Notes to Consolidated Financial Statements

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      BayHill Capital Corporation (“we,” “us” or “BHCC”), formerly Cognigen Networks, Inc., was incorporated in May 1983 in the State of Colorado. Through our wholly-owned subsidiary, Commission River Corporation (“Commission River”), we market and sell services and products through commission-based marketing agents who use the Internet as a platform to provide customers and subscribers with a variety of telecommunications and technology-based products and services. Historically, we have generated revenues in two ways:

      First, we have generated marketing commission revenues from vendors who are represented on web sites operated by independent agents and for whom we sell products and services via contractual agreements. Generally, we enter into contractual agreements with these vendors, who pay us commissions based on the volume of products and services sold by our independent sales agents. We then pay a portion of those commission revenues to the independent sales agents responsible for making the sales upon which the commissions were based. A significant portion of our commission revenues is attributable to the sale of domestic long distance services and commercial telecommunications services; however, we also generate commission revenues from the sale of wireless communications, residential broadband services, Voice over Internet (“VoIP”) services and prepaid calling cards/PINs.

      Second, we have, at times also generated revenues from sales of proprietary products and services. Generally, we have acquired or developed these proprietary products and services with the intention of marketing such products and services through our independent agent network. These products and services have included long distance telecommunication services, online shopping websites and broadband voice, data, video and management communication and control support services. Most of these products have been sold by independent agents, and we have generally paid commissions to independent agents based on the dollar volume of products sold. Currently we do not offer any proprietary products or services. We regularly look for opportunities to acquire or develop proprietary products or services. If we identify any proprietary products or services which we believe we could market profitably, we may offer proprietary products or services in the future.

      On March 31, 2008, we held a special meeting of shareholders at which our shareholders approved a series of proposals previously approved by our Board of Directors. These proposals consisted of (i) a proposal to amend our Articles of Incorporation to effect a reverse split of the outstanding shares of our common stock pursuant to which each 50 shares of our pre-split common stock issued and outstanding as of the effective date of the reverse split would be exchanged for one share of our post-split common stock, (ii) a proposal to amend our Articles of Incorporation to reduce the number of authorized shares of our common stock from 300,000,000 shares, $.001 par value per share, to 100,000,000 shares, $.0001 par value per share, and the number of authorized shares of our preferred stock from 20,000,000 shares, no par value per share, to 400,000 shares, $.0001 par value per share, (iii) a proposal to amend our Articles of Incorporation to change our name to BayHill Capital Corporation and make other changes necessary to facilitate the foregoing actions and the re-incorporation of BHCC, (iv) a proposal to re-incorporate BHCC under the laws of the State of Delaware, and (v) a proposal to adopt the Cognigen Networks, Inc. 2008 Stock Incentive Plan.

      Based upon the approval of our shareholders at the March 31, 2008 special meeting, effective April 23, 2008 our management completed the actions necessary to effect the name change, reverse stock split, Delaware re-incorporation and reduction in the number of authorized shares of common and preferred stock. Our common stock began trading on April 23, 2008 on a post-split basis under the symbol "BYHL." All share and per-share amounts reflected in this report have been restated to reflect the 1 for 50 reverse stock split unless otherwise indicated.

      During the fiscal year ended June 30, 2008, the Company issued to BayHill Capital, LC, which was managed by two of our executives, 703,930 shares of common stock for conversions of a series of notes. In addition, the Company issued to Commission River, Inc., which is owned by two executives of our wholly owned subsidiary, 320,000 shares of common stock pursuant to an Asset Purchase Agreement. These shares represent approximately 37% and 17% respectively of the outstanding common stock at June 30, 2008.

Principles of Consolidation

      Our accompanying consolidated financial statements include the accounts of BHCC, Commission River and two former subsidiaries, LowestCostMall.com (“LCM”) and Cognigen Business Systems, Inc. (“CBSi”). For purposes of the accompanying consolidated financial statements, LCM and CBSi have been treated as discontinued operations. All intercompany accounts and transactions have been eliminated in consolidation (see Note 2 to these consolidated financial statements).

