primarily carrier costs, decreased
$191,713 during 2003 compared to 2002. These expenses as a percentage of their
respective revenue decreased from 58% in 2002 to 53% in 2003. These decreases
are primarily attributable to reductions in pricing with carriers.

Selling, general and administrative expenses decreased $133,600 for 2003
compared to 2002, or 3%. The majority of the decrease is attributable to
decreases in travel and outside consulting expenses, which decreased 37% from
the prior year. These decreases were offset partially by increases of 26% in
legal and professional fees. Approximately $90,000 of the legal fees increase
results from activity surrounding the eMax Direct LLC lawsuit described in Note
8 to the Consolidated Financial Statements and Item 3. Legal Proceedings
included as part of this Annual Report on Form 10-KSB.

Depreciation and amortization of $134,587 for 2003 decreased slightly from
$145,905 for 2002.

Income from operations of $453,340 for the year ended June 30, 2003 versus
a loss from operations of $392,044 for the year ended June 30, 2002 resulted
from the reduction in operating expenses as described above.

Interest expense increased for the year ended June 30, 2003 to $51,933 from
$33,757 for the year ended June 30, 2002.

Seasonality and Economic Conditions

Our revenue and sales are not affected by seasons of the year.

Inflation

We do not believe that inflation had a material impact on our results of
operations for the fiscal years ended June 30, 2003 or 2002.

Liquidity and Capital Resources

We have historically funded our operations primarily from sales of
securities and operations. At June 30, 2003 we had cash and cash equivalents of
$412,992 and negative working capital of $897,674. Cash provided by operations
during the year ended June 30, 2003 was $113,085. The majority of this was
attributable to the net income for 2003 of $401,407, before adjustments for
non-cash items of $277,576, offset by a decrease in commissions payable of
$569,954.

Cash used in investing activities of $219,940 included loans of $172,752
under the terms of the Funding Agreement with Intandem and $47,188 for property
and equipment. Cash provided by financing activities of $37,130 primarily
included net proceeds from the issuance of preferred stock of $470,000 and the
increase in the note payable of $119,490 offset by the payment of deferred
commissions of $535,402 and payment on the note payable of $25,000.

We have a note payable of $254,389 at June 30, 2003. As the note is in
default, the interest, which was at 12%, has been increased to 14% and is
compounded daily. We are currently negotiating with the holder of the note
payable to arrange for a new note with terms commensurate with our current
operating activities. The note payable is secured by the accounts, as defined,
and other assets of CST. As a result, if we can not arrange for a new note
acceptable to us, there is the risk of foreclosure on the accounts and other
assets.

As of June 30, 2003, we had available cash of $412,992. We anticipate that
we will need additional financing in the future to expand unless we realize
sufficient cash flow from our current operations. We have suffered losses in the
past and there are no assurances that we will realize a sufficient amount of
cash flow from our current operations to expand. If we do not, we will have to
reduce or discontinue our plans for expansion.

Cash generated from operations and financing activities was sufficient to
meet our working capital requirements for the year ended June 30, 2003, but may
not be sufficient to meet our working capital requirements for the foreseeable
future. 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 our operations. As a result of this search, during the year ended June
30, 2003, we sold 500,000 shares of preferred stock for net proceeds of
$470,000. There can be no assurance we will be able to secure additional debt or
equity financing or that operations will produce adequate cash flow to enable us
to meet all of our future obligations. However, we believe that we will be
successful in producing sufficient cash flow from all collective sources to
continue for at least the next twelve months.

Critical Accounting Policies

We have identified the policies below as critical to our business
operations and the understanding of our results of operations. In the ordinary
course of business, we have made a number of estimates and assumptions relating
to the reporting of results of operations and financial condition in the
preparation of our financial statements in conformity with accounting principles
generally accepted in the United States. Actual results could differ
significantly from those estimates under different assumptions and conditions.
We believe that the following discussion addresses our most critical accounting
policies, which are those that are most important to the portrayal of our
financial condition and results of operations and require our most difficult,
subjective, and complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain.

Our critical accounting policies are as follows:

o commissions receivable;
o goodwill;
o valuation of long-lived assets;
o commissions payable; and
o revenue recognition.

Commissions Receivable

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

An allowance for doubtful accounts of $170,457 at June 30, 2003 has been
established by us to provide for potential uncollectible accounts and is deemed
to be adequate by management based on historical results.

Goodwill

The excess of the purchase price over net assets acquired by us from unrelated
third parties is recorded as goodwill. Goodwill resulted from the acquisition of
CST. In July 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) Nos. 141 and 142, "Business Combinations" and "Goodwill and Other
Intangible Assets." SFAS No. 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method. Under the
guidance of SFAS No. 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. There is no
impairment of goodwill considered necessary as of June 30, 2003.

Valuation of Long-Lived Assets

We assess valuation of long-lived assets in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be disposed of". We periodically evaluate 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 Payable

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

Revenue Recognition

Marketing Commissions

Marketing commission income from the sale of long-distance telephone, personal
communication devices and marketing products is recognized at the time of sale.

Telecommunications

Calling card and pin revenue is recorded when the calling cards and pins are
shipped. Our policy is to delay shipment of calling cards and pins 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.

Long distance phone service revenue is recorded when services are rendered.

Prepaid long distance phone service is initially recorded as deferred revenue
and is recognized as the prepaid minutes are used by the customer.

Recently Issued Accounting Pronouncements

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value when the liability is incurred. SFAS No.
146 is effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The adoption of this
statement had no material impact on the Company's consolidated financial
statements.

In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain Financial
Institutions" SFAS No. 147 amends FASB Statement Nos. 72 and 144 and FASB
Interpretations No. 9. The adoption of this statement had no material impact on
the Company's consolidated financial statements.

