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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM
10-KSB

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

For the
fiscal year ended June 30, 2006

|[   ] |  | 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                                   |  | 
|(State or other jurisdiction of            |  | 
|incorporation or organization)             |  | 
|6405 - 218th Street, S.W., Suite 305       | 
|Mountlake Terrace, Washington              |  | 
|(Address of principal executive offices)   |  | 
|Issuers telephone number:  (425) 329-2300 | 

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 is not required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act. [   ]

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. _____

Indicate
by check mark  whether the  registrant  is a shell  company (as  defined in Rule 12b-2 of
the  Exchange  Act).  Yes     [   ]    No     |X|

State
issuers revenue for its most recent fiscal year:  $10,107,398

The
aggregate market value of the voting and non-voting common equity held by
non-affiliates at September 13 2006, computed by reference to the last sale
price of $0.12 per share on the OTC Bulletin Board, was $713,522.

The
number of shares outstanding of each of the issuers classes of common
equity on September 13, 2006 was 10,000,000.

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 or
definitive information statement with the Commission on or before October 30,
2006. If not, we will file an amendment to this Form 10-KSB to add such
information.

Transitional
Small Business Disclosure Format     Yes    [   ]     No  [X]





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TABLE OF CONTENTS



|         |  | PAGE NO.                                                                            
|-------- |  | ------------------------------------------------------------------------------------
|PART I   |  | 18                                                                                  
|         |  |                                                                                     
|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  |  | 18                                                                                  
|         |  |                                                                                     
|Item 5   |  | Market for Common Equity and Related Stockholder Matters                            
|         |  |                                                                                     
|Item 6   |  | Managements Discussion and Analysis or Plan of Operation                           
|         |  |                                                                                     
|Item 7   |  | Financial Statements                                                                
|         |  |                                                                                     
|Item 8   |  | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
|         |  |                                                                                     
|Item 8A  |  | Control and Procedures                                                              
|         |  |                                                                                     
|Item 8B  |  | Other Information                                                                   
|         |  |                                                                                     
|PART III |  | 18                                                                                  
|         |  |                                                                                     
|Item 13  |  | Exhibits                                                                            
|         |  |                                                                                     

*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 or
definitive information statement with the Securities and Exchange Commission on
or before October 30, 2006. If not, we will file an amendment to this Form
10-KSB to add such information.

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PART I

Forward-Looking
Statements.

The
discussion in this report contains forward-looking statements, including,
without limitation, statements relating to our wholly owned subsidiaries and us.
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 contained in this report are
often identifiable by the use of the words will, intend,
believe, expect, anticipate,
should, plan, or estimate and similar
expressions. Forward-looking statements involve risks and uncertainties that
affect our business, financial condition and results of operations, including
without limitation, our possible inability to become certified as a reseller in
all jurisdictions in which we apply, our possible inability to obtain additional
financing, the possible lack of producing agent growth, our possible lack of
revenue growth, our possible inability to add new products and services that
generate increased sales, our possible lack of cash flows, our possible loss of
key personnel, the possibility of telecommunication rate changes and
technological changes, the possibility of increased competition and the
possibility that our new subsidiary will not be successful. 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
are an Internet and relationship enabled marketer. Our core products are long
distance telephone and personal communications services. We have generated
revenue in two ways. First, marketing commissions revenue has been generated
from a number of vendors who are represented on our agent web sites and for whom
we sell their telecommunications and other products and services via contractual
agreements. Second, we have generated telecommunications revenue through sales
of our proprietary products and services through our agent web sites.

We
market and sell services and products through multifaceted sales and marketing
organizations that utilize the Internet as a platform to provide our customers
and subscribers with a variety of telecommunications and technology based
products and services. In the mid 1990s, Kevin E. Anderson, our founder,
recognized the marketing potential of the Internet and formed what we believe
was 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, Kevin E.
Anderson 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
website also contains customer detail status, recommended training sources,
frequently asked questions and agent benefits. The ingenuity of Kevin E.
Anderson and many of the agents who were attracted to us, continues to drive
sales through our position on web site searches. We continue to make changes and
modifications to our Internet technology to maintain our position.

We
have invested millions of dollars in developing business systems for our
independent agent network around the world. To date, over 860,000 customers have
purchased telecommunication and personal technology services and products from
our websites. Each individual who is currently registered as one of our agents
has a website that is replicated from our main www.ld.net
site.

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Through
our network of independent agents, we sell our own proprietary products and
services and, as agent, we sell third party or outside vendor products and
services, to customers and subscribers worldwide. Domestic and international
long distance services make up the major portion of our sales with prepaid
calling cards/pins and paging, wireless communications, computers and
Internet-based telecommunications products and other products in our sales mix.
As agent, have contractual agreements with a variety of product and service
vendors that provide us with a commission percentage of any sales made through
one of our supported web sites. As agent, our web-based marketing division sells
the products and services of industry leaders such as AT&T, AccuLinq,
Inphonic Cellular, ShopForT1, Convergia, IBN Tel, Pioneer Telephone, OPEX,
PowerNet Global, UniTel and Trinsic / Z-Tel. Our operations are, in large part,
dependent on our affiliations with the third party providers of the products and
services that our agents sell.

In
late July 2005, we launched LowestCostMall.com, an online shopping website that
offered thousands of products, ranging from personal electronics, office
products, and household items to toys, flowers and jewelry, at discounted
prices. LowestCostMall was offered by our agents through the same methods they
used to sell our telecommunications and personal technology services, with
Vcommerce Corporation, an independent organization, serving as the back office
and provisioning all of the orders and direct shipments from the manufacturer to
the purchaser. However, because LowestCostMall.com did not perform in accordance
with expectations, by written notification in July 2006, we terminated our
agreement with Vcommerce and have closed down our LowestCostMall operations.

On
July 7, 2006, we launched Cognigen Business Systems, Inc. (CBSi).
Through CBSi we provide integrated broadband voice, data, video, and management
communication and control support services to the quick service retail
(QSR) industry through an integrated suite of services known as
Retail Technologies CO-Op (RTC). CBSi was formed by entry into an
agreement with Anza Borrego Partners, Inc. (ABP) pursuant to which
we agreed to purchase two shares or 50% of CBSi for $50,000 and ABP agreed to
purchase two shares or 50% of CBSi in exchange for contributing to CBSi all of
ABPs assets (including intellectual property) used, developed, or to be
used in connection with its business plan for providing RTC services to the QSR
industry, including ABPs pilot installations in various Subway restaurants
located in San Diego County and Oregon. The four shares of CBSi constitute all
of the outstanding stock of CBSi.

In
connection with the formation of CBSi, we also obtained the option, exercisable
through September 7, 2006, to purchase ABPs two shares of CBSi upon
issuance to ABP of 1,246,028 shares of our restricted common stock. Pursuant to
the terms of the option, we are also obligated to deliver to ABP that number of
shares of our restricted common stock as are equal to 5% of the pretax income of
CBSi for the fiscal years ending June 30, 2007, 2008 and 2009. Such common stock
delivered to ABP will be valued at the average market trading value of the
common stock for the previous 20 trading days prior to the end of each fiscal
year.

On
September 1, 2006, we sent a letter to ABP in which we exercised the option to
purchase ABPs two shares of CBSi. The exercise was ratified by our Board
on September 5, 2006. CBSi is now our wholly owned subsidiary. Upon completion
of its pilot program, which is in its final stages, CBSi intends to offer its
bundled suite of integrated RTC broadband services to the approximately 21,000
Subway franchised restaurants located in the United States and to aggressively
pursue the over 1.5 million QSR industry establishments that, according to U.S.
Bureau of the Census data, comprise immediate market opportunities for
CBSis bundled RTC broadband services.

On
October 10, 2006, the Company entered into an agreement with Ven Core Solutions,
LLC (Ven Core) to borrow $250,000 in a term loan to be repaid
monthly as principal and interest at approximately 18.5% interest rate. The loan
is fully amortizable over 36 months. As part of the agreement, the Company
issued to Ven Core 75,000 warrants to purchase 75,000 shares of restricted
common stock of the Company. The warrants were granted at $.12 per share and are
exercisable for up to seven years from date of grant. The Company also gave Ven
Core a lien behind Silicon Valley Bank and Global Crossing on all assets of the
company, to the extent of the loan balance outstanding until the loan is fully
paid. Commitment and documentation fees of $5,500 were paid to Ven Core. This
loan was funded on October 11, 2006. Prior to the agreement, there was no material
relationship between the Company or its affiliates and Ven Core.

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On
October 13, 2006, the Company agreed to sell its interest to Acceris Management
and Acquisition LLC (Acceris) in the majority of its
telecommunications one plus accounts for which it records telecommunications
revenue through sales of proprietary products and services. The sales price
offered to the Company and agreed to by the Board of Directors was 1.5
multiplied by monthly revenue of the accounts from the third full monthly
billing cycle. The buyer paid $200,000 down and will pay the remainder upon
reaching regulatory approval, but retaining $25,000 until six months after
regulatory approval to address potential tax and other miscellaneous
liabilities. The sales price was determined reasonable by management based on
other similar proposals received for the same assets and based on industry
trends. The proceeds are intended to be used as working capital for the Company
and towards operational start up activities in its subsidiary CBSi.
There was no material relationship between Acceris and the Company or its affiliates or any of the officers and
directors of the Company or their associates prior to the transaction.

We
had marketing commissions revenue from two and three outside vendors that
generated a total of approximately 29% and 25%, respectively, of total revenue
for the years ended June 30, 2006 and 2005 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, and
with all outside vendors who sell telecommunications, personal communications
and other products directly and over the Internet. In addition, our wholly owned
subsidiary CBSi is a new entrant in the VoIP bundled broadband managed services
industry, and through CBSi we compete with companies offering various VoIP
bundled broadband solutions to the QSR industry.

Many
of our current and potential competitors have longer operating histories and
significantly greater selling and marketing, technical, financial, customer
support, professional services and other resources than we do. As a result,
these competitors are able to devote greater resources to the development,
promotion, sale and support of their products. Moreover, our competitors may
foresee the course of market developments more accurately than we do and could
develop new technologies that compete with us or even render our services
obsolete. We may not have sufficient resources to continue to make the
investments or achieve the technological advances necessary to compete
successfully with existing or new competitors. In addition, due to the rapidly
evolving markets in which we compete, additional competitors with significant
market presence and financial resources, including large telecommunications
companies, may enter our markets, thereby further intensifying competition.

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.

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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.

Regulation

We
are authorized pursuant to authority of the Federal Communications Commission
(FCC) to operate as an intrastate and international resale carrier
under Section 214 of the FCC rules. In addition, we are regulated by
approximately forty four state public utility commissions as a reseller of
interstate and intrastate long distance telecommunications services.

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. In addition, 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.

Employees

As
of October 13, 2006, we had 12 employees, all of whom are full-time, based in
our offices in Mountlake Terrace, Washington or who work from home. In addition,
we currently have approximately 134,000 persons registered as Cognigen
independent agents selling various products and services through our affiliated
self replicating websites.

Risk Factors

Need For
Additional Capital; Cash Flows From Operations May Not Be Sufficient

We
have historically funded our operations primarily from sales of securities, by
borrowing and from operations. Cash generated from operations alone may not be
sufficient to fund our operations in the coming fiscal year. If we fail to
generate sufficient net sales and cash flow to fund our operations, including
our new CBSi line of business, our ability to increase sales and generate
revenue will be severely limited and we will not be able to operate effectively
unless we are able to obtain additional capital through equity or debt
financings. Such additional capital may not be available. In addition, if we are
able to raise additional funds through the sale of equity, convertible
securities, or debt, such financing likely will cause a significant dilution of
the ownership percentage of existing shareholders.