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Marketing Commissions Receivable

      Marketing commissions receivable represent amounts due from outside vendors of telecommunication products. Typically outside vendors pay commissions due to us 45 to 60 days after the usage month-end.

      We established an allowance for doubtful accounts as of June 30, 2008 to provide for potential uncollectible accounts receivable determined to be uncollectible of $164,604.

      Commission revenue from our two largest vendors generated approximately 60% and 47%, respectively, of our total revenue for the years ended June 30, 2008 and 2007. Of the above percentages, 45% and 24% of our revenue respectively, were generated from Telarus, Inc. which is owned by two executive officers of Commission River.

      The fair value of identifiable intangible assets is based upon the lower of discounted future cash flow projections or the amount paid in an arm’s length transaction. These intangible assets are amortized over 3 years on a straight-line basis. Amortization expense totaled $155,554 and $0 for the years ended June 30, 2008 and 2007, respectively. The weighted-average remaining useful life of the intangible assets was 29 months as of June 30, 2008.

      We periodically review the estimated useful lives of our intangible assets and review these assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The determination of impairment is based on estimates of future undiscounted cash flows. If an intangible asset is considered to be impaired, the amount of the impairment will be equal to the excess of the carrying value over the fair value of the asset.

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 its outside vendors. It is our current policy to pay commissions to our agents only after receiving commissions due from its outside vendors. This policy results in approximately two months commission payable at any point in time.

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Share-based Compensation

      Effective July 1, 2007, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS No. 123(R)”), using the modified-prospective transition method. There were no share-based payments granted during the year ended June 30, 2008 and therefore no costs associated with share-base compensation. Prior to July 1, 2007, we applied Accounting Principles Board (“Opinion No. 25”), and related interpretations in accounting for our stock-based compensation plans. Results for prior periods have not been restated.

      Applying SFAS No. 123(R), we estimate the fair value of stock options as of the grant date using the Black-Scholes option pricing model. We use historical data to estimate option exercises and employee termination in the option pricing model. The expected term of options granted is derived from the output of the option pricing model and represents the period of time that options granted are expected to be outstanding. The expected volatilities are based on the historical volatility of our common stock and other factors.

Income Taxes

      We recognize deferred tax liabilities and assets based on the differences between the tax basis of assets and liabilities and their reported amounts in the consolidated 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. All allowances against deferred income tax assets are recorded in whole or in part, when it is more likely than not those deferred income tax assets will not be realized.

Marketing Commissions Revenue

      Marketing commissions revenue is recognized at the time the customer has been accepted by the vendor and/or received the product from the vendor or is under contract with the vendor and receiving the services. In those cases where services continue over future periods, revenue is recognized when delivery of service to the customer has occurred, the fee is fixed or determinable, collection by the vendor from the customer has been made or is probable and the vendor payment of commissions to us is probable.

Advertising Costs

      We expense advertising costs as incurred. Total advertising costs for the years ended June 30, 2008 and 2007 were $16,067 and $32,361, respectively.

Loss Per Share

      Basic loss per common share is computed by dividing the net loss attributable to common shareholders for the period by the weighted-average number of common shares outstanding during the period. Diluted net income per common share, where applicable, is computed giving effect to all dilutive common stock equivalents, primarily common stock options and warrants. All potential common shares that have an anti-dilutive effect on diluted per share amounts are excluded in determining the diluted loss per common share. Stock options and warrants exercisable into 18,500 and 30,540 common shares as of June 30, 2008 and 2007, respectively, were excluded from the calculation of diluted loss per common share because their effect would have been anti-dilutive.

Use of Estimates

      The preparation of financial statements in conformity with United States generally accepted accounting principles 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 will differ, and could differ materially from those estimates.

Recently Issued Accounting Pronouncements

      In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “ Fair Value Measurements. ” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after

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November 15, 2007 and interim periods within those fiscal years. We do not expect SFAS No. 157 to have an impact on our consolidated financial statements.

      In February 2007, the FASB issued SFAS No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities –Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We do not expect SFAS No. 159 to have an impact on our consolidated financial statements.