In November 2002, the FASB published interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". The Interpretation expands on the
accounting guidance of Statement Nos. 5, 57, and 107 and incorporates without
change the provisions of FASB Interpretation No. 34, which is being superseded.
The Interpretation elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The initial recognition and
initial measurement provisions apply on a prospective basis to guarantees issued
or modified after December 31, 2002, regardless of the guarantor's fiscal
year-end. The disclosure requirements in the Interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of this statement had no material impact on the Company's
consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation- Transition and Disclosure". This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for an entity that voluntarily changes to the fair value method of
accounting for stock-based compensation. In addition, SFAS 148 amends the
disclosure provision of SFAS 123 to require more prominent disclosure about the
effects of an entity's accounting policy decisions with respect to stock-based
employee compensation on reported net income. The effective date for this
Statement is for fiscal years ended after December 15, 2002. We adopted SFAS No.
148 for the year ended June 30, 2003 and have included the required disclosure
requirements of this statement in our consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB 51" (FIN No. 46). The
primary objectives of FIN 46 are to provide guidance on the identification of
entities for which control is achieved through means other than through voting
rights (Variable Interest Entities or "VIEs") and to determine when and which
business enterprise should consolidate the VIE. This new model for consolidation
applies to an entity which either (1) the equity investors (if any) do not have
a controlling financial interest or (2) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. The disclosure requirements
of FIN No. 46 became effective for financial statements issued after January 31,
2003. The adoption of this statement had no material impact on the Company's
consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. This statement amends and clarifies financial accounting
and reporting for derivative instruments including certain instruments embedded
in other contracts and for hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." The adoption of this
standard is not expected to have a material impact on our consolidated financial
statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity," which is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS No. 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The adoption of this standard is
not expected to have a material impact on our consolidated financial statements.

Forward Looking Statements

Certain of the information discussed herein, and in particular in this
section entitled "Management's Discussion and Analysis or Plan of Operations,"
contains forward looking statements that involve risks and uncertainties that
might adversely affect our operating results in the future in a material way.
Such risks and uncertainties include, without limitation, our possible inability
to become certified as a reseller in all jurisdictions in which we apply, the
possibility that our proprietary customer base will not grow as we expect, our
ability to obtain additional financing, lack of agent growth, loss of key
personnel, telecommunication 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.

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

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.

Table of Contents

Independent Auditors' Report

Consolidated Financial Statements

Consolidated Balance Sheet

Consolidated Statements of Operations

Consolidated Statement of Changes in 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 subsidiary as of June 30, 2003, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years ended June 30, 2003 and 2002. 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 subsidiary as of June 30, 2003, and the results of their operations and
their cash flows for the years ended June 30, 2003 and 2002 in conformity with
accounting principles generally accepted in the United States of America.

/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
September 12, 2003
Denver, Colorado

Consolidated Balance Sheet
June 30, 2003

Assets

Current assets
Cash $ 412,992
Accounts receivable, net of allowance of $51,858 313,537
Commissions receivable, net of allowance of $170,457 897,000
Inventory 24,901
Other current assets 58,111
-----------
Total current assets 1,706,541
-----------

Non-current assets
Property and equipment, net 150,412
Notes receivable 250,252
Deposits and other assets 109,552
Goodwill 2,893,029
-----------
Total non-current assets 3,403,245
-----------

Total assets $ 5,109,786
===========

Liabilities and Stockholders' Equity

Current liabilities
Accounts payable $ 687,362
Accrued liabilities 192,657
Commissions payable 892,848
Current portion of deferred commissions 511,200
Note payable 254,389
Other current liabilities 65,759
-----------
Total current liabilities 2,604,215
-----------

Non-current liabilities
Deferred commissions 763,990
Other long-term liabilities 40,966
-----------
Total non-current liabilities 804,956
-----------
Total liabilities 3,409,171
-----------

Commitments and contingencies

Stockholders' equity
8% Convertible Series A preferred stock, no par value, 20,000,000
shares authorized, 500,000 shares issued and outstanding, $1.00
per share liquidation preference 450,000
Common stock $.001 par value, 300,000,000 shares authorized;
9,553,972 shares issued and outstanding 9,554
Additional paid-in capital 12,175,531
Accumulated deficit (10,934,470)
-----------
Total stockholders' equity 1,700,615
-----------

Total liabilities and stockholders' equity $ 5,109,786
===========

See notes to consolidated financial statements.

Consolidated Statements of Operations

For the Years Ended
June 30,
-------------------------
2003 2002
----------- -----------
Revenue
Marketing commissions $ 6,918,479 $ 7,089,784
Telecommunications 3,988,343 3,984,973
Other 9,450 504
----------- -----------
Total revenue 10,916,272 11,075,261
----------- -----------

Operating expenses
Marketing commissions 3,903,093 4,570,835
Telecommunications 2,132,035 2,323,748
Selling, general and administrative 4,293,217 4,426,817
Depreciation and amortization 134,587 145,905
----------- -----------
Total operating expenses 10,462,932 11,467,305
----------- -----------

Income (loss) from operations 453,340 (392,044)

Interest expense 51,933 33,757
----------- -----------

Income (loss) before income taxes 401,407 (425,801)

Deferred income tax benefit - 37,025
----------- -----------

Net income (loss) 401,407 (388,776)

Preferred dividends (28,225) -
----------- ----------

Net income (loss) attributable to common shareholders $ 373,182 $ (388,776)
=========== ===========

Income (loss) per common share - basic $ 0.04 $ (0.04)
=========== ===========

Weighted average number of common shares outstanding -
basic 9,266,307 9,778,940
=========== ===========

Income (loss) per common share - diluted $ 0.04 $ (0.04)
=========== ===========

Weighted average number of common shares outstanding -
diluted 9,267,760 9,778,940
=========== ===========

See notes to consolidated financial statements.

Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended June 30, 2003 and 2002

Preferred Stock Common Stock Additional Total
---------------------- ---------------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
---------- ---------- ---------- ---------- ----------- ------------ ----------
Balance - June 30, 2001 - $ - 10,813,359 $ 10,813 $13,689,516 $(10,918,876) $2,781,453

Common stock issued for cash - - 750,000 750 299,235 - 299,985

Common stock tock issued for
services - - 203,598 203 122,598 - 122,801

Common stock repurchased - - (2,712,501) (2,712) (2,085,910) - (2,088,622)

Options to purchase Company
stock issued to consultant - - - - 16,649 - 16,649

Net loss - - - - - (388,776) (388,776)
---------- ---------- ---------- ---------- ----------- ------------ ----------

Balance - June 30, 2002 - - 9,054,456 9,054 $12,042,088 (11,307,652) 743,490

Issuance of preferred stock,
net of expenses 500,000 450,000 64,516 65 19,935 - 470,000

Cash received for share
rounding - - - - 296 - 296

Issuance of common shares
and options for AIC (Note 8) - - 400,000 400 99,600 - 100,000

Issuance of common shares to
director - - 35,000 35 13,612 - 13,647

Dividends on preferred stock - - - - - (28,225) (28,225)

Net income - - - - - 401,407 401,407
---------- ---------- ---------- ---------- ----------- ------------ ----------

Balance - June 30, 2003 500,000 $ 450,000 9,553,972 $ 9,554 $12,175,531 $(10,934,470) $1,700,615
========== ========== ========== ========== =========== ============ ==========

See notes to consolidated financial statements.

Consolidated Statements of Cash Flows

For the Years Ended
June 30,
----------------------------
2003 2002
------------ ------------
Cash flows from operating activities
Net income (loss) $ 401,407 $ (388,776)
------------ ------------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation and amortization 134,587 145,905
Provision for doubtful accounts 129,342 61,208
Stock options granted to non-employees and stock
issued for services 13,647 139,450
Deferred income taxes - (37,025)
Changes in assets and liabilities
Accounts receivable (79,211) 66,283
Commissions receivable 54,007 (294,645)
Employee receivable 1,865 37,005
Note receivable - related party - 35,803
Inventory 11,059 7,903
Other current assets (34,398) 183,329
Deposits and other assets (14,713) (52,383)
Accounts payable 76,777 (54,343)
Accrued liabilities (57,054) 88,011
Commissions payable (569,954) 524,879
Other current liabilities 45,724 (48,039)
------------ ------------
(288,322) 803,341
------------ ------------
Net cash provided by operating activities 113,085 414,565
------------ ------------

Cash flows from investing activities
Increase in notes receivable (172,752) -
Purchases of property and equipment (47,188) (63,436)
------------ ------------
Net cash used in investing activities (219,940) (63,436)
------------ ------------

Cash flows from financing activities
Principal payments on note payable (25,000) (175,000)
Increase in note payable 119,490 -
Payments on deferred commissions (535,402) (278,030)
Other 8,042 (12,314)
Proceeds from the issuance of preferred stock 470,000 -
Proceeds from the issuance of common stock - 299,985
------------ ------------
Net cash provided by (used in) financing
activities 37,130 (165,359)
------------ ------------

Net (decrease) increase in cash (69,725) 185,770

Cash - beginning of year 482,717 296,947
------------ ------------

Cash - end of year $ 412,992 $ 482,717
============ ============

Supplemental disclosure of cash flow information:

Cash paid for interest was $25,514 and $10,093 for 2003 and 2002,
respectively.

Supplemental disclosure of non-cash activity:

During the year ended June 30, 2003:

The Company issued 400,000 shares of common stock and 500,000 options
to purchase common stock in exchange for an approximate 32% interest
in AIC and a $300,000 Promissory Note and Agreement.

The Company issued 35,000 shares of common stock to a new independent
director of the Company. These shares were valued at $13,647.

The Company accrued dividends on preferred stock totaling $28,225.

During the year ended June 30, 2002:

The Company obtained fixed assets valued at $7,732 through a capital
lease.

The Company accepted a piece equipment as full payment on an
outstanding accounts receivable balance of $21,245.

The Company re-purchased 2,712,501 shares of common stock in exchange
for future commissions valued at $2,088,622.

See notes to consolidated financial statements.

Notes to Consolidated Financial Statements

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

Cognigen Networks, Inc. (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. Between 1989 and 1999, Silverthorne 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. is an internet and relationship enabled marketer of
long-distance telephone and personal communications services and a licensed,
facilities based interstate and international long-distance carrier. The Company
receives commissions from sales of these services through agents and affinity
groups, from telecommunications sales of prepaid calling cards and from the sale
of call switching services.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Cognigen Networks, Inc. and its subsidiary, Cognigen Switching Technologies,
Inc. (Cognigen Switching). All intercompany accounts and transactions have been
eliminated in consolidation.

Cash

The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash. The Company continually monitors
its positions with, and the credit quality of, the financial institutions with
which it invests. As of the balance sheet date, balances of cash and cash
equivalents exceeded the federally insured limit by approximately $516,000.

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 $170,457 at June 30, 2003 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 customers that generated 22% of total
revenue and made up 42% of gross commissions receivable at June 30, 2003. The
Company had two customers that generated 23% of total revenue for the year ended
June 30, 2002.

Inventory

Inventory consists of prepaid calling cards held for resale and is stated at the
lower of cost or market, determined using the first-in, first-out method (FIFO).
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 cards are sold, the excise tax is collected and offset against
the prepaid excise tax.

Property and Equipment

Property and equipment is stated at cost. Depreciation is provided utilizing the
straight-line method over the estimated useful lives for owned assets, ranging
from 3 to 7 years.