Revenue And
Growth Largely Dependent Upon Sales Generated By Independent Agents

We
use a network of independent agents and affiliate groups, each utilizing their
own customized website, replicated from our main www.ld.net website through the
use of our proprietary software and technology, to sell both our own proprietary
products and services and to sell, as agent, third party or outside vendor
products and services to customers and subscribers worldwide. As a result, our
revenue is dependent largely on sales generated by our independent agents.
Failure of these agents to achieve sustained sales or to grow their sales, or
our inability to attract and retain producing agents with an appropriate
commission structure, will materially and adversely affect our financial
condition and results of operations.

We
Market The Products And Services Of Third Party Vendors Pursuant To Authority
Granted By Such Vendors; However Such Vendors Are Under No Long Term Obligation
To Continue To Allow Us to Market And Sell Their Products

A
material portion of our revenue results from the sale and marketing of the
products of third party vendors who own and control the rights to market sell
their products and services. Our ability to offer these products and services is
dependent on our agreements with such vendors 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.

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We Rely On
Innovative Technology To Enable And Support The Marketing Of Products And Services By Our
Independent Agents

We
use proprietary 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.

The
Traditional Markets In Which We Compete Are Marked By High Customer Turnover And Intense
Competition

The
industries in which our agents traditionally resell have severally experienced
high rates of customer turnover. The high 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 or cause significant fluctuation in our results of
operations from period to period.

Consumer
Tastes And Trends; Product Mix; Technological Changes

We
are a multifaceted sales and marketing organizations that utilizes the Internet
as a platform to provide our customers and subscribers with a variety of
telecommunications and technology based products and services in markets that
are characterized by high rates of customer turnover, shortening product life
cycles, rapid changes in technology and customer preferences. If we are unable
to accurately forecast customer preferences and demands or market and
technological trends and transitions, or if we are unable to add new products
and services that generate increased sales to our offered product and services
mix, our financial condition and result of operations could be materially and
adversely affected.

As A
Reseller And Provider of  Telecommunications  Services,  The Markets In Which We Operate
Are Subject To Numerous Federal And State  Regulations

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 and various state public utility commissions. While we
believe that our services comply with all current governmental laws, regulations
and standards, we cannot assure you that our services will continue to comply in
the future. 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.
In addition, if we are unable to become certified as a reseller in all
jurisdictions in which it apply, or if we fail to remain certified as a reseller
in the jurisdictions in which we apply, our financial condition and results of
operations could suffer materially.

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We Intend to
Expand Our Operations by Entering the QSR Broadband Managed Services Market Through Our
Wholly Owned Subsidiary CBSi

In
an effort to grow our business, through our wholly owned subsidiary CBSi, we
have entered into the broadband managed services market. Through CBSi we intend
to provide integrated broadband voice, data, video, and management communication
and control support services to the quick service retail (QSR)
industry through an integrated suite of services known as Retail Technologies
CO-Op. We will incur significant costs in connection with entering into the
business of providing broadband managed services to the QSR industry and expend
a significant amount of our managements time and attention in doing so,
however, there can be no assurance that our efforts will be successful. We are
financing the start-up costs of this expansion from our existing business. Our
failure to timely or efficiently expand our operational and financial systems
and to implement and maintain effective internal controls and procedures in
connection with our new line of business could result in operating
inefficiencies that would increase our costs and expenses more than we
anticipate and could cause us to lose the ability to take advantage of perceived
market opportunities, enhance existing products, develop new products, satisfy
customer requirements, respond to competitive pressures or otherwise execute our
business plan. Additionally, if we do increase our operating expenses in
anticipation of the growth of our broadband business and this growth does not
meet our expectations, our financial results will be negatively impacted

An
Active Trading Market For Our Securities Has Not Developed And The Price Of Our
Securities May Be Volatile.

An active sustained trading market for our securities has not developed.
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. The price at which our
securities trade is likely to be highly volatile and may fluctuate substantially
due to a number of factors including, but not limited to, those discussed in the
other risk factors described above and the following:

| |  | volatility
in stock market prices and volumes, which is particularly common among smaller companies;
|- |  | ----------------------------------------------------------------------------------------------------

| |  | lack
of research coverage for companies with small public floats;
|- |  | -----------------------------------------------------------------

| |  | failure
to achieve sustainable financial performance;
|- |  | -----------------------------------------------------

| |  | actual
or anticipated fluctuations in our operating results;
|- |  | ------------------------------------------------------------

| |  | announcements
of technological innovations by us or others;
|- |  | -----------------------------------------------------------

| |  | entry
of new or more powerful competitors into our markets or consolidation of
existing competitors to create larger, more formidable competitors;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

| |  | terrorist
attacks either in the US or abroad;
|- |  | ---------------------------------------------

| |  | general
stock market conditions; and
|- |  | ------------------------------------

| |  | the
general state of the US and world economies
|- |  | -----------------------------------------------

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We
Do Not Intend To Pay Dividends And You May Not Experience A Return On Investment
Without Selling Your Securities.

We
have never declared or paid, nor do we intend in the foreseeable future to
declare or pay, any cash dividends on our common stock. Since we intend to
retain all future earnings to finance the operation and growth of our business,
you will likely need to sell your securities in order to realize a return on
your investment, if any.

Item 2.   
Description of Property

We
lease approximately 3,353 square feet of office space at 6405 218th
Street, S.W., Suite 305, Mountlake Terrace, Washington 98043, pursuant to a
lease that will terminate on July 31, 2007 (unless extended), and that currently
requires monthly rental payments of $5,100.

Item 3.   
Legal Proceedings

In
September  2004, we filed a lawsuit  against  American  Communications  LLC (American
Communications),  David Stone (Stone) and Harry  Gorlovesky  (Gorlovesky) in the Circuit
Court of the Twentieth  Judicial  Circuit in  and for  Dade  County,  Florida.  In our
complaint,  we  alleged  (1)  that  American  Communications  breached  a  settlement
agreement  by not making all of the  $100,000 of payments  required  thereunder  to
payoff a promissory  note and  agreement  for $300,000  that was  assigned to and is owed
to us and we demanded  judgment of $334,119 on  the  promissory  note and agreement  plus
interest from May 10, 2004: (2) that we are owed $81,000 for a dishonored  check of
$20,000  written as the last payment due under the settlement  agreement and (3) that
Stone and Gorlovesky  guaranteed  the promissory  note and agreement and must pay the
amount due under the promissory  note and agreement  plus our  attorneys  fees,  cost and
expenses  in  collecting  on the  promissory  note  and  agreement.  American
Communications  and Stone and  Gorlovesky  filed  answers  denying the claims in our
complaint  and setting  forth  certain affirmative defenses which we denied.

In
October 2004,  American  Communications  issued us a check for $21,000 as a complete
settlement of our  claims.  We returned the check to the attorney for American
Communications  and subsequently  sent a letter to the  attorney  for  American
Communications  stating  that the check was not a complete  settlement.  The  attorney
for  American Communications never agreed to the letter that we sent. We deposited the
check in February 2005.

The
attorney  for  American  Communications  and Stone  filed a motion to  withdraw  as their
counsel in  February 2005 and we field a motion for summary judgment against American
Communications,  Stone and Gorlovesky in  June 2005.  In September of 2006 we  determined
that the costs and expense of  continuing  to obtain and enforce a  judgment  against
American  Communications,  Stone and  Gorlovesky  outweighed  the  likelihood  of
obtaining  any  additional  payments form American  Communications,  Stone or Gorlovesky
and we accepted an offer of settlement of  $1,200.

On
April 7, 2005,  David  L.Jackson,  one of our  directors  and a member of our
Compensation  Committee,  filed a complaint with the California Department of Fair
Employment and Housing (No.  E200405M1559-oo-ap)  alleging  that he was  improperly
terminated  as an employee  by our Board of  Directors.  Because of the costs  involved
in  litigating  this  complaint,  we settled with Mr. Jackson by agreeing to pay Mr.
Jackson  $32,000 in one lump sum,  which we did in the first  qarter of fiscsl 2006 Mr.
Jackson did not  specify in his  complaint  the amount of his  alleged losses.

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, 2006.

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.OB. The following table sets forth, for the periods indicated,
the high and low closing bid price quotations for the common stock as reported
by the Commodity Systems, Inc., and available at http://finance.yahoo.com. Such
quotations reflect inter-dealer prices, but do not include retail mark-ups,
markdowns or commissions and may not necessarily represent actual transactions.

9



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##### Table of Contents

|                                 | High Bid | Low Bid
|-------------------------------- | -------- | -------
|Quarter ended June 30, 2006      |          | $     0
|                                 |          |        
|Quarter ended March 31, 2006     |          | 0      
|                                 |          |        
|Quarter ended December 31, 2005  |          | 0      
|                                 |          |        
|Quarter ended September 30, 2005 |          | 0      
|                                 |          |        
|Quarter ended June 30, 2005      |          | 0      
|                                 |          |        
|Quarter ended March 31, 2005     |          | 0      
|                                 |          |        
|Quarter ended December 31, 2004  |          | 0      
|                                 |          |        
|Quarter ended September 30, 2004 |          | 0      
|                                 |          |        

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 September 13, 2006, there were approximately 1,057holders 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, in the foreseeable future, anticipate paying any
cash dividends on our common stock. 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, 2006:

10



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##### Table of Contents

|                            
|----------------------------
|
|
|                            
|Equity compensation plans   
|approved by security holders
|                            
|                            
|Equity compensation plans   
|not approved by security    
|holders                     
|                            
|                            
|Total                       
|                            

A
description of the options and warrants issued without shareholder approval is
contained in Note 5 Stockholders Equity  Stock Options and Warrants
 contained in our Notes to Consolidated Financial Statements]

Except
as previously disclosed in our Quarterly Reports on Form 10-QSB and in our
Current Reports on Form 8-K, we did not sell any equity securities, warrants, or
options during our fiscal year that ended June 30, 2006.

No
repurchases by us of our equity securities were made during the fourth quarter
of our fiscal year that ended June 30, 2006.

Item 6.   
Managements Discussion and Analysis or Plan of Operation.

Overview

We
are an Internet and relationship enabled marketer. The core products that we
have sold have been long distance telephone and personal communications
services. We have generated revenue in two ways. First, marketing commissions
revenue has been generated from a number of vendors who are represented on our
agent web sites and for whom we sell their telecommunications and other products
and services via contractual agreements. Second, we have generated
telecommunications revenue through sales of our proprietary products and
services through our agent web sites. Our founder, Kevin E. Anderson, pioneered
our Internet based long distance telecommunication marketing opportunity in the
1990s. We have invested millions of dollars in developing business systems
for our independent agent network around the world. To date, over 860,000
customers have purchased telecommunication and personal technology services and
products from our websites. Each of the individuals, who are currently
registered as our agents, has a website that is replicated from the main
www.ld.net site.

In
late July 2005, the Company formed LowestCostMall.com (LCM) an
online shopping website that offered thousands of products, ranging from
personal electronics, office products, and household items to toys, flowers and
jewelry, at discounted prices. LCM was offered by the agents through the same
methods they used to sell the Companys telecommunications and personal
technology services, with Vcommerce Corporation, an independent organization,
serving as the back office and provisioning all of the orders and direct
shipments from the manufacturer to the purchaser. However, because
LowestCostMall.com did not perform in accordance with expectations, by written
notification in July 2006, the Company terminated its agreement with
Vcommerce and has closed down LCM operations.

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##### Table of Contents

On
July 7, 2006, the Company incorporated Cognigen Business Systems, Inc.
(CBSi). Through CBSi the Company provides integrated broadband
voice, data, video, and management communication and control support services to
the quick service retail (QSR) industry through an integrated suite
of services known as Retail Technologies CO-Op (RTC). CBSi was
formed by entry into an agreement with Anza Borrego Partners, Inc.
(ABP) pursuant to which the Company agreed to purchase two shares or
50% of CBSi for $50,000 and ABP agreed to purchase two shares or 50% of CBSi in
exchange for contributing to CBSi all of ABPs assets (including
intellectual property) used, developed, or to be used in connection with its
business plan for providing RTC services to the QSR industry, including
ABPs pilot installations in various Subway restaurants located in San
Diego County and Oregon. The four shares of CBSi constitute all of the
outstanding stock of CBSi.