      In December 2007, the FASB issued SFAS No. 141R, “ Business Combinations ,” which establishes principles for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired and liabilities assumed in a business combination, recognizes and measures the goodwill acquired in a business combination, and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of a business combination. We are required to apply this standard prospectively to business combinations for which the acquisition date is on or after May 1, 2009. We do not expect our adoption of SFAS No. 141R to have a material impact on our 2010 consolidated financial statements.

      In December 2007, the FASB issued SFAS No. 160, “ Noncontrolling Interests in Consolidated Financial Statements ”. SFAS No. 160 requires noncontrolling ownership interests (previously referred to as minority interests) to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. In addition, it requires that the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the statement of operations. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. We do not expect our adoption of SFAS No. 160 to have a material impact on our 2010 consolidated financial statements.

      In March 2008, the FASB issued SFAS No.161, “ Disclosures about Derivative Instruments and Hedging Activities—An Amendment of FASB Statement No. 133 .” This standard applies to derivative instruments, nonderivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under SFAS No. 133. It does not change the accounting for derivatives and hedging activities, but requires enhanced disclosures concerning the effect on the financial statements from their use. This standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Currently, we do not have any instruments that would be impacted by this standard.

Reclassifications

     Certain amounts in the 2007 consolidated financial statements have been reclassified to conform to the 2008 presentation.

NOTE 2 – DISCONTINUED OPERATIONS

   LowestCostMall

      In July 2005, we formed LCM, an online shopping website. In July 2006, we terminated our agreement with Vcommerce, and discontinued LCM operations. In June 2007, we reached an agreement with Vcommerce in which we paid Vcommerce $60,000 for satisfaction of approximately $112,000 of liabilities payable to Vcommerce for a gain on satisfaction of debt of $52,714.

   Cognigen Business Systems, Inc.

      During the fiscal years ended June 30, 2007 and June 30, 2006 and the fiscal quarter ended September 30, 2007, we generated revenue from CBSi’s operations in the amount of $58,463, $0 and $15,233, respectively. During the same period (July 1, 2005 through September 30, 2007), we incurred in excess of $600,000 in expenses associated with the CBSi operations. After reviewing the activities and operations of CBSi, our Board of Directors concluded that the large losses generated by CBSi, and the projected amount of cash required to develop and market the intended CBSi products, did not warrant further investment in CBSi or continued marketing and sale of the CBSi products. Our Board of Directors determined that it was in the best interests of BHCC and our shareholders to focus our efforts on continuing to develop its historical agent marketing business and, on August 31, 2007 we sold our its 100% ownership in CBSi to Carl Silva and ABP, for 24,921 shares of our common stock valued at $56,196 and the retention of $30,844 of CBSi-related accounts payable. In conjunction with this sale, the employment agreement and all benefits related thereto with Carl Silva were terminated and or relinquished. All other agreements with ABP were also terminated. The 24,921 shares of our common stock we received in the transaction were cancelled.

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   Sale of Proprietary Telecommunications Accounts

      On October 13, 2006, we sold our interest in the majority of our telecommunications “one plus” accounts for which we recorded telecommunications revenue through sales of proprietary products and services. We recorded a gain of approximately $230,000, net of commissions of $9,000 on its sale of these assets.

     The following is financial information as of June 30, 2008 relative to discontinued operations described above.

NOTE 3 – GOING CONCERN

      Cash flows generated from operations, advances pursuant to our financing arrangements and cash from the issuance of notes payable to BayHill Capital, LC were sufficient to meet our working capital requirements for the year ended June 30, 2008, but will not likely be sufficient to meet our working capital requirements for the foreseeable future or provide for expansion opportunities. We had a working capital deficit of $895,782 as of June 30, 2008, incurred $2,337,301 in losses from continuing operations, losses of $44,590 from discontinued operations, and used $186,621 in cash flows from operations for the year ended June 30, 2008. These conditions raise substantial doubt about our ability to continue as a going concern.

      Throughout the fiscal year ended June 30, 2008, BayHill Capital, LC and Vector Capital LLC extended to us a series of loans in the form of short-term and convertible notes in the amount of $695,000. All of these notes, together with $250,000 of notes outstanding as of June 30, 2007 and accrued interest, were converted into 744,330 shares of our common stock in multiple transactions during the fiscal year ended June 30, 2008 (see Note 6 to these consolidated financial statements).