Goodwill

The excess of the purchase price over net assets acquired by the Company from
unrelated third parties is recorded as goodwill. Goodwill resulted from the
acquisition of Cognigen Switching. In July 2001, the FASB issued Statement of
Financial Accounting Standards (SFAS) Nos. 141 and 142, "Business Combinations"
and "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. Under the guidance of SFAS No. 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. There is no impairment of goodwill considered necessary as of June
30, 2003.

Valuation of Long-Lived Assets

The Company assesses valuation of long-lived assets in accordance with 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 Payable

Commissions payable represent amounts due to agents for commissions 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 recognizes deferred tax liabilities and assets based on the
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements that will result in taxable or deductible
amounts in future years. 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

Marketing Commissions

Marketing commission income from the sale of long-distance telephone, personal
communication devices and marketing products is recognized at the time of sale.

Telecommunications

Calling card and pin revenue is recorded when the calling cards and pins are
shipped. The Company's policy is to delay shipment of calling cards and pins 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.

Long distance phone service revenue is recorded when services are rendered.

Prepaid long distance phone service is initially recorded as deferred revenue
and is recognized as the prepaid minutes are used by the customer.

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures 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.

Basic Loss Per Share

The Company applies the provisions of SFAS No. 128, "Earnings Per Share". All
dilutive potential common shares that have an antidilutive effect on diluted per
share amounts have been excluded in determining net income (loss) per share.
Shares issued in the initial capitalization of the Company have been treated as
outstanding since inception.

Advertising Costs

The Company expenses advertising costs as incurred. Total advertising costs for
the years ended June 30, 2003 and 2002 were $151,951 and $148,455, respectively.

Recently Issued Accounting Pronouncements

In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain
Financial Institutions". SFAS No. 147 amends FASB Statements No's. 72 and 144
and FASB Interpretations No. 9. The adoption of this statement had no material
impact on the Company's consolidated financial statements.

In November 2002, the FASB published Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". The Interpretation expands on the
accounting guidance of Statement Nos. 5, 57, and 107 and incorporates without
change the provisions of FASB Interpretation No. 34, which is being superseded.
The Interpretation elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The initial recognition and
initial measurement provisions apply on a prospective basis to guarantees issued
or modified after December 31, 2002, regardless of the guarantor's fiscal
year-end. The disclosure requirements in the Interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of this statement had no material impact on the Company's
consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure". This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for an entity that voluntarily changes to the fair value method of
accounting for stock-based compensation. In addition, SFAS No. 148 amends the
disclosure provision of SFAS No. 123 to require more prominent disclosure about
the effects of an entity's accounting policy decisions with respect to
stock-based employee compensation on reported net income. The effective date for
this Statement is for fiscal years ended after December 15, 2002. The Company
adopted SFAS No. 148 for the year ended June 30, 2003 and has included the
required disclosure requirements of this statement in the consolidated financial
statements.

In April 2003, FASB issued SFAS No. 149, "Accounting for Derivative Instruments
and Hedging Activities," which is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. This statement amends and clarifies financial accounting and reporting
for derivative instruments including certain instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The adoption of this standard is
not expected to have a material impact on the Company's consolidated financial
statements.

In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity," which is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS No. 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The adoption of this standard is
not expected to have a material impact on the Company's consolidated financial
statements.

Reclassifications

Certain amounts in the 2002 consolidated financial statements have been
reclassified to conform to the 2003 presentation.

Note 2 - Basis of Presentation

On October 15, 2001, a one-for-eight (1:8) reverse stock split took place and
has been reflected retroactively in these financial statements, except for stock
options outstanding at that date.

Note 3 - Property and Equipment

Property and equipment consist of the following at June 30, 2003:

Furniture and fixtures $ 15,267
Computer equipment 177,590
Equipment 229,971
Leasehold improvements 191,268
Software 142,299
-----------
756,395
Less accumulated depreciation (605,983)
-----------
$ 150,412
===========

Note 4 - Notes Receivable

Intandem Communications, Inc.

As of June 30, 2003, there are $172,752 in notes receivable representing amounts
advanced to InTandem Communications, Corp. (InTandem). On April 1, 2003, the
Company, and InTandem, David B. Hurwitz (Hurwitz), Richard G. De Haven (De
Haven) and Anthony Sgroi (Sgroi) entered into an agreement (Funding Agreement)
pursuant to which the Company agreed to provide up to $448,093 in a series of
loans over a period of nine months to InTandem. Each loan is to bear interest at
the rate of 7.5% per annum and the loans are to be secured by a pledge of the
outstanding InTandem common stock. After providing the first four loans, on 30
days written notice, the Company may cancel its obligation to provide further
loans should InTandem fail to attain a performance level of at least 75% of
certain revenue and profit and loss projections.

If the Company makes all of the loans, it has the option to convert the loans
into 49% of InTandem's outstanding common stock at any time not later than 12
months after the last payment on all the loans has been received by the Company.
If the Company does not convert the promissory notes into InTandem common stock,
InTandem's obligation to repay the promissory notes will be discounted by a
value equal to 25% of the net income realized by the Company from the sale of
the Company's services through the 1+ long distance Cognigen Resale Division
(CRD). Further, if the Company discontinues further lending due to InTandem's
failure to meet 75% of InTandem's revenue and profit and loss projections, then
the principal and interest of each promissory note will be due from InTandem in
12 equal monthly installments (discounted by the formula above) commencing one
year after the last promissory note is issued. During the time that the Company
is the (i) holder of an unpaid InTandem promissory note, (ii) an InTandem
shareholder or (iii) has the right to acquire InTandem's common stock, the
Company has the right to designate two of the five directors on InTandem's Board
of Directors. Further, the InTandem Board of Directors has to approve every
transaction by a vote of not less than 80% of InTandem's directors and a quorum
of the InTandem Board of Directors has been established as four.