In
connection with the formation of CBSi, the Company also obtained the option,
exercisable through September 7, 2006, to purchase ABPs two shares of CBSi
upon issuance to ABP of 1,246,028 shares of the Companys restricted common
stock. Pursuant to the terms of the option, the Company is also obligated to
deliver to ABP that number of shares of the Companys restricted common
stock as are equal to 5% of the pretax income of CBSi for the fiscal years
ending June 30, 2007, 2008 and 2009. Such common stock delivered to ABP will be
valued at the average market trading value of the common stock for the previous
20 trading days prior to the end of each fiscal year.

On
September 1, 2006, the Company sent a letter to ABP in which the Company
exercised the option to purchase ABPs two shares of CBSi. The exercise was
ratified by the Companys Board of Directors on September 5, 2006. CBSi
became a wholly owned subsidiary of the Company in September, 2006. Upon
completion of its pilot program, which is in its final stages, CBSi intends to
offer its bundled suite of integrated RTC broadband services to the
approximately 21,000 Subway franchised restaurants located in the United States
and to aggressively pursue the over 1.5 million QSR industry establishments
that, according to U.S. Bureau of the Census data, comprise immediate market
opportunities for CBSis bundled RTC broadband services.

We
continue to make a strategic transition in our business profile and delivery of
telecommunications products and services. We began our business as an agent,
representing and selling the telecommunications services and products of outside
vendors primarily to residential users, and then moved to selling multiple
branded products and services whereby the customer and account are owned by us.
We refer to these latter products and services as our proprietary products and
services. The most significant impact of this strategic transition is that by
billing our owned customer accounts, we generate approximately five to seven
times as much revenue compared to commission revenue we receive from vendors.
Although we have agreed to sell the majority of our existing primarily
residential oriented proprietary telecommunications accounts, it is our
intention that this will be more than replaced by our sales through CBSi of
higher margined business accounts such as multiple broadband based services for which we will record top
line revenue.

Through
the acquisition of multiple state licenses, billing capability, and new
distribution channels, we can increase revenue, maintain closer contact with our
customers, and control bottom line retention and contribution to a greater
degree including that which we do in CBSi with our broadband services.

See
additional discussion of liquidity and capital resources below.

12



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##### Table of Contents

We
had  a net loss for fiscal 2006 of $1,308,483, including an income tax expense of
$815,303. This income tax expense primarily represents the net tax effect of  accounting
for providing an allowance for the Companys prior year net  operating losses,
previously valued at $815,303, that management believes is  less than likely will be
utilized.

|Detailed Statement of Operations Data: | Proforma | 2006             | 2005
|-------------------------------------- | -------- | ---------------- | ----
|Revenue                                |          |                  |     
|Marketing commissions                  |          | $   6,246,094    |     
|Telecommunications                     |          | 3,784,126        |     
|Other                                  |          | 77,178           |     
|                                       |          |                  |     
|Total revenue                          |          | 10,107,398       |     
|                                       |          |                  |     
|                                       |          |                  |     
|Operating expenses                     |          |                  |     
|Commissions:                           |          |                  |     
|Marketing                              |          | 4,451,182        |     
|Telecommunications                     |          | 555,413          |     
|Telecommunications                     |          | 2,473,195        |     
|Other                                  |          | 51,766           |     
|Selling, general and administrative    |          | 3,135,471        |     
|Depreciation and amortization          |          | 90,050           |     
|                                       |          |                  |     
|Total operating expenses               |          | 10,757,077       |     
|                                       |          |                  |     
|                                       |          |                  |     
|Income (loss) from operations          |          | (649,679         | )   
|                                       |          |                  |     
|Interest expense                       |          | (69,569          | )   
|                                       |          |                  |     
|                                       |          |                  |     
|Income (loss) before income taxes      |          | (719,248         | )   
|                                       |          |                  |     
|Income taxes                           |          | (815,303         | )   
|                                       |          |                  |     
|                                       |          |                  |     
|Net income (loss)                      |          | (1,534,551       | )   
|                                       |          |                  |     
|                                       |          |                  |     
|Basic income (loss) per common share   |          | $           (.18 | )   
|                                       |          |                  |     
|                                       |          |                  |     

The
proforma statement of operations data reflects the statement of operations data
for the year ended June 30, 2006 had the marketing commissions payments to a
shareholder, under the Stock Redemption Agreement, of $226,068 been accounted
for as marketing commissions expense on the statement of operations versus as a
reduction of deferred commissions payable on the balance sheet. All deferred
commission have been eliminated from the balance sheet and all commissions since
October 1, 2005 are being expenses in the statement of operations. See further
details in Note 6  Stockholders Equity to the notes to the
consolidated financial statements.

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##### Table of Contents

Year Ended
June 30, 2006 Compared to Year Ended June 30, 2005

Total
revenue for the year ended June 30, 2006 was $10,107,398 compared to $11,745,673
for 2005. Marketing commissions revenue was $6,246,094 for 2006 compared to
$6,046,084 for the prior year. Telecommunications revenue was $3,784,126 for
2006 as compared to $5,699,589 for the prior year.

Marketing
commissions revenue for 2006 increased $200,010 from that of 2005, or 3%. This
increase reflects increases in sales of cellular products offset by the decrease
in sales of long distance products.

Telecommunications
revenue decreased $1,915,463 for 2006 compared to 2005, or 34%. This decrease
results from lower sales of our proprietary products and services, as well as,
lower selling prices of those products and services due to declining long
distance rates.

Marketing
commissions expense increased from $3,376,606 for 2005 to $4,225,114 for 2006,
an increase of $848,508, or 25%. This increase correlates to an increase in
marketing commissions revenue explained above. The higher percentage increase in
marketing commissions expense compared to the increase in marketing commissions
revenue results from a difference in product mix between the periods and the
payment of higher commission expense to certain master sales agents who have
been added to our sales agent force to increase volume and sell certain products
and services such as cellular products.

In
addition, marketing commission expense increased in October 2005 when we began
accruing payments to Cantara as marketing commissions expense. During the year
ended June 30, 2006, the Company expensed approximately $350,000 related to
payments made to Cantara as marketing commissions. In prior periods, these
payments were reflected as a reduction of the amounts owed to Cantara as a
result of the Stock Redemption Agreement entered into in November 2001 (see Note
6 to the Consolidated Financial Statements). Accordingly, we have reported a net
loss for the year ended June 30, 2006 of $1,308,483. If we had been able to
account for payments to Cantara in a manner similar to prior periods, we would
have reported approximately $1,534,551 in net loss. This change in accounting
had no effect on our cash flows since we have been paying approximately $120,000
to $150,000 of marketing commissions each quarter to Cantara related to this
obligation. See proforma information in Note 6 to the Consolidated Financial
Statements.

Telecommunications
commissions expense decreased from $831,150 for 2005 to $555,413 for 2006, a
decrease of $275,737, or 33%. This decrease is consistent with the decrease
described above in telecommunications revenue.

Telecommunications
expense, or carrier costs, decreased from $3,171,958 for 2005 to $2,473,195 for
2006, or a decrease of $698,763, or 22%. This decrease correlates to the
decrease in telecommunications revenue described above. The margins on our
telecommunications revenue decreased compared to the prior period reflective of
higher carrier costs and a highly competitive market for long distance customers
being driven by declining long distance rates.

Selling,
general and administrative expenses decreased $150,466 or 5% for 2006 compared
to 2005. This decrease is largely attributable to lower bad debt expense on the
sales of our proprietary products.

The
increase in depreciation and amortization of $72,025 for 2006 compared to 2005
represents amortization of cost related to LCM, fully depreciated due to the
discontinuance of LCM.

14



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##### Table of Contents

Interest
expense for 2006 of $69,569 is higher than the $47,164 for 2005 due to higher
average outstanding receivables financing balances during 2006.

Seasonality
and Economic Conditions

We
do not believe that our current revenue and sales are 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, 2006 or 2005.

Liquidity
and Capital Resources

We
have historically funded our operations primarily from sales of securities,
loans and operations. As of June 30, 2006 we effectively had no cash and cash
equivalents as they had been applied to the receivables financing
arrangement. Negative working capital was $987,244. Cash used in operations
during the year ended June 30, 2006 was $46,988.

Cash
provided by financing activities of $39,682 primarily included higher balances
from the receivables financing agreement of $265,750 and the payment of deferred
commissions of $226,068.

We
have a balance outstanding under a receivables financing arrangement with
Silicon Valley Bank as of June 30, 2006 of $460,750. This represents the amount
of marketing commissions receivables that have been pledged under an Accounts
Receivable Purchase Agreement (Receivables Purchase Agreement) with a bank. The
Receivables Purchase Agreement provides for up to $1,250,000 in marketing
commissions receivable to be used as collateral for advances under the
Receivables Purchase Agreement of which 75% of the marketing commissions
receivable balances are available in cash advances to us. Interest charges are
1.3% per month on the marketing commissions receivable balances used as
collateral. After one year, the Receivables Purchase Agreement is from year to
year unless terminated in writing by either party. We are in compliance with the
terms and conditions of the Receivables Purchase Agreement.

On
October 10, 2006, the Company entered into an agreement with Ven Core Solutions,
LLC (Ven Core) to borrow $250,000 in a term loan to be repaid
monthly as principal and interest at approximately 18.5% interest rate. The loan
is fully amortizable over 36 months. As part of the agreement, the Company
issued to Ven Core 75,000 warrants to purchase 75,000 shares of restricted
common stock of the Company. The warrants were granted at $.12 per share and are
exercisable for up to seven years from date of grant. The Company also gave Ven
Core a lien behind Silicon Valley Bank and Global Crossing on all assets of the
company, to the extent of the loan balance outstanding until the loan is fully
paid. Commitment and documentation fees of $5,500 were paid to Ven Core. This
loan was funded on October 11, 2006.

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##### Table of Contents

On
October 13, 2006, the Company agreed to sell its interest in the majority of its
telecommunications one plus accounts for which it records telecommunications
revenue through sales of proprietary products and services. The sales price
offered to the Company and agreed to by the Board of Directors was 1.5
multiplied by monthly revenue of the accounts from the third full monthly
billing cycle. The buyer paid $200,000 down and will pay the remainder upon
reaching regulatory approval, but retaining $25,000 until six months after
regulatory approval to address potential tax and other miscellaneous
liabilities. The sales price was determined reasonable by management based on
other similar proposals received for the same assets and based on industry
trends. The proceeds are intended to be used as working capital for the Company
and towards operational start up activities in its subsidiary CBSi.

Cash
flows generated from operations and from our receivables financing arrangement
were sufficient to meet our working capital requirements for the year ended June
30, 2006, but may not be sufficient to meet our working capital requirements for
the foreseeable future or provide for expansion opportunities. We incurred
$423,611 in losses from operations and used $46,988 in cash flows for operations
for the year ended June 30, 2006. In the fourth quarter of fiscal 2006 and the first
quarter of fiscal 2007, we made changes that helped us operate at breakeven
for July and August.

As
previously mentioned, we have acquired CBSi and we anticipate that this new
business venture will generate profit from operations in fiscal 2008. In October 2006
we closed on a new financing that, as discussed in Note 8 to the consolidated
financial statements, generated $250,000 for us. We are in negotiations to
replace our current debt financing agreements in an
opportunity that will reduce our cost of borrowing. In addition, we are in
discussions with interested parties to raise equity that will also help
reduce our cost of borrowing and allow us to pursue opportunities with CSBi. On
October 13, 2006, we closed on a transaction where, as discussed in Note 8 to
the consolidated financial statements, we sold certain of our telecommunication
accounts and received $200,000.

We
believe that we will be successful in producing sufficient cash flows from all
collective sources to continue for at least the next twelve months.