      Subsequent to June 30, 2008, we obtained an advance of $100,000 in cash funds for use as working capital from Little Hollow Farms, Inc., a company that is affiliated with our Chief Executive Officer. It is our intention that the full amount of the advance will be included as a portion of our next round of equity funding. Currently, we have not reached an agreement with the lender regarding the repayment or conversion of the advances.

      In order to continue as a going concern, we plan to obtain additional debt or equity financing, increase revenues, and increase cash flows from operations. There can be no assurance that we will be able to secure additional debt or equity financing, that we will be able to reduce our operating costs and expenses, or that cash flows from operations will produce adequate cash flow to enable us to meet all our future obligations or to be able to expand. If we are unable to obtain additional debt or equity financing, we may be required to significantly reduce or cease operations.

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Secured Term Loan with VenCore Solutions, Inc.

      On October 10, 2006, we entered into an agreement with VenCore Solutions, Inc. (“VenCore”) to borrow $250,000 under a term loan to be repaid by making monthly payments of $9,000, which included interest at 16.7% per annum. The loan was fully amortizable over 36 months. The loan documents contained certain covenants, which included the requirement of VenCore’s approval of the disposition of any of our material assets, a prohibition against our incurrence of additional liens on our assets or the change of creditors. As part of our agreement with VenCore, we issued to VenCore warrants to purchase 1,500 shares of our restricted common stock valued at $5,093. The warrants have an exercise price of $6.00 per share and are exercisable for up to seven years from date of grant. We granted VenCore a lien on substantially all of our assets. We also paid to VenCore commitment and documentation fees of $5,500. These fees were amortized over three years as an adjustment to interest expense. As of June 30, 2008 the remaining principal and accrued interest balance was $166,614. In July 2008 we entered in to a “Payment Restructure Agreement” with VenCore whereby VenCore converted $83,500 of the term loan into an unsecured 12% convertible note due September 30, 2009 which is convertible, at the option of VenCore, into no more than 66,800 shares of our common stock. The interest on this convertible note is payable at our option in common stock priced at a value of $1.25 per share. In addition, VenCore was granted a two-year warrant to purchase 20,875 shares of common stock at an exercise price of $2.00 per share. The remaining original note balance of $83,321, along with interest at 16.7%, is to be paid in monthly payments of an amount equal to the greater of $5,000 per month or 10% of any debt or equity funding we receive in any given month. We paid VenCore $1,000 for documentation fees in relation to the Payment Restructure Agreement, which was expensed. Based on a calculation using the Black Scholes Model, we believe that during the year ending June 30, 2009 the conversion feature within this convertible promissory note and warrants will result in us recording a beneficial conversion feature of, approximately $14,000 and an increase to debt discount, which will be accreted to interest expense over the term of the note.

Note Payable to Cardelco

      On December 31, 2007, we entered into a short-term promissory note with Cardelco, LLC (“Cardelco”) in the amount of $25,000. The note obligated us to make payments in the amount of $5,000 per month starting February 1, 2008 until fully paid. The note did not bear interest unless default occurred, at which time interest would accrue at 10% per annum. This note was part of a lease termination agreement we executed with Cardelco relating to a lease for office space in San Diego, California. The termination agreement consisted of paying $45,000 to Cardelco, $20,000 of which was paid upon agreeing to the termination agreement and $25,000 was paid in form of a short-term promissory note. As of June 30, 2008, we were in default and $5,000 remained unpaid on the note.