If the Company has exercised its conversion rights on or before April 1, 2005,
or the date the Company's conversion rights expire, whichever is later, but no
earlier than April 1, 2004, the Company shall have the right to acquire the
remaining 51% of Intandem or all of the outstanding common stock of InTandem
from Messrs. Hurwitz, De Haven and Sgroi. The price that the Company is required
to pay for such common stock is equal to four times the gross revenue generated
by InTandem for the last three months prior to the acquisition of the InTandem
common stock by the Company, multiplied by 51%.

Each of Messrs. Hurwitz, De Haven and Sgroi received a five-year non-qualified
stock option to purchase 60,000 shares of the Company's common stock that is
exercisable at a price of $0.36 per share. Such options vest quarterly over a
period commencing in Apri1 2004, and will expire if InTandem fails to meet 75%
of its revenue and profit and loss projections. Since the measurement date to
value these options has not yet occurred, no compensation expense has been
recorded in the consolidated financial statements.

As a part of the transaction, the Company organized CRD. CRD is under the
managerial authority and guidance of Mr. Sgroi, who is the President of CRD and
has entered into an Employment Agreement with the Company. Mr. Sgroi reports
directly to the Company's CEO and Board of Directors. In addition, InTandem has
agreed to provide consulting services at all levels to assist CRD to fulfill its
mission and responsibilities through the overall transition of a substantial
part of the Company's sales production from master agency status to proprietary
resale revenue.

If a third party introduces a large affiliated group of subscribers to the
Company that requires the specialized product and service management of InTandem
and the Company agrees to pay a gross revenue commission to that third party and
its sponsoring entity at the level of a super-agency, the Company has agreed to
pay Messrs. Hurwitz, De Haven and Sgroi a bonus of a 15% share of the total
commission payable to the super-agency and sponsoring entity.

In conjunction with this transaction, a consultant is to be paid, under his
consulting agreement with the Company, a commission that is being negotiated
with the Company. Although, the commission amount has not yet been determined,
the Company believes that a majority of it is based on the Company's exercise of
the option to acquire the remaining 51% of InTandem and future cash flows
generated from InTandem activities and would be paid in the future, at the
option of the consultant, either in net cash flows from InTandem activities or
common stock of the Company.

American Internet Communications

As of June 30, 2003, the Company had a note receivable outstanding of $77,500
from American Internet Communications (AIC) in accordance with a $300,000
Promissory Note and Agreement due in October 2004. This note bears interest at
12% payable annually, is secured by the personal guaranty of the principals of
AIC, and is due October 4, 2004. This note was acquired by the Company in
October 2002 as part of the agreement dated October 17, 2002 with Stanford
Venture Capital Holdings, Inc. described in more detail in Note 7 Stockholders'
Equity.

Note 5 - Note Payable

Note payable consists of the following at June 30, 2003:

Note payable consists of a secured note payable, with interest at
14%, compounded daily, principal and interest payable in varying
amounts. The note payable is secured by the accounts, as defined,
and other assets of CST. As the note is in default, the interest,
which was at 12%, has been increased to 14% and is compounded daily.
The Company is currently negotiating with the holder of the note
payable to arrange for a new note with terms commensurate with the
Company's current operating activities. $ 254,389

Note 6 - Income Taxes

The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax basis of assets
and liabilities using the enacted tax rates in effect for the year in which the
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that are not expected
to be realized based on available evidence.

The Company's temporary differences 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 $3,429,000 of net operating loss carryforwards, which expire in
varying amounts through 2023, if unused.

The net current and long-term deferred tax assets and liabilities in the
accompanying balance sheet include the following:

Current deferred tax asset $ 125,000
Current deferred tax liability -
Valuation allowance (125,000)
-----------

Net current deferred tax asset $ -
===========

Long-term deferred tax asset $ 1,334,000
Long-term deferred tax liability (1,079,000)
Valuation allowance (255,000)
-----------

Net long-term deferred tax asset $ -
===========

Temporary differences and carryforwards giving rise to a significant portion of
deferred tax assets and liabilities are as follows at June 30, 2003:

Current
Allowance for doubtful accounts $ 125,000
Long-term
Net operating loss carryforwards 1,279,000
Property and equipment 55,000
Goodwill (1,079,000)
Less valuation allowance (380,000)
-----------

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

The components of the provision for income tax benefit reflected in the
consolidated statements of operations are as follows:

For the Years Ended
June 30,
-------------------------
2003 2002
----------- -----------

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

The following is a reconciliation of the statutory federal income tax rate
applied to pre-tax accounting net loss compared to the income taxes in the
consolidated statements of operations:

For the Years Ended
June 30,
-------------------------
2003 2002
----------- -----------

Income tax benefit at the statutory rate $ 134,478 $ (144,772)
State and local income taxes, net of federal income tax 13,246 (14,051)
Change in valuation allowance (194,000) 517,000
Nondeductible expenses 8,717 50,000
Other timing differences, net 37,559 (370,972)
----------- -----------

Deferred income tax benefit $ - $ 37,205
=========== ===========

Note 7 - Stockholders' Equity

Preferred Stock

As of June 30, 2003, the Company has authorized 20,000,000 shares of preferred
stock. During 2003, the Company designated 500,000 shares as 8% Convertible
Series A.

On October 17, 2002 the Company issued 500,000 shares of 8% Convertible Series A
Preferred Stock (Preferred Stock) to Stanford Venture Capital Holdings, Inc. for
$500,000. Each share of the 8% Convertible Series A Preferred Stock is
convertible, at the option of the holder, into one share of the Company's common
stock for a period of five years. After five years the Preferred Stock is
automatically converted to common stock. The Preferred Stock does not have
voting rights and has a liquidation preference of $1.00 per share. In
conjunction with the issuance of the Preferred Stock, the Company paid $30,000
in cash and issued 64,516 shares of the Company's common stock valued at $20,000
to unaffiliated third-parties as a finders' fee.