16



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##### Table of Contents

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:

|· |  | marketing commissions receivable;
|- |  | ---------------------------------

|· |  | valuation
of long-lived assets;
|- |  | -------------------------------

|· |  | commissions payable;
|- |  | --------------------

|· |  | revenue
recognition; and
|- |  | ------------------------

|· |  | income taxes
|- |  | ------------

Marketing
Commissions Receivable

Marketing
commissions receivable represent amounts due from outside vendors of
telecommunication services used by subscribers. Typically outside vendors pay
commissions due to us forty five to sixty days after the usage month-end.

There
is no allowance for doubtful accounts as of June 30, 2006 established by us to
provide for potential uncollectible accounts as management has written off all
receivables determined to be uncollectible as of that date.

Valuation of
Long-Lived Assets

We
assess valuation of long-lived assets in accordance with Statement of Financial
Accounting Standards 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 or
sales for which we are due marketing commissions revenue from our outside
vendors and commissions payable on sales of telecommunications revenue. It is
our policy to pay commissions to its agents only after receiving commissions due
from its outside vendors. This policy results in approximately two months
commission payable at any point in time. Commissions are paid on
telecommunications revenue usually within one to two months of generating the
telecommunications revenue. Commissions were paid on sales of discounted
products through LCM usually within one to two months of generating the sales
revenue.

17



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##### Table of Contents

Revenue
Recognition

Marketing
Commissions

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

Telecommunications

Telecommunications
pin revenue is recorded when the pins are shipped. Our policy is to delay
shipment of pins for a short period of time after receipt of cash to allow for
processing. This delay results in deferred revenue, which is recorded as a
liability until the pins are shipped. Pin revenue includes amounts paid for the
cost of the telecommunications services provided by third-party carriers.

Telecommunications
long distance phone service revenue is recorded when services are rendered.

Revenue
generated through the sales of products through LCM was recorded when the
products were shipped. Sales of products where the shipping had not occurred was
deferred until the product was shipped.

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.

For
the year ended June 30, 2006, income tax expense of $815,303 was recorded. This
expense primarily represents the net tax effect of accounting for providing a
valuation allowance for the Companys prior year net operating losses.
During the fourth quarter of fiscal 2006, management determined that providing a
valuation allowance was necessary based on the Companys estimates of when
the net operating losses would actually be utilized, among other reasons.

Recently
Issued Accounting Pronouncements

In
July 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48, Accounting for uncertainty in Income Taxes
 an interpretation of FASB Statement No. 109 (FIN 48), which
prescribes accounting for and disclosure of uncertainty in tax positions. FIN 48
defines the criteria that must be met for the benefits of a tax position to be
recognized. The provisions of FIN 48 are effective for fiscal years beginning
after December 15, 2006, which is our fiscal 2008. We are evaluating the
potential impact of this interpretation on our future results of operations and
financial condition.

On
September 13, 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements (SAB 108), which provides interpretive guidance on
how the effects of the carryover or reversal of prior year misstatements should
be considered in quantifying a current year misstatement. The guidance is
applicable for our fiscal 2008. We do not believe SAB 108 will have a material
impact on our consolidated financial statements.

From
time to time, new accounting pronouncements are issued by the FASB or other
standard setting bodies which we adopt as of the specified effective date.
Unless otherwise discussed, we believe the impact of recently issued standards
which are not yet effective will not have a material impact on our consolidated
financial statements upon adoption.

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##### Table of Contents

Forward
Looking Statements

Certain
of the information discussed in this report, and in particular in this section
entitled Managements Discussion and Analysis or Plan of
Operation, 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,, our possible inability to obtain additional financing, the
possible lack of producing agent growth, our possible lack of revenue growth,
our possible inability to add new products that generate sales, our lack of cash
flows, our possible loss of key personnel, the possibility of telecommunication
rate changes and technological changes; the possibility of increased competition
and the possibility that the operations of CBSi will not be successful. Many of
these risks are beyond our control. The forward-looking statements contained in
this report are often identifiable by the use of the words will,
intend, believe, expect,
anticipate, should, plan, or
estimate and similar expressions. We are not entitled to rely on the
safe harbor provisions of Section 27A of the Securities Act of 1933, as amended,
or Section 21E of the Securities Exchange Act of 1934 as amended, when making
forward-looking statements.

Item 7.   
Financial Statements.

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

19



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##### Table of Contents

COGNIGEN
NETWORKS, INC.

Consolidated
Financial StatementsandIndependent
Auditors ReportJune
30, 2006 and 2005

Table
of Contents

|                                                                    | Page
|------------------------------------------------------------------- | ----
|Report of Independent Registered Public Accounting Firm             |     
|Consolidated Financial Statements                                   |     
|Consolidated Balance Sheet                                          |     
|Consolidated Statements of Operations                               |     
|Consolidated Statement of Changes in Stockholders Equity (Deficit) |     
|Consolidated Statements of Cash Flows                               |     
|Notes to Consolidated Financial Statements                          |     

20



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##### Table of Contents

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of
Directors and StockholdersCognigen Networks, Inc.Mountlake Terrace, Washington

We
have audited the accompanying consolidated balance sheet of Cognigen Networks,
Inc. and subsidiaries as of June 30, 2006, and the related consolidated
statements of operations, changes in stockholders equity (deficit) and
cash flows for the years ended June 30, 2006 and 2005. These consolidated
financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal
control over financial reporting. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Cognigen Networks, Inc. and
subsidiaries as of June 30, 2006 and 2005, and the results of their operations
and their cash flows for the years then ended, in conformity with U.S. generally
accepted accounting principles.

Ehrhardt Keefe
Steiner & Hottman PC

September
29, 2006Denver, Colorado

F-1



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##### Table of Contents

COGNIGEN
NETWORKS, INC.Consolidated Balance SheetJune 30, 2006

Assets

|                                                                                     | 
|------------------------------------------------------------------------------------ | 
|Current assets                                                                       | 
|Cash                                                                                 | 
|Accounts receivable                                                                  | 
|Marketing commissions receivable                                                     | 
|Other current assets                                                                 | 
|                                                                                     | 
|Total current assets                                                                 | 
|                                                                                     | 
|Non-current assets                                                                   | 
|Property and equipment, net                                                          | 
|Deposits and other assets                                                            | 
|                                                                                     | 
|Total non-current assets                                                             | 
|                                                                                     | 
|Total assets                                                                         | 
|                                                                                     | 
|                                                                                     | 
|                                                                                     | 
|Liabilities and Stockholders Deficit                                                | 
|                                                                                     | 
|Current liabilities                                                                  | 
|Accounts payable                                                                     | 
|Accrued liabilities                                                                  | 
|Commissions payable                                                                  | 
|Receivables financing arrangement                                                    | 
|Other current liabilities                                                            | 
|                                                                                     | 
|Total current liabilities                                                            | 
|                                                                                     | 
|                                                                                     | 
|Commitments and contingencies                                                        | 
|                                                                                     | 
|Stockholders' deficit                                                                | 
|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        | 
|($608,225 including undeclared dividends)                                            | 
|Common stock $.001 par value, 300,000,000 shares authorized; 8,753,972 shares issued | 
|and outstanding                                                                      | 
|Additional paid-in capital                                                           | 
|Accumulated deficit                                                                  | 
|                                                                                     | 
|Total stockholders' deficit                                                          | 
|                                                                                     | 
|Total liabilities and stockholders' deficit                                          | 
|                                                                                     | 
|                                                                                     | 

See notes to
consolidated financial statements.

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##### Table of Contents

COGNIGEN
NETWORKS, INC.Consolidated Statements of Operations

|                                                               | For the Years EndedJune 30, |                 
|-------------------------------------------------------------- | --------------------------- | ----------------
|
|Revenue                                                        |                             |                 
|Marketing commissions                                          |                             | $   6,246,094   
|Telecommunications                                             |                             | 3,784,126       
|Other                                                          |                             | 77,178          
|                                                               |                             |                 
|Total revenue                                                  |                             | 10,107,398      
|                                                               |                             |                 
|Operating expenses                                             |                             |                 
|Commissions:                                                   |                             |                 
|Marketing                                                      |                             | 4,225,114       
|Telecommunications                                             |                             | 555,413         
|Telecommunications                                             |                             | 2,473,195       
|                                                               |                             |                 
|Other                                                          |                             | 51,766          
|Selling, general and administrative                            |                             | 3,135,471       
|Depreciation and amortization                                  |                             | 90,050          
|                                                               |                             |                 
|Total operating expenses                                       |                             | 10,531,009      
|                                                               |                             |                 
|Income (loss) from operations                                  |                             | (423,611        
|                                                               |                             |                 
|Interest expense                                               |                             | (69,569         
|                                                               |                             |                 
|Income (loss) before income taxes                              |                             | (493,180        
|                                                               |                             |                 
|Income taxes                                                   |                             | (815,303        
|                                                               |                             |                 
|Net income (loss)                                              |                             | (1,308,483      
|                                                               |                             |                 
|Preferred dividends                                            |                             | (40,000         
|                                                               |                             |                 
|Net income (loss) attributable to common shareholders          |                             | $(1,348,483     
|                                                               |                             |                 
|Income (loss) per common share  basic                         |                             | $           (.15
|                                                               |                             |                 
|Weighted average number of common shares outstanding - basic   |                             | 8,753,972       
|                                                               |                             |                 
|Income (loss) per common share  diluted                       |                             | $           (.15
|                                                               |                             |                 
|Weighted average number of common shares outstanding - diluted |                             | 8,753,972       
|                                                               |                             |                 
|                                                               |                             |                 

See notes to
consolidated financial statements.

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##### Table of Contents

COGNIGEN
NETWORKS, INC. Consolidated Statement of Changes in Stockholders; Equity (Deficit)For
the Years Ended June 30, 2006 and 2005

|                                         | Preferred Stock | Common Stock | AdditionalPaid-in | Accumulated | TotalStockholders |           | 
|---------------------------------------- | --------------- | ------------ | ----------------- | ----------- | ------------------ | --------- | 
|
|Balance - June 30, 2004                  |                 | 500,000      |                   | $450,000    |                    | 8,753,972 | 
|Reversal of dividends on preferred stock |                
|(Note 5)                                 |                 | --           |                   | --          |                    | --        | 
|Net income                               |                 | --           |                   | --          |                    | --        | 
|                                         |                 |              |                   |             |                    |           | 
|Balance - June 30, 2005                  |                 | 500,000      |                   | $450,000    |                    | 8,753,972 | 
|Issuance of stock options                |                 | --           |                   | --          |                    | --        | 
|Net loss                                 |                 | --           |                   | --          |                    | --        | 
|                                         |                 |              |                   |             |                    |           | 
|Balance - June 30, 2006                  |                 | 500,000      |                   | $450,000    |                    | 8,753,972 | 
|                                         |                 |              |                   |             |                    |           | 

See notes to
consolidated financial statements.