Receivables Purchase Agreement

      On December 26, 2003, we entered into a Receivables Purchase Agreement with Silicon Valley Bank which, as subsequently amended, provided for up to $1,000,000 in marketing commissions receivable to be used as collateral for advances under the Receivables Purchase Agreement, of which 80% of the marketing commissions receivable balances were available in cash advances to us. Interest charges were 1.5% per month on the marketing commissions receivable balances used as collateral. Silicon Valley Bank was given a first-position security interest in our assets, including all of our copyrights, trademarks, patents and mask works, as a condition to the Receivables Purchase Agreement. The Receivables Purchase Agreement contains certain positive and negative covenants with respect to our business operations, including but not limited to, the requirement of Silicon Valley Bank’s approval to the disposition of assets, change in ownership and additional indebtedness. We paid facility, audit and due diligence fees to Silicon Valley Bank upon renewal of the Receivables Purchase Agreement in March of 2007 of approximately $7,000 and extension fees in March 2008 of $2,500. These amounts were amortized into interest expense over one year. Silicon Valley Bank did not renew the Receivables Purchase Agreement and demanded that we repay the outstanding balance by May 8, 2008. On May 12, 2008, we repaid the full amount owing to Silicon Valley Bank pursuant to the Receivables Purchase Agreement, and the Receivables Purchase Agreement was terminated.

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Financing Subsequent to June 30, 2008

      Subsequent to June 30, 2008, we obtained an advance of $100,000 in cash funds for use as working capital from Little Hollow Farms, Inc., a company that is affiliated with our Chief Executive Officer. It is our intention that the full amount of the advance will be included as a portion of our next round of equity funding. Currently, we have not reached an agreement with the lender regarding the repayment or conversion of the advances.

Commissions Payable

      As part of verbal agreements with certain of our independent marketing agents, we periodically place commissions payable on a deferred payment schedule. As of June 30, 2008 we had placed approximately $200,000 of commissions payable on a deferred payment schedule with interest accumulating at a rate of 10% per annum. These marketing agents have agreed to allow us to use accrued commissions that normally would have been paid to them for our working capital purposes. We have verbally agreed to repay these commissions plus interest when requested by the participating agents. Accrued interest expense, relating to these commissions payable, as of June 30, 2008 was $2,180.

NOTE 5 - INCOME TAXES

      We recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been included in its 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.

      Temporary differences between the financial statement and tax basis of our assets result primarily from differing depreciation and amortization, provision for doubtful accounts, net operating loss carry forwards and the recognition of certain expenses for financial statement purposes and not for tax purposes. We had approximately $4,000,000 of net operating loss carry forwards as of June 30, 2008, which expire in varying amounts through 2028, if unused. A change in our ownership of more than 50% occurred during the year ended June 30, 2008. As such, according to the Internal Revenue Code, our net operating loss carry forwards may be limited as to their utilization in future periods.

      Temporary differences and carry forwards giving rise to a significant portion of deferred tax assets (liabilities) at June 30, 2008 were as follows:

      As discussed in Note 1 to these consolidated financial statements, during the year ended June 30, 2008, the Company entered into a series of stock transactions that have culminated in a 50% change in control in the ownership of our common stock. Our ability to utilize the full benefit or our net operating losses for tax purposes may be limited due to the changes in control.

      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:

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      Effective July 1, 2007, we adopted the provision of the Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting of Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109. Under FIN 48, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. We measure the tax benefits recognized in the consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. Laws and regulation in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax law and regulation change over time and may result in changes to our subjective assumptions and judgments which can materially affect amounts recognized in our consolidated financial statements. The result of the assessment of our tax positions in accordance with FIN 48 did not have a material impact on our consolidated financial statements for the year ended June 30, 2008. Our federal tax returns for all years after June 30, 2004 and state tax returns after June 30, 2003 are subject to future examination by tax authorities for all our tax jurisdictions. It is our policy to record costs associated with interest and penalties related to tax in the selling, general and administrative line of the consolidated statements of operations.