Dividends on the Preferred Stock are cumulative at the rate of 8% per annum of
the liquidation value, $1.00 per share, are payable in cash, when and if
declared by the Board of Directors, and are preferential to any other junior
securities, as defined. The Board has not declared any such dividends.

Common Stock

As part of the agreement dated October 17, 2002 discussed above, Stanford
Financial Group Company, Inc. agreed to transfer to the Company, an approximate
32% interest in American Internet Communications (AIC), a private company, and a
$300,000 Promissory Note and Agreement due in October, 2004 in exchange for
400,000 shares of the Company's common stock, two-year warrants to purchase
150,000 shares of the Company's common stock at an exercise price of $.50 per
share and five-year warrants to purchase 350,000 shares of the Company's common
stock at an exercise price of $.75 per share. This transaction was completed on
February 5, 2003 and the stock and warrants were issued.

On February 3, 2003, the Company entered into a letter of intent with David
Stone and Harry Gorlovezky, current members of AIC, pursuant to which Messrs.
Stone and Gorlovezky indicated their intent to purchase the approximate 32%
interest in AIC that the Company acquired from Standford Financial for a cash
consideration of $22,500. In addition, Messrs. Stone and Gorlovezky had a right
until June 10, 2003 to purchase the $300,000 Promissory Note and Agreement due
in October 2004 for a purchase price of $77,500 in cash. The $22,500 was
received and the 32% interest in AIC was delivered to Messrs. Stone and
Gorlovezky. The option to purchase the $300,000 Promissory Note and Agreement
for $77,500 was not exercised.

In April 2003, 35,000 shares were issued to a new member of the Board of
Directors of the Company. The shares were valued at $13,647 and are included in
the 2003 operating results as stock-based compensation expense.

In April 2002 and September 2001, the Company issued a total of 150,000 shares
of common stock to a consultant valued at $87,001 as stock-based compensation.

On November 21, 2001, the Company entered into a Stock Redemption Agreement with
a shareholder, in which the shareholder agreed to sell to the Company 2,712,501
shares of the Company's common stock, at approximately $.77 per share, which
approximated market value, in exchange for potential future commissions of
$2,088,622 on certain customers, as defined in the agreement. The shares were
purchased in December 2001. Deferred commissions payable will be paid out based
upon future commissions earned as defined in the agreement. The agreement does
not guarantee that future commissions will be earned. As of June 30, 2003, the
remaining balance of deferred commissions payable was $1,275,190. The Company
has classified $511,200 as an estimate of the current portion of this agreement
based on historical commissions.

In October and November 2001, the Company sold 750,000 shares of common stock
and warrants to purchase 600,000 shares of common stock at $1.00 for net
proceeds of $299,985 in cash.

In September and October 2001, the Company authorized the issuance of 10,938
shares of common stock in exchange for services valued at $8,500. The shares
were issued in November 2001.

On September 24, 2001, the Board of Directors authorized the issuance of 42,660
shares of common stock to several officers of the Company valued at $27,300 as
stock-based compensation.

Stock Options

The Company has established the 2001 Incentive and Nonstatutory Stock Option
Plan, which authorizes the issuance of up to 625,000 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.

During the year ended June 30, 2003, the Board of Directors granted options to
employees to purchase 281,000 shares of the Company's common stock that vest at
varying times between immediately and three years, are exercisable at between
$.36 to $.44 per share and expire in five years.

In April 2003, the Board of Directors granted options to purchase 25,000 shares
of the Company's common stock to a shareholder of the Company for prior services
rendered. These options vest immediately, are exercisable at $.40 per share, and
expire in five years.

In April 2003, as part of the Funding Agreement with Intandem, the Board of
Directors granted to the principals of Intandem options to purchase up to
450,000 shares of the Company's common stock. The exercise price of the options
is $.36 per share and the options expire in five years. The actual number of
options to purchase the Company's common stock is based on the achievement of
certain objectives outlined in the Funding Agreement and could be as low as
options to purchase zero shares and as high as options to purchase 450,000
shares. The vesting periods of these options range from one year to three years.
See Note 4.

In February 2003, the Board of Directors granted options to purchase 25,000
shares of the Company's common stock to a consultant of the Company for services
rendered. These options vest over two year, are exercisable at $.48 per share,
and expire in five years.

In December 2002, April 2003 and June 2003, the Board of Directors granted
options to purchase a total of 85,000 shares of the Company's common stock to
the four independent directors at that time of the Company as a partial fee for
services rendered as independent directors. The options vested immediately, are
exercisable at between $.38 and $.52 per share and expire in four to five years.

In September 2001, various individual and corporate option holders of the
Company voluntarily surrendered to the Company, stock options to purchase
3,050,000 million shares of the Company's common stock. The surrendered options
had an exercise price of $3.68 per share, and would not have expired until
August 24, 2004. The Company originally granted options to purchase a total of
4,050,000 million of the Company's common stock in August 1999. With the
surrender by these option holders, there remain outstanding options to purchase
1,000,000 million shares at $3.68 per share that can be exercised until August
2004.

During the year ended June 30, 2002, the Company issued 30,000 options to
purchase the Company's common stock to employees. The options have an exercise
price of $.41 and expire 5 years from issuance. The options were valued at
$21,227 using the below Black-Scholes assumptions.

During the year ended June 30, 2002, the Company issued 50,000 options to
purchase the Company's common stock to an outside consultant. The options have
an exercise price of $.55 and expire 5 years from issuance. The options were
valued at $16,649 using the Black-Scholes assumptions below.

