**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-KSB**





x
            Annual
                report under Section 13 or 15 (d) of the Securities Exchange Act
                of 1934
                for the fiscal year ended March 31, 2005o
            Transition
                report under Section 13 or 15 (d) of the Securities Exchange Act
                of 1934
                for the transition period from _____________ to
                ____________





Commission
      File Number 33-92894




**PREFERRED
      VOICE, INC.**


(Name
      of
      Small Business Issuer in its Charter)





**Delaware**
            
            **75-2440201**(State
                or Other Jurisdiction of
            
            (I.R.S.
                EmployerIncorporation
                or Organization)
            
            Identification
                No.)





**6500
                  Greenville Avenue****Suite
                  570****Dallas,
                  Texas**
              
              **75206**(Address
                  of Principal Executive Offices)
              
              (Zip
                  code)
  **214-265-9580**(Issuer’s
                  Telephone Number, Including Area
                  Code.)










Securities
      registered under Section 12(b) of the Exchange Act:


Title
                of Each Class
            
            Name
                of Each ExchangeNONE
            
            on
                Which RegisteredN/A





Securities
                registered under Section 12(g) of the Exchange Act:
            **NONE**(Title
                of class)





Check
      whether the issuer: (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Securities Exchange Act of 1934 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 past 90 days.




Yes
xNo o




Indicate
      by checkmark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-B is not contained in this form, and will not be contained, to
      the
      best of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      this Form 10-KSB. x





State
      issuer’s revenues for its most recent fiscal year: $912,599





The
      aggregate market value of the voting and non-voting stock held by non-affiliates
      of the registrant as of June 24, 2005 was approximately $4,512,182. For purposes
      of this computation, all executive officers, directors and 10% stockholders
      were
      deemed affiliates. Such a determination should not be construed as an admission
      that such executive officers, directors or 10% stockholders are
      affiliates.





As
      of
      June 24, 2005, there were 29,815,826 shares of the common stock, $0.001 par
      value, of the registrant issued and 29,793,326 shares outstanding.





Transitional
      Small Business Disclosure Format:  Yes o   No x











**Preferred
      Voice, Inc.**





PART
                I
            PageItem
                1. Description of Business
            1Item
                2. Description of Properties
            9Item
                3. Legal Proceedings
            9Item
                4. Submission of Matters to a Vote of Security Holders
            9





PART
                IIItem
                5. Market for Common Equity and Related Stockholder Matters
            10Item
                6. Management’s Discussion and Analysis or Plan of Operations
            11Item
                7. Financial Statements
            15Item
                8. Changes In and Disagreements With Accountants on Accounting and
                Financial Disclosure
            15Item
                8A. Controls and Procedures
            15Item
                8B. Other Information
            15





PART
                IIIItem
                9. Directors, Executive Officers, Promoters and Control Persons;
                Compliance with Section 16(a) of the Exchange Act
            16Item
                10. Executive Compensation
            17Item
                11. Security Ownership of Certain Beneficial Owners and
                Management
            18Item
                12. Certain Relationships and Related Transactions
            20Item
                13. Exhibits
            21Item
                14. Principal Accountant Fees and Services
            22





SIGNATURES
            23





-i-


**PART
      I**




This
      report contains forward-looking statements within the meaning of Section 27A
      of
      the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E
      of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These
      forward-looking statements are subject to certain risks and uncertainties that
      could cause actual results to differ materially from historical results or
      anticipated results, including those set forth under “Management’s Discussion
      and Analysis of Financial Condition and Results of Operations” and elsewhere in,
      or incorporated by reference into, this report.





**Item
      1: Description of Business**





*Background
      of the Company*





We
      integrate and market enhanced services to phone companies, to complement their
      overall package of voice services. Our Global Application Platform ( *GAP* )
      is
      designed as a best-in-class architecture that can be leveraged to provide
      additional services as they are developed. This base architecture supports
      a
      multi-switch/multi-vendor environment and a basic platform that can scale for
      a
      small regional carrier to a larger national carrier’s network. The GAP system
      successfully integrates both speech recognition and non-speech recognition
      applications within the same platform. The system is designed to utilize
      standard industry hardware and a microprocessor-based computing system, with
      a
      Windows 2000-series server operating system that fits into a standard rack
      that
      can be placed in the phone company’s switch room or can be remotely accessed
      through a telephony network.