NOTE 6 - STOCKHOLDERS' EQUITY

Special Meeting of the Shareholders

      On March 31, 2008, we held a special meeting of shareholders at which our shareholders approved a series of proposals previously approved by our Board of Directors. These proposals consisted of (i) a proposal to amend our Articles of Incorporation to effect a reverse split of the outstanding shares of our common stock pursuant to which each 50 shares of our pre-split common stock issued and outstanding as of the effective date of the reverse split would be exchanged for one share of our post-split common stock, (ii) a proposal to amend our Articles of Incorporation to reduce the number of authorized shares of our common stock from 300,000,000 shares, $.001 par value per share, to 100,000,000 shares, $.0001 par value per share, and the number of authorized shares of our preferred stock from 20,000,000 shares, no par value per share, to 400,000 shares, $.0001 par value per share, (iii) a proposal to amend our Articles of Incorporation to change our name to BayHill Capital Corporation and make other changes necessary to facilitate the foregoing actions and the re-incorporation of BHCC, (iv) a proposal to re-incorporate BHCC under the laws of the State of Delaware, and (v) a proposal to adopt the Cognigen Networks, Inc. 2008 Stock Incentive Plan.

      Based upon the approval of our shareholders at the March 31, 2008 special meeting, effective April 23, 2008 our management completed the actions necessary to effect the name change, reverse stock split, Delaware re-incorporation and reduction in the number of authorized shares of common and preferred stock. Our common stock began trading on April 23, 2008 on a post-split basis under the symbol "BYHL." All share and per-share amounts reflected in this report have been restated to reflect the 1 for 50 reverse stock split unless otherwise indicated.

Preferred Stock

      On October 17, 2002 we issued 10,000 shares of 8% Convertible Series A Preferred Stock (the “Series A Preferred Stock”) to Stanford International Bank Limited for $500,000. Each share of the Series A Preferred Stock was convertible, at the option of the holder, into one share of our common stock for a period of five years. After five years, all of the issued and outstanding shares of the Series A Preferred Stock were automatically converted to shares of our common stock. The Series A Preferred Stock did not have voting rights and had a liquidation preference of $50.00 per share. All of the issued and outstanding shares of Series A Preferred Stock were automatically converted into 10,000 shares of our common stock on October 14, 2007 according to the terms of the Series A Preferred Stock and the 10,000 shares of Series A Preferred Stock were cancelled.

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      As of June 30, 2008 we had authorized 400,000 shares of Preferred Stock. There were no shares of Preferred Stock outstanding as of June 30, 2008.

Common Stock

   BayHill Capital, LC

      Throughout the fiscal year ended June 30, 2008, BayHill Capital, LC, an entity which is affiliated with two of our executive officers (one of whom is also a director), extended to us a series of loans in the form of short-term and convertible notes in the amount of $645,000. All of these notes, together with $250,000 of notes outstanding as of June 30, 2007 and accrued interest, were converted into 703,930 shares of our common stock in multiple transactions during the fiscal year ended June 30, 2008. The following table sets forth the information relating to each of these notes and the number of shares of our common stock issued upon their conversion:

   Commission River, Inc.

      On November 30, 2007, we entered into an Asset Purchase and Reorganization Agreement (the “Purchase Agreement”) with Commission River, Inc. Pursuant to the terms of the Purchase Agreement, we acquired substantially all of Commission River’s assets in exchange for the issuance of 320,000 shares of our common stock. The assets we acquired from Commission River, Inc. consisted primarily of intellectual property, employment agreements and non-compete agreements executed by the two principals of our wholly-owned subsidiary, Commission River. The cost of the acquisition was valued at $800,000. These intangible costs are being amortized over their three-year estimated useful lives (See Note 1 to these consolidated financial statements).

      The unaudited pro forma combined condensed statements of operations for the years ended June 30, 2008 and June 30, 2007 have been included below to illustrate the pro forma effects of the acquisition of Commission River, Inc. and give effect to the acquisition as if it had occurred on July 1, 2007 and 2006. All pro forma information has been prepared for information purposes only and does not purport to be indicative of the results of operations had the acquisition actually occurred on the dates indicated or results of operations had the acquisition actually occurred on the dates indicated or results of operations to be expected in the future.

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      The values recorded for 2008 and 2007 for compensation were recorded at the closing market price of our common stock on the dates our Board of Directors approved the respective issuances.

      The values recorded for 2008 and 2007 to the settlement of outstanding liabilities, conversion of notes payables and related accrued interest were all recorded at contractually stated or negotiated amounts. The values of all other transactions were recorded at the closing market price of our common stock on the dates our Board of Directors approved the respective issuances.