The following table presents the activity for options outstanding:

Weighted
Average
Stock Exercise
Options Price
---------- ---------
Outstanding - June 30, 2001 4,050,000 $ 3.68
Granted 80,000 0.50
Forfeited/canceled (3,050,000) 3.68
Exercised - -
---------- ---------

Outstanding - June 30, 2002 1,080,000 3.44
Granted 866,000 0.38
Forfeited/canceled (50,000) 0.55
Exercised - -
---------- ---------

Outstanding - June 30, 2003 1,896,000 $ 2.12
========== =========

The following table presents the composition of options outstanding and
exercisable:

Options Outstanding Options Exercisable
--------------------- ---------------------
Range of Exercise Prices Number Price* Life* Number Price*
------------------------ --------- ---------- ---------- ---------- ---------
$ 0.38 - .39 685,000 4.78 175,000
$ 0.40 - .44 156,000 4.51 126,000
$ 0.45 - .52 55,000 4.53 30,000
$ 3.68 1,000,000 1.17 1,000,000
--------- ---------- ----------

Total - June 30, 2003 1,896,000 $ 2.12 - 1,331,000 $ 2.86
========= ======== ========== ========== ========

*Price and Life reflect the weighted average exercise price and weighted average
remaining contractual life, respectively.

The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for the
Company's options been determined based on the fair value at the grant date for
awards consistent with the provisions of SFAS No. 123, the Company's net loss
and basic loss per common share would have been changed to the pro forma amounts
indicated below:

For the Years Ended
June 30,
------------------------
2003 2002
----------- -----------

Net income - as reported $ 401,407 $ (388,776)
Net income - pro forma $ 265,543 $ (426,652)

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used:

Approximate risk free rate 6.00%
Average expected life 5 years
Dividend yield 0%
Volatility 35%
Estimated fair value of total options granted $135,864

Warrants

During the year ended June 30, 2002, the Company granted outside investors
600,000 warrants to purchase the Company's common stock in conjunction with the
purchase of 750,000 shares of common stock. The warrants have an exercise price
of $1 and 100,000 of the warrants expire in 2 years and 500,000 expire in 4
years.

The following table presents the activity for warrants outstanding:

Weighted
Average
Number of Exercise
Warrants Price
----------- ----------

Outstanding - June 30, 2001 - $ -
Issued 600,000 1.00
Forfeited/canceled - -
Exercised - -
----------- ----------

Outstanding - June 30, 2002 600,000 1.00
Issued 500,000 .67
Forfeited/canceled - -
Exercised - -
----------- ----------

Outstanding - June 30, 2003 1,100,000 $ .85
=========== ==========

All of the outstanding warrants are exercisable and have a weighted average
remaining contractual life of 2.75 years.

Note 8 - Commitments and Contingencies

Operating Leases

The Company leases office space under operating lease agreements. Rent expense
for these leases was approximately $141,000.

Future minimum lease payments under these leases are approximately as follows:

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

2004 $ 100,995
2005 14,148
-----------

$ 115,143
===========

Litigation

On December 17, 2002, the Company filed a lawsuit in the Superior Court for the
State of Washington, King County, WA (Case No. 02-2-35718-1 SEA) against eMax
Direct LLC, Troy D. Carl and William A. Bergfeld III, to obtain an injunction to
prevent them from violating certain provisions of the Training Services
Framework Agreement with the Company that the Company had previously terminated.

On December 17, 2002, the Company filed a lawsuit in the District Court, City
and County of Denver, Colorado (Case No. 02CV8684) against Messrs. Carl,
Bergfeld, Cranfil, Kris Wilson and Pam Lawson, to obtain injunctions restraining
them from violating certain provisions of the Training Services Framework
Agreement with the Company that the Company had previously terminated.

On January 28, 2003, Messrs. Carl, Bergfeld, Cranfill, Kris Wilson and Pam
Lawson and eMax Direct LLC filed counterclaims in the lawsuit that the Company
had filed in the District Court, City and County of Denver, Colorado, requesting
injunctive relief preventing the Company from misappropriations and use of eMax
Direct LLC's trade secrets and business values; requesting injunctive relief
enjoining the Company from allegedly breaching the no hire clause of the
agreement with eMax Direct LLC; alleging breach of the agreements that the
Company had with Messrs. Carl, Bergfeld, Cranfill, Kris Wilson and Pam Lawson;
alleging breaches by the Company of the covenant of good faith and fair dealing;
alleging wrongful termination of the Company's employment of Troy Carl; alleging
breach by the Company of the Colorado Wage Act by failing to pay commissions to
Messrs. Bergfeld, Cradfill, Kris Wilson and Pam Lawson; alleging unjust
enrichment on behalf of individual counterclaimants against the Company;
alleging aiding and abetting breach of fiduciary duty on behalf of eMax Direct
LLC against the Company; alleging promissory estoppel on behalf of Troy Carl
against the Company; alleging fraud on behalf of the Company in connection with
the termination of Troy Carl as an employee of the Company; alleging conversion
and/or aiding or abetting conversion on behalf of eMax Direct LLC against the
Company and requesting declatory judgment as to the applicable agreements
between the Company and the individual defendants.

In March 2003, the Superior Court for the State of Washington, King County
issued a preliminary injunction enjoining eMaxDirect from using any source code
of the Company it may have acquired, any "Best Rate Calculator" or agent
compensation calculation formula, any web-page technology, or any agent data it
may have obtained, collected or stored in any medium, during the term of the
eMaxDirect contract, including such information collected by the principals of
eMaxDirect before or during the term of the contract.

Also, in March 2003, Messrs. Carl, Bergfeld, Cranfill and Wilson and Ms. Lawson
filed a Motion for Joinder and the Company filed Motions to Compel Arbitration
of Counterclaims and against the Motion for Joinder in the District Court, City
and County of Denver, Colorado. On May 29, 2003, the District Court, City and
County of Denver denied the Motion filed by Messrs. Carl, Bergfeld, Cranfill and
Wilson and Ms. Lawson and granted the Company's Motions. The District Court,
City and County of Denver, Colorado also set a hearing date on the Company's
injunction for June 12 and 13, 2003.