We
      were
      incorporated in Delaware in 1992 under the name of Direct Connect, Inc. and
      began operations in the telecommunications industry under the name of Preferred
      Telecom, Inc. in April 1994. We began as a long distance telecommunications
      carrier with a variety of enhanced services; however, in February 1997 we sold
      a
      number of assets, including our end-user customer base to Brite
      Voice Systems, Inc. We have since focused on enhanced telephone services that
      feature speech recognition technology and end-user entertainment and
      personalization features. We believe that there are larger market opportunities
      in offering enhanced services to phone companies.





*The
      Market and Market Strategy*




Our
      current marketing efforts are focused on telecommunications providers, primarily
      cell phone companies. Greater marketing effort will address local telephone
      companies with subscriber bases of 10,000 and above, and competitive local
      exchange carriers, or competitive local telephone companies, in the future.
      The
      cell phone market has grown from approximately 69 million subscribers in 1998
      to
      approximately 182 million subscribers as of December 2004, and as prices for
      cellular use drop, cellular use is becoming affordable to more economic segments
      of the population. These companies are already offering some enhanced services
      to their subscribers, such as voice mail, call forwarding, call waiting and
      caller identification. In order to remain competitive, however, cell phone
      companies, local telephone companies, and competitive local telephone companies,
      need to provide their subscribers more enhanced services. We believe that our
      GAP system, with its unique variety of integrated services, provides a solution
      to satisfy this need.





*Cell
      Phone Companies*





Cell
      phone companies had an estimated 182 million subscribers nationwide at the
      end
      of December 2004. 2004 was the second highest growth year for wireless adoption.
      Wireless phones are now a mass-market consumer device with an overall wireless
      penetration rate of 60% of the U.S. population. We believe cell phone companies
      need to capitalize on this growth and that they want to differentiate themselves
      from each other to be competitive. Therefore, many are beginning to offer their
      subscribers enhanced services, including voice and picture messaging, e-mail
      reading, short message services, voice activated services, and personalized
      entertainment content.





*Local
      Telephone Companies*





The
      Federal Communications Commission (“FCC”) reported in December of 2004 in its
      report on “Local Telephone Competition” that as of June 30, 2004 there were at
      least 1,300 such telephone companies providing over 148 million of the
      approximately 180 million end-user service lines nationwide (carriers with
      under
      10,000 lines in a state were not required to report to the FCC). Local telephone
      companies already have an existing subscriber base, and we believe that many
      desire to add enhanced service options to increase revenue and deter continued
      loss of subscribers to wireless competition. The FCC reported in its “Statistics
      of Communications Common Carrier” report for




-1-


year
      ended December 31, 2003 that in 2003 alone, local telephone common carriers
      spent approximately $2 billion on upgrading to digital central office switches.
      These switches enable carriers to provide their subscribers the latest enhanced
      services. We believe that local telephone companies have begun and ultimately
      will utilize enhanced services such as ours to provide a host of services that
      not only provide voice services to their customers but might include
      entertainment and personalized features not commonly provided on fixed lines
      today.





*Competitive
      Local Telephone Companies*





As
      of
      June 2004, there were approximately 350 facilities based competitive local
      telephone companies nationwide, providing approximately 32 million end-user
      service lines nationwide. We, therefore, believe that the competitive local
      telephone market will provide a significant marketing opportunity over the
      next
      two years.





*Our
      Market Strategy*





We
      utilize direct mail and personal sales calls to contact and market our GAP
      system and services to phone companies in the markets we have targeted. We
      initially begin our efforts with a direct mail piece that introduces our suite
      of services and addressed the current trends in consumer adoption. We then
      follow up with personal sales calls. We utilize trade shows as a means to
      present our product and to network with our potential customers—cell phone
      companies, local telephone companies and competitive local telephone
      companies.





The
      principal elements of our strategy to achieve a leading position in the
      telecommunications enhanced services market are as follows:





·
            *Target
                Tier II and Tier III carriers.*We
                believe that our experience in providing enhanced services positions
                us
                strongly in carrier markets of less than 20 million total subscriber
                bases. Our ability to interconnect with various types of switches
                and
                billing formats gives us the opportunity to serve carriers in both
                the
                wireless and wireline market.





·
            *Continue
                to enhance our phone company customer relationships.*We
                consider our relationships with our phone company customers to be
                strategic. Our long-term revenue sharing agreements allow us to plan
                a
                joint, strategic deployment of services to a contracting phone company’s
                subscribers.





·
            *Develop
                strategic alliances.*We
                are working to establish strategic relationships with other companies
                around the nation to broaden our services and provide our customers
                with
                additional speech and non-speech services that we do not currently
                provide. Our hosted network approach has allowed us to centralize
                operations and provide services to numerous phone companies from
                one
                location eliminating the need for our equipment to be collocated
                at each
                phone company’s site.