      On April 7, 2008, Vector Capital LLC extended to us a short-term loan of $50,000 with interest at 12% per annum. This note plus accrued interest of $500 was converted on June 27, 2008 into 40,400 shares of our common stock. Vector Capital is affiliated with our Chief Executive Officer.

Cognigen Business Systems, Inc.

      On August 31, 2007, we repurchased 24,921 shares of our common stock in connection with the sale of CBSi. These shares were valued at $56,196 and were cancelled upon repurchase (See Note 2 to these consolidated financial statements).

2007 Restricted Stock Issuances

      We issued 24,921 common shares valued at $137,163 for the acquisition of 100% of CBSi. (See Note 2 to these consolidated financial statements.) We issued 3,396 common shares valued at $30,000 to cancel any further obligations to BayHill Group, LC, and 7,314 common shares valued at $39,230 as compensation to a former officer and a former director for advisory services and legal fees.

Subsequent Restricted Stock Issuances

      In July 2008, we issued 73,958 shares of restricted common stock for the settlement of $92,447 in liabilities all to related parties (See Note 8 to these consolidated financial statements).

Stock Options

      At a special meeting of our shareholders held on March 31, 2008, our shareholders approved a proposal to adopt our 2008 Stock Incentive Plan (the “Stock Incentive Plan”). The Stock Incentive Plan became effective on April 23, 2008. Directors, employees, consultants and advisors of BHCC and its subsidiaries are eligible to receive awards under the Stock Incentive Plan. The Stock Incentive Plan will be administered by the Compensation Committee of our Board of Directors. The Stock Incentive Plan will

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continue until April 23, 2018. A maximum of 300,000 shares of our common stock (after giving effect to the reverse split of our common stock which became effective on April 23, 2008) are available for issuance under the Stock Incentive Plan. The following types of awards are available under the Stock Incentive Plan: (i) stock options; (ii) stock appreciation rights; (iii) restricted stock; (iv) restricted stock units; and (v) performance awards. Our Board of Directors may, from time to time, alter, amend, suspend or terminate the Stock Incentive Plan. As of June 30, 2008, we had made no awards under the Stock Incentive Plan.

      We also have established the 2001 Incentive and Nonstatutory Stock Option Plan (the “Plan”), which authorizes the issuance of up to 12,500 shares of our common stock (after giving effect to the reverse split of our common stock which became effective on April 23, 2008) . The Plan will remain in effect until 2011 unless terminated earlier by an action of our Board of Directors. Employees, directors and consultants of BHCC are eligible to receive options under the Plan at the discretion of our Board of Directors. Options issued under the Plan vest according to the individual option agreement for each grantee.

      We did not grant any stock options during the year ended June 30, 2008. As of June 30, 2008 there were 13,000 stock options outstanding under the Plan and outside the Plan. During the year ended June 30, 2008, there were 5,040 stock options that either expired or were cancelled unexercised.

      In June 2007, our Board of Directors granted to our non-employee directors options to purchase 2,600 shares of our common stock. Options to acquire 600 shares of common stock vested immediately, are exercisable at $4.50 per share and expire five years from the date of grant. Options to acquire 2,000 shares of common stock, along with cash payments of $7,500 per month for four months beginning June 15, 2007, were issued to one director as part of an advisory fee for additional services rendered to BHCC. These options vest over three years. This one director also received 5,000 shares of our common stock as part of the compensation for the advisory services. We have included $11,358 in general and administrative expenses for the issuance of these options based on a calculation using the Black-Scholes Model. We have also included $21,875 in general and administrative expenses for the issuance of the common shares to the director for advisory services based on a calculation using the Black-Scholes Model. The following represents assumptions used in our calculations using the Black-Scholes Model. There were no stock option issuances during 2008

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

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

** All but 667 stock options outstanding will be vested within twelve months. The 667 stock options will be vested in two years.

      We have included the expense of the foregoing warrants in general and administrative expenses based on a calculation using the Black-Scholes Model.

      All of the outstanding warrants are exercisable and had a weighted average remaining contractual life of 1.9 years as of June 30, 2008.