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##### Table of Contents

COGNIGEN
NETWORKS, INC.Consolidated Statements of Cash Flows

|                                                                   | For the Years EndedJune 30, |                
|------------------------------------------------------------------ | --------------------------- | ---------------
|
|Cash flows from operating activities                               |                             |                
|Net income (loss)                                                  |                             | $(1,308,483    
|                                                                   |                             |                
|                                                                   |                             |                
|Adjustments to reconcile net income (loss) to net cash provided by |                             |                
|(used in) operating activities                                     |                             |                
|Depreciation and amortization                                      |                             | 90,050         
|Provision for doubtful accounts                                    |                             | 87,442         
|Issuance of stock options                                          |                             | 11,246         
|Income tax expense                                                 |                             | 815,303        
|Changes in assets and liabilities:                                 |                             |                
|Accounts receivable                                                |                             | 45,030         
|Commissions receivable                                             |                             | 260,121        
|Other current assets                                               |                             | 27,173         
|Deposits and other assets                                          |                             | (54,602        
|Accounts payable                                                   |                             | 63,356         
|Accrued liabilities                                                |                             | 171,102        
|Commissions payable                                                |                             | (236,344       
|Other current liabilities                                          |                             | (18,266        
|Other liabilities                                                  |                             | (116           
|                                                                   |                             |                
|                                                                   |                             | 1,261,495      
|                                                                   |                             |                
|Net cash provided by (used in) operating activities                |                             | (46,988        
|                                                                   |                             |                
|Cash flows from investing activities                               |                             |                
|Payments towards acquisition of Cantara Agency                     |                             | (135,000       
|Purchases of property and equipment                                |                             | (918           
|                                                                   |                             |                
|Net cash used in investing activities                              |                             | (135,918       
|                                                                   |                             |                
|Cash flows from financing activities                               |                             |                
|Increase (decrease) in receivables financing arrangement           |                             | 265,750        
|Payments on deferred commissions                                   |                             | (226,068       
|Other                                                              |                             |               
|                                                                   |                             |                
|Net cash provided by (used in) financing activities                |                             | 39,682         
|                                                                   |                             |                
|Net decrease in cash                                               |                             | (143,224       
|                                                                   |                             |                
|Cash - beginning of year                                           |                             | 143,224        
|                                                                   |                             |                
|Cash - end of year                                                 |                             | $             
|                                                                   |                             |                

(Continued on
following page.)

F-5



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##### Table of Contents

COGNIGEN
NETWORKS, INC.Consolidated Statements of Cash Flows

(Continued from
previous page.)

Supplemental
disclosure of cash flow information:

Cash
paid for interest was $69,569 and $47,164 for 2006 and 2005, respectively.

See notes to
consolidated financial statements.

F-6



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##### Table of Contents

COGNIGEN
NETWORKS, INC.Notes to 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. The Company is an Internet and relationship enabled marketer. The core
products that have been sold have been long distance telephone and personal
communications services. Revenue has been generated in two ways. First,
marketing commissions revenue has been generated from a number of vendors who
are represented on the Companys agent web sites and for whom the Company
sells their products and services via contractual agreements. Second,
telecommunications revenue has been generated through sales of the
Companys proprietary products and services through the Companys
agent web sites.

In
late July 2005, the Company formed LowestCostMall.com (LCM) an
online shopping website that offered thousands of products, ranging from
personal electronics, office products, and household items to toys, flowers and
jewelry, at discounted prices. LCM was offered by the agents through the same
methods they used to sell the Companys telecommunications and personal
technology services, with Vcommerce Corporation, an independent organization,
serving as the back office and provisioning all of the orders and direct
shipments from the manufacturer to the purchaser. However, because
LowestCostMall.com did not perform in accordance with expectations, by written
notification in July 2006, the Company terminated its agreement with
Vcommerce, and closed down LCM operations.

On
July 7, 2006, the Company incorporated Cognigen Business Systems, Inc.
(CBSi). Through CBSi the Company provides integrated broadband
voice, data, video, and management communication and control support services to
the quick service retail (QSR) industry through an integrated suite
of services known as Retail Technologies CO-Op (RTC). CBSi was
formed by entry into an agreement with Anza Borrego Partners, Inc.
(ABP) pursuant to which the Company agreed to purchase two shares of
CBSi for $50,000 and ABP agreed to purchase two shares of CBSi in exchange for
contributing to CBSi all of ABPs assets (including intellectual property)
used, developed, or to be used in connection with its business plan for
providing RTC services to the QSR industry, including ABPs pilot
installations in various Subway restaurants located in San Diego County and
Oregon. The four shares of CBSi constitute all of the outstanding stock of CBSi.

In
connection with the formation of CBSi, the Company also obtained the option,
exercisable through September 7, 2006; to purchase ABPs two shares of CBSi
upon issuance to ABP of 1,246,028 shares of the Companys restricted common
stock. Pursuant to the terms of the option, the Company is also obligated to
deliver to ABP that number of shares of the Companys restricted common
stock as are equal to 5% of the pretax income of CBSi for the fiscal years
ending June 30, 2007, 2008 and 2009. Such common stock delivered to ABP will be
valued at the average market trading value of the common stock for the previous
20 trading days prior to the end of each fiscal year.

On
September 1, 2006, the Company sent a letter to ABP in which the Company
exercised the option to purchase ABPs two shares of CBSi. The exercise was
ratified by the Companys Board of Directors on September 5, 2006. CBSi
became a wholly owned subsidiary of the Company in September 2006. Upon
completion of its pilot program, which is in its final stages, CBSi intends to
offer its bundled suite of integrated RTC broadband services to the
approximately 21,000 Subway franchised restaurants located in the United States
and to aggressively pursue the over 1.5 million QSR industry establishments
that, according to U.S. Bureau of the Census data, comprise immediate market
opportunities for CBSis bundled RTC broadband services.

F-7



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##### Table of Contents

COGNIGEN
NETWORKS, INC.Notes to Financial Statements

Principles
of Consolidation

The
accompanying consolidated financial statements include the accounts of Cognigen
Networks, Inc. and its subsidiaries Intandem Communications Corp. (Intandem)
since February 1, 2004 and LCM beginning in July 2005. See Note 5 regarding
information regarding the sale of CST. All intercompany accounts and
transactions have been eliminated in consolidation. CBSi is not consolidated
until September 1, 2006.

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.

Marketing
Commissions Receivable

Marketing
commissions receivable represent amounts due from outside vendors of
telecommunication products and services used by subscribers. Typically outside
vendors pay commissions due to the Company forty five to sixty days after the
usage month-end.

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##### Table of Contents

COGNIGEN
NETWORKS, INC.Notes to Financial Statements

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

Marketing
Commissions Receivable (continued)

There
is no allowance for doubtful accounts as of June 30, 2006 established by the
Company to provide for potential uncollectible accounts receivables determined
to be uncollectible as all uncollectible accounts receivable have been written
off.

The
Company had marketing commissions revenue from two and three outside vendors
that generated a total of approximately 29% and 25%, respectively, of total
revenue for the years ended June 30, 2006 and 2005.

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.

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.

Accounts
Receivable

At the
time the accounts receivable are originated, the Company considers a reserve for
doubtful accounts based on the creditworthiness of the customer. The provision
for uncollectible amounts is continually reviewed and adjusted to maintain the
allowance at a level considered adequate to cover future losses. The allowance
is managements best estimate of uncollectible amounts and is determined
based on historical performance that is tracked by the Company on an ongoing
basis. The losses ultimately incurred could differ materially in the near term
from the amounts estimated in determining the allowance. The allowance as of
June 30, 2006 was $87,442.

F-9



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##### Table of Contents

COGNIGEN
NETWORKS, INC.Notes to Financial Statements

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

Commissions
Payable

Commissions
payable represent amounts due to agents for commissions related to the usage or
sales for which the Company is due marketing commissions revenue from its
outside vendors and commissions payable on sales of telecommunications revenue.
It is the Companys policy to pay commissions to its agents only after
receiving commissions due from its outside vendors. This policy results in
approximately two months commission payable at any point in time. Commissions
are paid on telecommunications revenue usually within one to two months of
generating the telecommunications revenue. Commissions were paid on sales of
discounted products through LCM usually one to two months of generating the
sales revenue.

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.

For
the year ended June 30, 2006, income tax expense of $815,303 was recorded. This
expense primarily represents the net tax effect of accounting for providing a
valuation allowance for the Companys prior year net operating losses.
During the fourth quarter of fiscal 2006, management determined that providing a
valuation allowance was necessary based on the Companys estimates of when
the net operating losses would actually be utilized, among other reasons.

Revenue
Recognition

Marketing
Commissions

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

Telecommunications

Telecommunications
pin revenue is recorded when the pins are shipped. The Companys policy is
to delay shipment of pins for a short period of time after receipt of cash to
allow for processing. This delay results in deferred revenue, which is recorded
as a liability until the pins are shipped. Pin revenue includes amounts paid for
the cost of the telecommunications services provided by third-party carriers.

Telecommunications
long distance phone service revenue is recorded when services are rendered.

Revenue
generated through the sales of products through LCM was recorded when the
products were shipped. Sales of products where the shipping had not occurred
were deferred until the product was shipped.

F-10



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##### Table of Contents

COGNIGEN
NETWORKS, INC.Notes to Financial Statements

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

Stock Based
Compensation

The
Company adopted the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation. and SFAS No. 123R, Share-Based Payment.
Accordingly, compensation cost has been recognized for the stock options issued
during the year of $11,246 to Directors representing the fair market value of
the issued stock options based on a Black-Scholes option-pricing model. No
compensation expense has been recorded for options issued to employees during
the year ended June 30, 2006. There were no options granted during the year
ended June 30, 2005.

Had
compensation expense for the Companys options issued to employees 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 income (loss) and basic
income (loss) per common share would have been changed to the pro forma amounts
indicated below:

|                                                             | For the Years EndedJune 30, |            
|------------------------------------------------------------ | --------------------------- | -----------
|
|Net income (loss) - as reported                              |                             | $(1,308,483
|Deduct stock-based compensation expense determined under the |                            
|fair value based method, net of tax                          |                             | (13,814    
|                                                             |                             |            
|Net income (loss) - pro forma                                |                             | $(1,322,297
|                                                             |                             |            

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:

|                                              | For the Years EndedJune 30, |         
|--------------------------------------------- | --------------------------- | --------
|
|Approximate risk free rate                    |                             | 6.00%   
|Average expected life                         |                             | 2.5 year
|Dividend yield                                |                             | 0%      
|Volatility                                    |                             | 63%     
|Estimated fair value of total options granted |                             | $13,814 

Advertising
Costs

The
Company expenses advertising costs as incurred. Total advertising costs for the
years ended June 30, 2006 and 2005 were $42,296 and $39,722, respectively.

F-11



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##### Table of Contents

COGNIGEN
NETWORKS, INC.Notes to Financial Statements

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

Income
(Loss) Per Share

The
Company applies the provisions of SFAS No. 128, Earnings Per Share.
All dilutive potential common shares that have an anti-dilutive effect on
diluted per share amounts have been excluded in determining net income (loss)
per share. The dilutive effect of stock options, warrants and preferred stock
included in the calculation of income (loss) per share on a diluted basis for
the years ended June 30, 2006 and 2005 are zero and 535,897, respectively.
1,949,000 and 1,514,103 of options, warrants, and preferred stock have been
excluded from diluted shares for the years ended June 30, 2006 and 2005,
respectively, as their affect was anti-dilutive. 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.

Recently
Issued Accounting Pronouncements

In
July 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48, Accounting for uncertainty in Income Taxes
 an interpretation of FASB Statement No. 109 (FIN 48), which
prescribes accounting for and disclosure of uncertainty in tax positions. FIN 48
defines the criteria that must be met for the benefits of a tax position to be
recognized. The provisions of FIN 48 are effective for fiscal years beginning
after December 15, 2006, which is our fiscal 2008. We are evaluating the
potential impact of this interpretation on our future results of operations and
financial condition.

On
September 13, 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements (SAB 108), which provides interpretive guidance on
how the effects of the carryover or reversal of prior year misstatements should
be considered in quantifying a current year misstatement. The guidance is
applicable for our fiscal 2008. We do not believe SAB 108 will have a material
impact on our consolidated financial statements.

From
time to time, new accounting pronouncements are issued by the FASB or other
standard setting bodies which we adopt as of the specified effective date.
Unless otherwise discussed, we believe the impact of recently issued standards
which are not yet effective will not have a material impact on our consolidated
financial statements upon adoption.

F-12



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##### Table of Contents

COGNIGEN
NETWORKS, INC.Notes to Financial Statements

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

Reclassifications

Certain
amounts in the 2005 consolidated financial statements have been reclassified to
conform to the 2006 presentation.