·
              *Technological
                  enhancements.*We
                  believe that we provide high quality, reliable enhanced services
                  to
                  consumers through phone companies. We intend to continue to develop
                  services that we believe will enhance the services we are already
                  providing or for which we believe there is a viable
                  market.


*Primary
      Market*





*Cell
      Phone Companies* .
      Of the
      approximately 700 cellular telephone markets in the United States, there are
      approximately 400 rural service areas and 300 metropolitan service areas that
      have multiple cell phone companies serving the same markets. Cell phone
      companies are the primary market in which we have focused our marketing efforts,
      offering these phone companies a revenue sharing opportunity. We focus on these
      markets because the phone companies in these markets have an existing subscriber
      base.





We
      believe that our revenue sharing agreements whereby we provide service equipment
      at or below cost and then share revenues generated from the different services
      provided by the carrier to their subscriber base is a cost effective way for
      phone companies to provide enhanced services.





The
      cell
      phone companies who contract with us are responsible for billing and collecting
      revenue generated from the GAP system’s enhanced services. However, our GAP
      system can produce subscriber information for marketing or billing
      use.****In
      addition, we assist each phone company in marketing the services by providing
      various co-branded advertising materials we have designed and by training the
      contracting cell phone company’s sales force and customer service staff. As of
      June 24, 2005, we are providing enhanced services to fourteen carrier’s
      subscribers and generating revenues for the cell phone companies and
      us.





-2-


*Standard
      Company Contract* **.** We use a
      substantially similar form of software license agreement and marketing agreement
      with each of our carrier customers. The software license agreement grants each
      contracting phone company a license to use our software and all subsequent
      improvements to the software in the carrier’s local calling areas. We retain
      title to the software and require that those who contract with us keep all
      information related to the software confidential. The term of our software
      license agreement coincides with that of our marketing agreement.





Our
      marketing agreements have provisions to remain in effect for up to ten years.
      Most of our agreements are for an initial five year term which automatically
      renews unless cancelled by either party on 60 days’ notice prior to the
      anniversary date of the agreement after the initial term. In our marketing
      agreement, we agree to initiate service after a testing period by which the
      carrier can evaluate the service within its network. If we are unable to cure
      any material deficiency of the service then either we or the contracting phone
      company may terminate the contract on thirty (30) days’ written notice. If
      neither notice of problems nor an acceptance certificate is provided to us
      by
      the end of the phone company’s thirty (30) day testing period, then the
      contracting phone company is deemed to have accepted the GAP
      services.





The
      agreement provides for revenue sharing in which the split ranges from seventy
      percent (70%) to thirty percent (30%) depending on the service and the amount
      of
      revenue obtained by the phone company through sale of our services to their
      subscribers. The cell phone company pays us either a percentage of the revenues
      received from the phone company’s subscribers for the services we offer in that
      area or a minimum amount for each of its subscribers subscribing to our
      services.





Once
      the
      participating carrier has accepted the services, it must use its best efforts
      to
      promote the sale of our services and applications to its subscribers. The
      contracting local telephone companies and cell phone companies are responsible
      for billing and collection on the services, but we and those with whom we
      contract jointly agree on the pricing of those services. The phone companies
      with whom we contract agree that they will not install any system, for testing
      or otherwise, that competes with our GAP services in the area designated under
      the marketing agreement. We agree to provide marketing materials, technical
      support and training to our partners and their personnel. We also provide in
      the
      marketing agreement that we may provide services directly to our own subscribers
      in the contracting phone companies’ designated areas. Our marketing agreements
      are subject to termination by either party on standard events of default, such
      as breach of the agreement or insolvency.





*Opt-Out
      Contract for Voice Activated Dialing* .
      Through
      May of 2003, many of our contracts provided for the phone companies to put
      their
      entire subscriber base onto the GAP system’s voice activated dialing service.
      After receiving the service, any of the company’s subscribers may elect not to
      continue the service, effectively “opting out” of the voice activated dialing
      service program. However, for those subscribers that do not "opt-out," the
      contracting cell phone company will typically pay us fifty percent (50%) of
      all
      revenue generated from such service, but the company must typically pay us
      the
      greater of $1.00 per subscriber per month for the Voice Activated Dialing
      service or fifty percent (50%) of the revenue generated from the voice dialing
      service, as part of the revenue share arrangement for the service. The fifty
      percent (50%) revenue share split differs from the standard agreement in which
      the split ranges from seventy percent (70%) to thirty percent (30%) depending
      on
      the amount of revenue obtained by the phone company through sale to their
      subscribers.