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NOTE 7 - COMMITMENTS AND CONTINGENCIES

Operating Leases

      We were not obligated to pay any future minimum lease payments under any leases as of June 30, 2008. On December 31, 2007, we entered into a lease termination agreement with Cardelco, which is described in more detail in Note 4 to these consolidated financial statements.

We currently sublease approximately 160 square feet of space on a month to month basis at approximately $1,000 per month.

LowestCostMall

      In July 2005, we formed LCM, an online shopping website. In July 2006, we terminated our agreement with Vcommerce, and discontinued LCM’s operations. In June 2007, we reached an agreement with Vcommerce pursuant to which we paid Vcommerce $60,000 for satisfaction of approximately $112,000 of liabilities payable to Vcommerce for a gain on satisfaction of debt of $52,714.

NOTE 8 – RELATED PARTY ACTIVITY

BayHill Capital, LC

      Throughout the fiscal year ended June 30, 2008, BayHill Capital, LC extended to us a series of loans in the form of short-term and convertible notes in the aggregate amount of $645,000. All of these notes, together with $250,000 of notes outstanding as of June 30, 2007 and accrued interest, were converted into 703,930 shares of our common stock in multiple transactions during the fiscal year ended June 30, 2008. Additional detail regarding these transactions is presented in Note 6 to these consolidated financial statements.

      Robert K. Bench, who became our President and Chief Executive Officer in October 2007 and a director in December 2007, and M. Todd Esplin, who became our Executive Vice President in December 2007, are managing members of BayHill Group, LC, which was the manager of BayHill Capital, LC. In July 2008, BayHill Capital, LC was dissolved and the shares of our common stock acquired by BayHill Capital, LC in the transactions described above were distributed to the 22 members of BayHill Capital, LC, including Messrs. Bench and Esplin.

Vector Capital, LLC

      On April 7, 2008, Vector Capital LLC extended to us a short-term loan of $50,000 with interest at 12% per annum. This note, together with accrued interest of $500, was converted on June 27, 2008 into 40,400 shares of our common stock. Robert K. Bench, our President, Chief Executive Officer and a director, is the managing member of Vector Capital LLC. Additional detail regarding these transactions is presented in Note 6 to these consolidated financial statements.

Consulting Fees

      One of our former directors performed consulting services for us from June 15, 2007 through February 15, 2008 and was paid a total of $52,500 during this period of time .

Telarus, Inc.

      Commission revenue from our two largest vendors generated approximately 60% and 47%, respectively, of our total revenue for the years ended June 30, 2008 and 2007. The larger of these two vendors is Telarus, Inc. (“Telarus”) which is owned by two executive officers of Commission River. Of the above percentages, 45% or $1,463,560 and 24% or $1,364,395 of our revenue respectively, were generated from Telarus. Commissions receivable from Telarus at June 30, 2008 and June 30, 2007 were $240,000 and $0 respectively.

      During the year ended June 30, 2008, we accrued $79,303 for payments to Telarus for services performed by the employees of Telarus and expenses paid on our behalf. On March 31, 2008, upon the approval of our Board of Directors, Telarus converted $75,000 of the accrued amount into 60,000 shares of our common stock. We plan to continue using the services of Telarus employees on a limited basis for approximately the next twelve months. Services provided by Telarus include the performance of

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various accounting and software development projects which are limited in scope. We are billed for Telarus’ services on an hourly basis. Those billings are reviewed and approved by one of our executive officers who is not affiliated with Telarus. We anticipate that the expense of services provided by Telarus will be less than $10,000 per month in the future.

Accrued Liabilities

      Included in accrued liabilities are amounts due to two of our former directors for director fees in the amount of $22,600 and two of our executive officers for accrued consulting fees of $16,000.

Subsequent Borrowings

      Subsequent to June 30, 2008, we obtained an advance of $100,000 in cash funds for use as working capital from Little Hollow Farms, Inc., a company that is affiliated with our Chief Executive Officer. It is our intention that the full amount of the advance will be included as a portion of our next round of equity funding. Currently, we have not reached an agreement with the lender regarding the repayment or conversion of the advances

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