Note 2
 Managements Plan

Cash
flows generated from operations and from the Companys receivables
financing arrangement were sufficient to meet working capital requirements for
the year ended June 30, 2006, but may not be sufficient to meet working capital
requirements for the foreseeable future or provide for expansion opportunities.
The Company incurred $423,611 in losses from operations and used $46,988 in cash
flows for operations for the year ended June 30, 2006. In the fourth quarter of
fiscal 2006 and the first quarter of fiscal 2007, management made changes that helped the
Company operate at break-even for July and August.

The
Company has acquired CBSi and anticipates that this new business venture will
generate profit from operations in fiscal 2008. In October 2006 we closed on a new
financing arrangement that, as discussed in Note 9, generated $250,000 for the
Company. We are in negotiations to replace debt current financing agreements
in an opportunity that will reduce the Companys cost of
borrowing. In addition, management is in discussions with interested parties to
raise equity that will also help reduce the Companys cost of borrowing
and allow it to pursue opportunities with CSBi. On October 13, 2006, the Company
closed on a transaction where, as discussed in Note 8 the Company sold certain
telecommunication accounts and received $200,000.

Management
believes that the Company will be successful in producing
sufficient cash flows from all collective sources to continue for at least the
next twelve months.

Note 3
 Property and Equipment

Property
and equipment consist of the following at June 30, 2006:

|                              | 
|----------------------------- | 
|Furniture and fixtures        | 
|Computer equipment            | 
|Equipment                     | 
|Leasehold improvements        | 
|Software                      | 
|                              | 
|                              | 
|Less accumulated depreciation | 
|                              | 
|                              | 
|                              | 
|                              | 

F-13



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##### Table of Contents

COGNIGEN
NETWORKS, INC.Notes to Financial Statements

Note 4
 Receivables Financing Arrangement

The
balance of receivables financing arrangement as of June 30, 2006 is $460,750.
This represents the amount of marketing commissions receivables that have been
pledged under an Accounts Receivable Purchase Agreement (Receivables Purchase
Agreement) with Silicon Valley Bank. The Receivables Purchase Agreement provides
for up to $1,250,000 in marketing commissions receivable to be used as
collateral for advances under the Receivables Purchase Agreement of which 75% of
the marketing commissions receivable balances are available in cash advances to
the Company. Interest charges are 1.3% per month on the marketing commissions
receivable balances used as collateral. The bank was given a Security Agreement
in the assets of the Company including any of the Companys copyrights,
trademarks, patents and mask works as a condition to the Receivables Purchase
Agreement. Facility, audit and due diligence fees were paid to the bank of
$15,976. In addition, finders fees were paid to a party who may be deemed
to be a related party of $19,337. Both of these amounts have been fully
amortized into interest expense through June 30, 2006. The Receivables Purchase
Agreement is renewable from year to year unless terminated in writing by either
party.

Note 5
 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 $2,668,608 of net operating loss carryforwards, which expire
in varying amounts through 2026, if unused.

Temporary
differences and carryforwards giving rise to a significant portion of deferred
tax assets (liabilities) are as follows at June 30, 2006:

|                                 | 
|-------------------------------- | 
|Current                          | 
|Allowance for doubtful accounts  | 
|Vacation accruals                | 
|Long-term                        | 
|Property and equipment           | 
|Net operating loss carryforwards | 
|Other                            | 
|Less valuation allowance         | 
|                                 | 
|                                 | 
|                                 | 
|                                 | 

F-14



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##### Table of Contents

COGNIGEN
NETWORKS, INC.Notes to Financial Statements

Note 5 -
Income Taxes (continued)

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 EndedJune 30, |             
|------------------------------------------------------- | --------------------------- | ------------
|
|Income tax expense (benefit) at the statutory rate      |                             | $  (167,681 
|State and local income taxes, net of federal income tax |                             |            
|Change in valuation allowance                           |                             | 1,018,734   
|Nondeductible expenses                                  |                             | 7,317       
|Other timing differences, net                           |                             | (43,067     
|                                                        |                             |             
|Deferred income tax expense (benefit)                   |                             | $    815,303
|                                                        |                             |             

For
the year ended June 30, 2006, income tax expense of $815,303 was recorded. This
expense primarily represents the net tax effect of accounting for providing a
valuation allowance for the Companys prior year net operating losses.
During the fourth quarter of fiscal 2006, management determined that providing a
valuation allowance was necessary based on the Companys estimates of when
the net operating losses would actually be utilized, among other reasons.

Note 6
 Stockholders Equity

Preferred
Stock

As of
June 30, 2006, the Company has authorized 20,000,000 shares of preferred stock.
The Company has 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. During the year ended
June 30, 2005, the Company reversed $68,222 of accrued dividends that had been
accrued on the balance sheet because they had not been declared. Because of the
cumulative nature of these dividends, if all dividends were to be declared the
balance owing would be $148,225 as of June 30, 2006.

F-15



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##### Table of Contents

COGNIGEN
NETWORKS, INC.Notes to Financial Statements

Note 6 -
Stockholders' Equity (continued)

Common Stock

Stock
Redemption Agreement

On
November 21, 2001, the Company entered into a Stock Redemption Agreement with
the Anderson Family Trust (AFT), a substantial stockholder of the Company, and
Cantara Communications Corporation (Cantara) whereby AFT sold 2,712,501 shares
of the Companys common stock to the Company in exchange for the transfer
by the Company to Cantara of the original Cognigen Agency and all of its
downline agents. As a result of this transaction, Cantara received the
contingent right to receive all of its direct sales commissions and generational
downline commission overrides. During the first twelve months of the ownership
by Cantara of the former Cognigen Agency, now renamed Cantara, Cantara agreed to
a capping of the commissions payable to it, thereafter commencing January 2003,
Cantara has received the full direct and generational override commissions it is
entitled to earn pursuant to the existing and current Company commission
structure applicable for all agents. Payment of commissions to Cantara is
totally contingent upon the generation of sales by it and its downline agents
and payment for the products and services sold by the Companys customers
and vendors. The sales are generated either directly by employees of Cantara
and/or its downline sub-agents. Cantara has contracted with Kevin E. Anderson
Consulting, Inc. (KEAC), a corporation owned by Kevin E, Anderson, founder of
Cognigen Communications Corporation and a beneficiary of the AFT, to manage
Cantara for a set monthly fee. AFT owns approximately 11% of the Companys
common stock. Currently, the monthly commission payment to the Cantara is
approximately 10% of the total commissions paid monthly to all of the
Companys agents.

The
following presents statement of operations data and proforma data. The proforma
data reflect certain statement of operations accounts for the years ended June
30, 2006 and 2005 that reflect the increase in commissions expense had the
payments to the stockholder, described in the preceding paragraph, during these
periods been accounted for as commissions expense rather than a reduction to
deferred commissions payable.

|                                    | Pro FormaYear EndedJune 30, 2006 | Actual YearEndedJune 30, 2006 | Pro FormaYear EndedJune 30, 2005 | Actual YearEndedJune 30, 2005
|----------------------------------- | -------------------------------- | ----------------------------- | -------------------------------- | -----------------------------
|Total revenue                       |                                  | $ 10,107,398                  |                                  | $ 10,107,398                 
|                                    |                                  |                               |                                  |                              
|Operating expenses:                 |                                  |                               |                                  |                              
|Marketing commissions               |                                  | 5,006,595                     |                                  | 4,780,527                    
|Telecommunications                  |                                  | 2,473,195                     |                                  | 2,473,195                    
|Other                               |                                  | 51,766                        |                                  | 51,766                       
|Selling, general and administrative |                                  | 3,135,471                     |                                  | 3,135,471                    
|Depreciation and amortization       |                                  | 90,050                        |                                  | 90,050                       
|                                    |                                  |                               |                                  |                              
|Total operating expenses            |                                  | 10,757,077                    |                                  | 10,531,009                   
|                                    |                                  |                               |                                  |                              
|Income from operations              |                                  | $    (649,679                 | )                                | $    (423,611                
|                                    |                                  |                               |                                  |                              
|Income taxes                        |                                  | $    (815,303                 | )                                | $    (815,303                
|                                    |                                  |                               |                                  |                              
|Net income attributable to          |                                  |                               |                                  |                              
|common shareholders                 |                                  | $(1,574,551                   | )                                | $(1,348,483                  
|                                    |                                  |                               |                                  |                              
|                                    |                                  |                               |                                  |                              
|Income per common share - basic     |                                  | $           (.18              | )                                | $           (.15             
|                                    |                                  |                               |                                  |                              
|                                    |                                  |                               |                                  |                              

F-16



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##### Table of Contents

COGNIGEN
NETWORKS, INC.Notes to Financial Statements

Note 6 -
Stockholders' Equity (continued)

Stock Options

The
Company has established the 2001 Incentive and Nonstatutory Stock Option Plan
(the 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.

In
June, 2006, the Company granted to employees, options to purchase 335,000 shares
of common stock of the Company, including 200,000 to the chief financial officer
and acting chief executive officer. These options vest over three years, are
exercisable at $.10 per share and expire in five years from the date of grant.

During
the year ended June 30, 2006, the Board of Directors granted 80,000 options to
non-employee directors of the Company. These options vested immediately and are
exercisable at $.71 per share and expire five years from the date of grant. The
Company has included $11,246 in general and administrative expenses for the
issuance of these options based on a calculation using the Black-Scholes Model.

During
the year ended June 30, 2005, there were no options granted, including any
options under the Plan.

During
the year ended June 30, 2005, a total of 1,000,000 options expired, all of which
were not issued under the Plan.

The
following table presents the activity for options outstanding:

|                            | StockOptions | WeightedAverageExercisePrice
|--------------------------- | ------------ | ----------------------------
|Outstanding - June 30, 2004 |              | 1,500,000                   
|Granted                     |              | --                          
|Forfeited/canceled          |              | (1,000,000                  
|Exercised                   |              | --                          
|                            |              |                             
|Outstanding - June 30, 2005 |              | 500,000                     
|Granted                     |              | 415,000                     
|Forfeited/canceled          |              | (16,000                     
|Exercised                   |              | --                          
|                            |              |                             
|Outstanding - June 30, 2006 |              | 899,000                     
|                            |              |                             

F-17



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##### Table of Contents

COGNIGEN
NETWORKS, INC.Notes to Financial Statements

Note 6 -
Stockholders' Equity (continued)

Stock
Options (continued

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

|                      | Options Outstanding |         | Options Exercisable |            | 
|--------------------- | ------------------- | ------- | ------------------- | ---------- | 
|
|$ 0.10 - .35          |                     | 535,000 |                     | .11        | 
|$ 0.36 - .39          |                     | 150,000 |                     | .36        | 
|$ 0.40 - .44          |                     | 79,000  |                     | .42        | 
|$ 0.45 - .52          |                     | 55,000  |                     | .51        | 
|$ 0.53 - .71          |                     | 80,000  |                     | .71        | 
|                      |                     |         |                     |            | 
|Total - June 30, 2006 |                     | 899,000 |                     | $      .28 | 
|                      |                     |         |                     |            | 

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

Warrants

The
following table presents the activity for warrants outstanding:

|                            | Number ofWarrants | WeightedAverageExercisePrice
|--------------------------- | ----------------- | ----------------------------
|Outstanding - June 30, 2004 |                   | 1,200,000                   
|Issued                      |                   | --                          
|Forfeited/canceled          |                   | (150,000                    
|Exercised                   |                   | --                          
|                            |                   |                             
|Outstanding - June 30, 2005 |                   | 1,050,000                   
|Issued                      |                   | 437,500                     
|Forfeited/canceled          |                   | (937,500                    
|Exercised                   |                   | --                          
|                            |                   |                             
|Outstanding - June 30, 2006 |                   | 550,000                     
|                            |                   |                             

All of the
outstanding  warrants are exercisable and have a weighted  average  remaining
contractual  life of 1.76  years.