On June 12, 2003, Messrs. Carl, Bergfeld, Cranfill and Wilson and Ms. Lawson
entered into a Stipulation with the Company pursuant to which they agreed to all
that the Company had requested in the lawsuit that the Company filed in the
District Court, City and County of Denver, Colorado.

In the lawsuit in the District Court, City and County of Denver, Colorado, the
Court ordered injunctive relief stands against the Defendants and no claims are
asserted or pending against Cognigen in the proceeding.

Due to the nature of the litigation and the uncertainty related to the outcome
of the litigation, no gain contingencies have been recorded in the consolidated
financial statements.

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

None.

Item 8A. Controls and Procedures.

Under the supervision and with the participation of our management,
including our chief executive officer and the principal accounting officer, we
have evaluated the effectiveness of our disclosure controls and procedures as of
a date within 90 days prior to the filing of this report. The have concluded
that these disclosure controls provide reasonable assurance that we can collect,
process and disclose, within the time periods specified in the Commission's
rules and forms, the information required to be disclosed in its periodic
Exchange Act reports.

There have been no significant changes in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
date of their most recent evaluation.

PART III

The information required by Items 9 through 12 is incorporated by reference
to our definitive proxy statement or definitive information 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 or definitive information statement with the Securities and Exchange
Commission on or before October 28, 2003.

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

Exhibits and Index of Exhibits.

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

2.1 Funding Agreement dated April 1, 2003, by and among us, InTandem
Communications Corp., David B. Hurwitz, Richard G. De Haven and
Anthony Sgroi (except for Schedule B-Financial Model and Schedule
E-Business Plan and Financial Statements) (incorporated by reference
to Exhibit 10.1 to our Current Report on Form 8-K filed on April 15,
2003).

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 our 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 our 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 our 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 Articles of Amendment to our Articles of Incorporation filed on
October 16, 2002 (incorporated herein by reference to Exhibit 3.1 to
our Current Report on Form 8-K filed on November 4, 2002).

3.6 Bylaws as amended through December 15, 2002 (incorporated by reference
to Exhibit 3.2 to our Current Report on Form 8-K filed on November 4,
2002).

10.1 Purchase Agreement among us, Stanford Financial Group Company, Inc.
and Stanford Venture Capital Holdings, Inc. (incorporated by reference
to Exhibit 10 to our Current Report on Form 8-K filed on November 4,
2002).

10.2 Letter dated December 6, 2002, from us to eMaxDirect, LLC
(incorporated by reference to Exhibit 10 to our Current Report on Form
8-K filed on December 10 2002).

10.3 Securities Purchase Agreement dated February 10, 2003, between us and
David Stone and Harry Gorlovezsky (incorporated by reference to
Exhibit 10.1 to our Current Report on Form 8-K filed on April 24,
2003).

10.4 Option to purchase Promissory Note and Agreement from us to David
Stone and Harry Gorlovezsky (incorporated by reference to Exhibit 10.2
to our Current Report on Form 8-K filed on April 24, 2003).

10.5 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).

10.6 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).

10.7 Stock Redemption Agreement dated November 30, 2001 between us, the
Anderson Family Trust, Cantara Communications Corporation, Kevin E.
Anderson Consulting, Inc. (without Exhibits A and B) (incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K dated
December 18, 2001).

10.8 Training Services Framework Agreement dated May 17, 2002, between us
and e-Max Direct LLC (incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K dated filed on July 2, 2002).

10.9 Transitional Supplemental Consulting Engagement letter dated July 11,
2002, between us and Kevin E. Anderson Consulting, Inc. (incorporated
by reference to Exhibit 10.10 to our Annual Report Form 10-KSB for the
year ended June 30, 2002).

10.10Letter Agreement dated April 19, 2002, between Cognigen Networks,
Inc. and Troy D. Carl (incorporated by reference to Exhibit 10.11 to
our Annual report on Form 10-KSB for the year ended June 30, 2002).

21 Subsidiaries (incorporated by reference to Exhibit 21 to our Annual
Report on Form 10-KSB for the year ended June 30, 2001).

31.1 Certification of Chief Executive Officer required by Rule 13a-14(a).

31.2 Certification of Chief Financial Officer required by Rule 13a-14(a).

32.1 Certification of Chief Executive Officer required by Section 906 of
the Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer required by Section 906 of
the Sarbanes-Oxley Act of 2002.

Reports on Form 8-K.

On April 15, 2003, we filed a Current Report on Form 8-K dated April 1,
2003, describing the transaction specified in the Funding Agreement among us,
InTandem Communications Corp., David B. Hurwitz, Richard De Haven and Anthony
Sgroi under Item 5 and filing the Funding Agreement as an Exhibit under Item 7.

On April 24, 2003, we filed a Current Report on Form 8-K dated April 22,
2003, describing the Securities Purchase Agreement and the Option to Purchase
Promissory Note and Agreement between and from us to David Stone and Harry
Gorlovezsky under Item 5 and filing the Securities Purchase Agreement and the
Option to Purchase Promissory Note as Exhibits under Item 7.

On May 19, 2003, we filed a Current Report on Form 8-K dated May 15, 2003,
that included a news release we issued on May 15, 2003, as an Exhibit under Item
7 and describing the news release under Item 12.

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, 2003

COGNIGEN NETWORKS, INC.

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

/s/ Gary L. Cook
Gary L. Cook, Senior Vice President of
Finance, 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/ Joseph W. Bartlett Director September 26, 2003
Joseph W. Bartlett

/s/ Gary L. Cook Director September 26, 2003
Gary L. Cook

/s/ Darrell H. Hughes Director September 26, 2003
Darrell H. Hughes

/s/ David L. Jackson Director September 26, 2003
David L. Jackson

/s/ Christopher R. Seelbach Director September 26, 2003
Christopher R. Seelbach

/s/ James H. Shapiro Director September 26, 2003
James H. Shapiro

EXHIBIT INDEX