F-18



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##### Table of Contents

COGNIGEN
NETWORKS, INC.Notes to Financial Statements

BayHill
Agreement

On November 22,
2005,  the Company and the BayHill  Group LC (BayHill)  entered into an agreement
whereby  BayHill  agreed to provide  services to assist the Company in developing
business  strategies and other corporate  matters,  including assisting the Company in
its strategic planning  activities,  raising capital,  finding companies for the  Company
to acquire,  assisting  the Company in its investor  relations  activities  and serving
in various  interim  management  capacities as requested.  The term of the agreement was
for six months.  Cognigen gave BayHill a notice  of termination of this contract which
endedMay 21, 2006.

For  providing
services  pursuant to the  agreement,  the Company  paid  BayHill  $10,000 per month for
six months  commencing  November 22, 2005. Of the $10,000,  one half was accrued until
the Company received  cumulative  equity  funding in amounts  greater  than  $1,000,000
or  acquired  another  business  or  businesses  which have at least  $1,000,000 in cash.

The Company
agreed to grant BayHill  warrants to purchase  437,500  shares of common stock at an
exercise price of  $.23 per share.  The  warrants  were to vest  according  to a schedule
if the Company met certain  parameters.  The  Company had agreed to grant BayHill certain
piggyback and demand registration rights.

By mutual
agreement  in May of 2006,  BayHill and the Company  agreed to  terminate  the
agreement.  In September  2006,  BayHill and the Company agreed to issue to BayHill
169,792  restricted  common shares of Cognigen in return  for  canceling  any  further
financial  obligations  Cognigen  had to BayHill  under the  original  agreement  and
canceling  outstanding  warrants given to BayHill.  These restricted common shares will
have piggyback rights and a  one time demand right to register if the Company is able to
bring in  $5,000,000  in equity or new  funding.  As of  June 30,  2006,  the  Company
had  $30,000 in accrued  and unpaid  fees to BayHill  recorded  in the balance  sheet
pursuant to the agreement.

F-19



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##### Table of Contents

COGNIGEN
NETWORKS, INC.Notes to Financial Statements

Note 7 -
Commitments and Contingencies

Operating Leases

The Company
leases  office space under  operating  lease  agreements.  Rent expense for these leases
for the years  ended June 30, 2006 and 2005 was approximately $95,331 and $100,000,
respectively.

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

Year Ending
June 30,

|     | 
|---- | 
|2007 | 
|2008 | 
|2008 | 
|2010 | 
|     | 
|     | 
|     | 

LowestCostMall

On
April 19, 2005, the Company entered into a Services Agreement with Vcommerce
Corporation pursuant to which Vcommerce agreed to provide the Company with the
back office for an online retail store, which the Company began offering to
customers in July 2005 through its sales agent force and subsidiary, LCM.
Pursuant to the Services Agreement, Cognigen paid Vcommerce $55,000 and has
accrued $25,000 on its balance sheet. In addition, the Company was to pay
Vcommerce a fee of $4,000 per month for monthly hosting services and other fees
as agreed upon by the Company. The Services Agreement was transferred to LCM
with a guarantee of such provisions in the agreement by Cognigen Networks, Inc.

LCM
did not perform in accordance with expectations, thus by written notification in
July 2006, the Company terminated its agreement with Vcommerce, and has
closed down LCM operations. According to the termination clause in the Services
Agreement, the Company has accrued a $24,000 termination fee in its balance
sheet.

Other
Contingencies

The
Company has granted a security interest to Global Crossing Bandwidth, Inc.
(Global Crossing) in the assets of the Company to the extent the assets relate
to services provided by Global Crossing and to the extent any amounts remain
outstanding to Global Crossing. This security interest is second to an existing
security interest by Silicon Valley Bank described in Note 3.

Note 8
 Related Party Activity

Stock
Redemption Agreement between the Company, the Anderson Family Trust, Cantara
Communications Corporation, and Kevin E. Anderson Consulting, Inc.

On
December 7, 2001, the Company closed a transaction in which it purchased, or
redeemed, 2,712,500 shares of the Companys common stock from the Anderson
Family Trust. The Anderson Family Trust delivered shares from those owned by
Cognigen Corporation, a company 98.9 % owned by AFT, to satisfy its obligation
pursuant to the transaction. Kevin E. Anderson and members of his family are the
beneficiaries of AFT. Kevin E. Anderson may be deemed to beneficially own the
shares of our common stock owned by AFT.

F-20



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##### Table of Contents

COGNIGEN
NETWORKS, INC.Notes to Financial Statements

Note 8  Related
Party Activity (continued)

Stock
Redemption Agreement between the Company, the Anderson Family Trust, Cantara
Communications Corporation, and Kevin E. Anderson Consulting, Inc. (continued)

As
consideration for the return of the 2,712,500 shares to us, among other
consideration, the Company transferred to Cantara, an affiliate of Kevin E.
Anderson, the rights to become the up-line for our current accounts and thereby
be entitled to commissions, fees and bonuses on our current customer accounts,
with a commission not to exceed 12%, which commissions were agreed to be capped
by Cantara through December 31, 2002. The amount of commissions, fees and
bonuses that Cantara is entitled to is totally contingent upon the generation of
sales by it and its down line agents and payment for the products and services
sold by our customers and vendors. The sales are generated either directly by
Cantara and/or its down-line sub-agents. For the years ended June 30, 2006 and
2005, the Company paid Cantara $511,124 and $527,709 in commissions,
respectively. In addition, as a part of the transaction, the Companys
agreement with Kevin E. Anderson Consulting, Inc., pursuant to which the Company
paid Kevin E. Anderson Consulting, Inc. consulting fees of $14,583 per month,
was cancelled and Kevin E. Anderson was retained through March 31, 2003 at the
rate of $1,000 per month to provide up to 20 hours telecommuting consulting
services to the Company per month.

In
March 2003 the Company entered into a separate consulting agreement with Kevin
E. Anderson Consulting, Inc to provide expanded consulting and
technical/administrative services. For the years ended June 30, 2006 and June
30, 2005, the Company paid Kevin E. Anderson Consulting, Inc. $54,980 and
$48,000, respectively, pursuant to the consulting agreement.

For
the years ended June 30, 2006 and June 30, 2005, Cognigen also paid members of
Kevin E. Andersons family $54,610 and $58,460 in agent commissions,
respectively.

On
December 9, 2005, the Company entered into an agreement, as amended, with AFT
and Cantara (the Cantara Purchase Agreement). Under the Cantara Purchase
Agreement, the Company has paid the AFT a total of $135,000 as of June 30, 2006.
The Stock Redemption Agreement will terminate if the Company pays AFT a total of
$1,500,000 by March 15, 2011 pursuant to a schedule set forth in the Cantara
Purchase Agreement, as amended. The next payments due are on October 15, 2006, November
15, 2006 and December 15, 2006 of $5,000 each.  Payments during subsequent
months increase until all payments totaling $1,550,000 by March 15, 2011 are made.
AFT continues to receive 100% of commission revenue due to the Cantara agency until
December 29, 2006, if all required payments are made, at
which time the Company will begin receiving 10% of commission due.
Thereafter, the percentage that the AFT receives reduces as the
Company makes additional payments. The Company has the right to prepay any unpaid amounts due
at anytime and stop all payments to the AFT under the Stock
Redemption Agreement.

F-21



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##### Table of Contents

COGNIGEN
NETWORKS, INC.Notes to Financial Statements

Note 8  Related
Party Activity (continued)

The
Company previously had an agreement with Combined Telecommunications
Consultancy, Ltd. (CTC), of which slightly less than 35% is owned by Peter
Tilyou, pursuant to which CTC received a percentage of a transaction if CTC
introduced a transaction to the Company and was paid a consulting fee of $150
per hour for providing consulting services to the Company. Although this
agreement was not formally renewed, it is the Companys intentions to pay
CTC under the same structure for any services rendered to the Company. During
the fiscal years ending June 30, 2006 and June 30, 2005, the Company paid CTC $0
and $6,250, respectively, in consulting fees. The foregoing amounts include up
to $5,000 that the Company reimbursed CTC for expenses CTC incurred in
performing services on its behalf.

Payments to
Former Chief Executive Officer

Thomas
S. Smith resigned as the Companys Chief Executive Officer in September
2005. After Mr. Smith resigned, the Company had an oral agreement with Thomas S.
Smith pursuant to which the Company retained Mr. Smith or any law firm with
which he became associated with to provide certain legal services to the Company
on a monthly retainer of $12,500 per month. The agreement was terminable upon 60
days by written notice by either party which notice was given by the Company to
Mr. Smith on December 22, 2005. After this date, the Company continued to use
law firms with which Mr. Smith was associated for legal services which amounted
to $59,821 through June 30, 2006.

Note 9
 Subsequent Events (Unaudited)

Term Loan
with Ven Core Solutions

On
October 10, 2006, the Company entered into an agreement with Ven Core Solutions,
LLC (Ven Core) to borrow $250,000 in a term loan to be repaid
monthly as principal and interest at approximately 18.5% interest rate. The loan
is fully amortizable over 36 months. As part of the agreement, the Company
issued to Ven Core 75,000 warrants to purchase 75,000 shares of restricted
common stock of the Company. The warrants were granted at $.12 per share and are
exercisable for up to seven years from date of grant. The Company also gave Ven
Core a lien behind Silicon Valley Bank and Global Crossing on all assets of the
company, to the extent of the loan balance outstanding until the loan is fully
paid. Commitment and documentation fees of $5,500 were paid to Ven Core. This
loan was funded on October 11, 2006.

Sale of
Proprietary Telecomunications Accounts

On
October 13, 2006, the Company agreed to sell its interest in the majority of its
telecommunications one plus accounts for which it records telecommunications
revenue through sales of proprietary products and services. The sales price
offered to the Company and agreed to by the Board of Directors was 1.5
multiplied by monthly revenue of the accounts from the third full monthly
billing cycle. The buyer paid $200,000 down and will pay the remainder upon
reaching regulatory approval, but retaining $25,000 until six months after
regulatory approval to address potential tax and other miscellaneous
liabilities. The sales price was determined reasonable by management based on
other similar proposals received for the same assets and based on industry
trends. The proceeds are intended to be used as working capital for the Company
and towards operational start up activities in its subsidiary CBSi Had these
assets been sold as of July 1, 2005 revenues for the year ended June 30, 2006
would have been lower by approximately $3,000,000 and the loss from operations
would have been lower by approximately $250,000.

F-22



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##### Table of Contents

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
Acting Chief Executive Officer and our Chief Financial Officer, he has evaluated
the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. They have concluded that these disclosure
controls are effective and 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.

In
preparing our audit for the year ended June 30, 2006, our auditors identified
potential deficiencies within our internal control framework which have the
potential to result in a material control weakness. These potential control
deficiencies relate to the manner in which we process transactions to record
telecommunications revenue and related accounts receivable as our current
processes and procedures require substantive manual intervention, estimation and
reliance on several sources of information that are not integrated with our
accounting system.

In
addition, our Chief Financial Officer oversees our accounting and general
internal control process. As we have a very limited staff, we can not afford the
luxury of having other financial accounting minded management members at his
level that would help either crosscheck or advise in the accounting or financial
reporting process. Although, our Chief Financial Officer is constantly involved
in consultation with peers in the field of accounting and reporting, this
situation could potentially result in a material control weakness.

Our
certifying officer does not believe that the potential control deficiencies
constitute material weaknesses because of the number of compensating internal
controls already in place. We are a small company and due to the fact that we
have a limited number of employees, we are not able to have proper segregation
of duties. Thus we may be deemed to have material weaknesses in our internal
control structure because of the lack of segregation of duties.

Item 8B.
Other Information.

None

21



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##### Table of Contents

PART III

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 30, 2006. If not, we will file an amendment to
this Form 10-KSB to add such information.

Item 13.   
Exhibit

Exhibits
and Index of Exhibits.

# EXHIBIT NO.
                 DESCRIPTION AND METHOD OF FILING

|2.1 |  | Stock
for Stock Exchange Agreement dated May 12, 2004 by among Jimmy L. Boswell,  David G.
Lucas, Reginald W., Einkauf and John D. Miller (incorporated by  reference to Exhibit 2.1
to our Current Report on Form 8-K filed on June 3,  2004).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 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 May 17, 2005, (incorporated by reference to Exhibit  3.2 to our
Current Report on Form 8-K filed on May 19, 2005).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|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 |  | 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).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3 |  | 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).
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22



---

##### Table of Contents

|10.4 |  | 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
filed on December 20, 2001).
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5 |  | 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 on Form 10-KSB for the year ended June 30,  2002).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.6 |  | Consultancy
Engagement Agreement dated September 9, 2002, by and between us and  Combined
Telecommunications Consultancy, Ltd and letter dated September 9, 2003  extending the
Consulting Engagement Agreement (incorporated by reference to  Exhibit 10.11 to our
amended Annual Report Form 10-KSB/A for the year ended June  30, 2003.)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.7 |  | Modified
Supplemental Consulting Engagement letter dated March 4, 2003 between  us and Kevin
Anderson (incorporated by reference to our amended Annual Report on  Form 10-KSB/A for
the year ended June 30, 2003).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8 |  | Extension
of Modified Supplemental Consulting Engagement Agreement dated  February 9, 2004 between
us and Kevin Anderson Consulting, Inc. (incorporated by  reference to Exhibit 2.1 to our
Quarterly Report on Form 10-QSB for the Quarter  ended December 31, 2003).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.9 |  | Amendment
dated September 9, 2004, to Consulting Engagement Agreement between us  and Combined
Telecommunications Consultancy, Ltd. (incorporated by reference to  Exhibit 10.15 to our
Annual Report on Form 10-KSB for the fiscal year ended June  30, 2004).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  | Accounts
Receivable Purchase Agreement dated December 26, 2003, between us and  Silicon Valley
Bank (incorporated by reference to Exhibit 10.16 to our Annual  Report on Form 10-KSB for
the fiscal year ended June 30, 2004).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 |  | Accounts
Receivable Purchase Modification Agreement dated November 24, 2004  between us and
Silicon Valley Bank (incorporated by reference to Exhibit 10.1 to  our Current Report on
Form 8-K filed on December 10, 2004).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.12 |  | Letter
Agreement with Segal & Co. Incorporated dated February 28, 2005  (incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K  filed on March 1, 2005).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.13 |  | An
Agreement Granting a First Right of Refusal to Purchase Enterprise Assets  (incorporated
by reference to our Current Report on Form 8-K filed on June 23,  2005).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.14 |  | Agreement
dated November 22, 2005, between the BayHill Group LLC and us  (incorporated by reference
to Exhibit 10.1 to our Current Report on Form 8-K  filed on November 25, 2005).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  | Agreement
dated December 9, 2005, among us, the Andersen Family Trust No. 1 and  Cantara
Communications corporation (incorporated by reference to reference to  Exhibit 10.1 to
our Current Report on Form 8-K filed on December 15, 2005).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 |  | Email
dated April 21, 2006, terminating the BayHill Group LLC Agreement dated  November 22,
2005 (incorporated by reference to Exhibit 10.2 to our Current  Report on Form 8-K filed
on May 15, 2006).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.17 |  | Amendment
#1, dated March 14, 2006, to Agreement Dated December 9, 2005, among  us, the Andersen
Family Trust No. 1 and Cantara Communications Corporation  (incorporated by reference to
Exhibit 10.1 to our Current Report on Form 8-K  filed on May 15, 2006).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.18 |  | Amendment
#2, dated May 12, 2006, to Agreement Dated December 9, 2005, among us,  the Andersen
Family Trust No. 1 and Cantara Communications Corporation  (incorporated by reference to
Exhibit 10.3 to our Current Report on Form 8-K  filed on May 15, 2006).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.19 |  | Common
Stock Purchase Agreement, dated July 7, 2006, among us, Anza Borrego  Partners, Inc., and
Cognigen Business Systems, Inc. (incorporated by reference  to Exhibit 10.1 to our
Current Report on Form 8-K filed on July 17, 2006).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.20 |  | Termination
Agreement, dated September 8, 2006, between us and Custom Switching  Technologies, Inc
(incorporated by reference to Exhibit 10.1 to our Current  Report on Form 8-K filed on
September 11, 2006).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.21 |  | Settlement
Agreement and Mutual Release, dated September 8, 2006, between us and  Custom Switching
Technologies, Inc (incorporated by reference to Exhibit 10.2 to  our Current Report on
Form 8-K filed on September 11, 2006).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.22 |  | Loan
and Security Agreement Number 1601, between us and Ven Core Solutions, LLC,  including
Warrant Purchase Agreements dated October 10, 2006.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

23



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##### Table of Contents

|10.23 |  | Asset
Purchase Agreement dated October 13, 2006, between us and Acceris  Management and
Acquisition LLC, including Management Services Agreement.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|10.24 |  | Amendment
#3,  dated  October 12,  2006,  to  Agreement  dated  December  9, 2005  between us, the
Anderson Family Trust No. 1 and Cantara Communications Corporation.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14.1 |  | Code
of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1  to our Annual
Report on Form 10-KSB for the year ended June 30, 2004).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|21 |  | Subsidiaries
|-- |  | ------------

|31 |  | Certification
of Chief Executive and Chief Financial Officer required by Rule 13a-14(a).
|-- |  | ----------------------------------------------------------------------------------------

|32 |  | Certification
of Chief Executive and Chief Financial Officer required by Section  906 of the
Sarbanes-Oxley Act of 2002.
|-- |  | ------------------------------------------------------------------------------------------------------------------------

24



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##### Table of Contents

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:  October
13, 2006

| | COGNIGEN
NETWORKS, INC./s/ Gary L. CookGary L. Cook, Acting Chief Executive Officer and
Chief Financial Officerr
| | ----------------------------------------------------------------------------------------------------------------

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/ Gary L. Cook            |       | Director
|Gary L. Cook                |      
|/s/ David L. Jackson        |       | Director
|David L. Jackson            |      
|/s/ Christopher R. Seelbach |       | Director
|Christopher R. Seelbach     |      
|/s/ James H. Shapiro        |       | Director
|James H. Shapiro            |      

25



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##### Table of Contents

EXHIBIT
INDEX

# EXHIBIT NO.
                 DESCRIPTION AND METHOD OF FILING

|2.1 |  | Stock
for Stock Exchange Agreement dated May 12, 2004 by among Jimmy L. Boswell,  David G.
Lucas, Reginald W., Einkauf and John D. Miller (incorporated by  reference to Exhibit 2.1
to our Current Report on Form 8-K filed on June 3,  2004).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 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 May 17, 2005, (incorporated by reference to Exhibit  3.2 to our
Current Report on Form 8-K filed on May 19, 2005).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|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 |  | 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).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3 |  | 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).
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents

|10.4 |  | 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
filed on December 20, 2001).
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5 |  | 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 on Form 10-KSB for the year ended June 30,  2002).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.6 |  | Consultancy
Engagement Agreement dated September 9, 2002, by and between us and  Combined
Telecommunications Consultancy, Ltd and letter dated September 9, 2003  extending the
Consulting Engagement Agreement (incorporated by reference to  Exhibit 10.11 to our
amended Annual Report Form 10-KSB/A for the year ended June  30, 2003.)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.7 |  | Modified
Supplemental Consulting Engagement letter dated March 4, 2003 between  us and Kevin
Anderson (incorporated by reference to our amended Annual Report on  Form 10-KSB/A for
the year ended June 30, 2003).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8 |  | Extension
of Modified Supplemental Consulting Engagement Agreement dated  February 9, 2004 between
us and Kevin Anderson Consulting, Inc. (incorporated by  reference to Exhibit 2.1 to our
Quarterly Report on Form 10-QSB for the Quarter  ended December 31, 2003).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.9 |  | Amendment
dated September 9, 2004, to Consulting Engagement Agreement between us  and Combined
Telecommunications Consultancy, Ltd. (incorporated by reference to  Exhibit 10.15 to our
Annual Report on Form 10-KSB for the fiscal year ended June  30, 2004).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  | Accounts
Receivable Purchase Agreement dated December 26, 2003, between us and  Silicon Valley
Bank (incorporated by reference to Exhibit 10.16 to our Annual  Report on Form 10-KSB for
the fiscal year ended June 30, 2004).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 |  | Accounts
Receivable Purchase Modification Agreement dated November 24, 2004  between us and
Silicon Valley Bank (incorporated by reference to Exhibit 10.1 to  our Current Report on
Form 8-K filed on December 10, 2004).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.12 |  | Letter
Agreement with Segal & Co. Incorporated dated February 28, 2005  (incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K  filed on March 1, 2005).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.13 |  | An
Agreement Granting a First Right of Refusal to Purchase Enterprise Assets  (incorporated
by reference to our Current Report on Form 8-K filed on June 23,  2005).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.14 |  | Agreement
dated November 22, 2005, between the BayHill Group LLC and us  (incorporated by reference
to Exhibit 10.1 to our Current Report on Form 8-K  filed on November 25, 2005).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  | Agreement
dated December 9, 2005, among us, the Andersen Family Trust No. 1 and  Cantara
Communications corporation (incorporated by reference to reference to  Exhibit 10.1 to
our Current Report on Form 8-K filed on December 15, 2005).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 |  | Email
dated April 21, 2006, terminating the BayHill Group LLC Agreement dated  November 22,
2005 (incorporated by reference to Exhibit 10.2 to our Current  Report on Form 8-K filed
on May 15, 2006).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.17 |  | Amendment
#1, dated March 14, 2006, to Agreement Dated December 9, 2005, among  us, the Andersen
Family Trust No. 1 and Cantara Communications Corporation  (incorporated by reference to
Exhibit 10.1 to our Current Report on Form 8-K  filed on May 15, 2006).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.18 |  | Amendment
#2, dated May 12, 2006, to Agreement Dated December 9, 2005, among us,  the Andersen
Family Trust No. 1 and Cantara Communications Corporation  (incorporated by reference to
Exhibit 10.3 to our Current Report on Form 8-K  filed on May 15, 2006).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.19 |  | Common
Stock Purchase Agreement, dated July 7, 2006, among us, Anza Borrego  Partners, Inc., and
Cognigen Business Systems, Inc. (incorporated by reference  to Exhibit 10.1 to our
Current Report on Form 8-K filed on July 17, 2006).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.20 |  | Termination
Agreement, dated September 8, 2006, between us and Custom Switching  Technologies, Inc
(incorporated by reference to Exhibit 10.1 to our Current  Report on Form 8-K filed on
September 11, 2006).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.21 |  | Settlement
Agreement and Mutual Release, dated September 8, 2006, between us and  Custom Switching
Technologies, Inc (incorporated by reference to Exhibit 10.2 to  our Current Report on
Form 8-K filed on September 11, 2006).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.22 |  | Loan
and Security Agreement Number 1601, between us and Ven Core Solutions, LLC,  including
Warrant Purchase Agreements dated October 10, 2006.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

23



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##### Table of Contents

|10.23 |  | Asset
Purchase Agreement dated October 13, 2006, between us and Acceris  Management and
Acquisition LLC, including Management Services Agreement.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|10.24 |  | Amendment
#3,  dated  October 12,  2006,  to  Agreement  dated  December  9, 2005  between us, the
Anderson Family Trust No. 1 and Cantara Communications Corporation.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14.1 |  | Code
of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1  to our Annual
Report on Form 10-KSB for the year ended June 30, 2004).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|21 |  | Subsidiaries
|-- |  | ------------

|31 |  | Certification
of Chief Executive and Chief Financial Officer required by Rule 13a-14(a).
|-- |  | ----------------------------------------------------------------------------------------

|32 |  | Certification
of Chief Executive and Chief Financial Officer required by Section  906 of the
Sarbanes-Oxley Act of 2002.
|-- |  | ------------------------------------------------------------------------------------------------------------------------

27



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