*Secondary
      Markets*





We
      signed
      Master Distributor Agreements with several companies to market our services
      directly to the end user. The form of master distributor agreement that was
      signed by all participating master distributors allows the distributor to market
      and sell our system services directly to the end user and through other
      distributors whom the master distributor is to identify. We may authorize other
      distributors in the master distributor’s market area, but we agree to direct
      those distributors to work with the master distributor, who pays a fee to
      acquire the right to sell our services in a specific market. We initially
      provided the master distributor with commissions for accounts acquired based
      upon the revenues billed and collected for such accounts. In 2002, we converted
      these agreements to wholesale agreements whereby the master distributor acquires
      the end-user, bills and collects from the end-user and pays us a set fee per
      end-user.





-3-


*Our
      Product and Services*





*The
      Platform*




The
      Global Application Platform (GAP SM )
      is a
      unified platform integrating telecommunications applications, subscriber web
      interfaces, billing and provisioning interfaces, and intelligent networking
      technology. The GAP system can be integrated with a variety of switches from
      manufacturers including Nortel, Lucent, Motorola, Ericsson, and others. Voice
      channels on the GAP can operate with T1 and E1 trunks or higher density links.
      Signaling and call control are accomplished using SS7, AIN/WIN, CAMEL, RLT,
      IS-41, ISDN PRI 2 B-Channel Transfer, and traditional signaling methodologies.
      The GAP system can be collocated at a carrier switch site or services can be
      provided through out hosted network system located in Allen, Texas. To
      facilitate the integration of services offered over the network with a carrier’s
      existing infrastructure, we have developed several call management and
      subscriber maintenance programs. Our call management program provides for the
      collection, analysis and reporting of call data by service offering. This data
      can be used to provide the carrier and service provider with information
      regarding empirical user trends, network usage and service functionality, all
      of
      which are necessary to the parties’ technical and marketing analysis of the
      network services





*The
      Services*





In
      September of 2004 we introduced our newly web enabled suite of services that
      we
      call My Phone Services Suite. Our bundled service suite was designed to address
      the growing trend to personalize all aspects of telecommunications. The suite
      has a core network based address book that is integrated with such services
      as *Rockin’
      Ringback* , *RemindMe* , *Push-2-Connect* , *SmartLine* ,
      and *Voice
      Activated Dialing* .
      According to Strategy Analytics, the personalization sector will command 8%
      of
      the global data revenues of $189 billion by 2009. These products are
      continuously being added to or improved to include elements that improve the
      subscriber’s experience. The bundling feature of the suite was created to
      address the fact that no one application will work for all subscribers. Each
      subscriber will prefer and utilize various features of each application
      differently. The applications can be customized, combined, and configured to
      meet each carrier’s needs.





**Rockin’
      RingbackTM**  **** This
      service allows you to entertain callers while they wait! Rockin’ RingbackTM lets
      subscribers send a message through music - before a call is even answered.
      This
      network-based service allows subscribers to replace the familiar *‘ring,
      ring* ’
      that
      callers normally hear with a popular song, personalized message or even an
      advertisement. Ringbacks can be specified by caller, group, and by time of
      day.
      The service includes an integrated store where subscribers shop from hundreds
      of
      tunes created especially for ringback use.





**Push-2-ConnectTM** Application
      that provides for reservationless conferencing on-demand. Seamless integration
      with the user’s network address book allows for customized grouping and naming
      conventions so that multiple contacts can be dialed simultaneously.





**Voice
      Activated Dialing** Speech
      recognition service that may be accessed by a telephone subscriber that allows
      the subscriber to speak a name, number or location from his or her personal
      directory or a common directory. The system then routes the call to the
      appropriate party. There is also an option for the disabled to access the
      system. By lifting the receiver or turning on the speakerphone and waiting
      three
      seconds, the telephone switch will automatically activate the system, and the
      system will prompt the subscriber to speak a name, number or location to be
      dialed.





**Smart
      Line** This
      application allows a subscriber to receive calls at any phone. The subscriber
      must notify the VIP system of a change in his or her location by giving it
      voice
      commands. A name from the subscriber’s voice dialing directory can be used as
      the new “locate” phone number. Incoming calls for the subscriber are routed to
      the pre-programmed “locate” phone number. That phone number can be either local
      or long distance, as required. The Smart Line may also be used to screen calls
      allowing the subscriber to take the incoming call or forward it to voice
      mail.





**Remind
      Me** This
      application allows the subscriber to schedule a message that is delivered to
      the
      subscriber on a predetermined date and time on a one time or recurring basis.





**EMMA
      the Perfect Receptionist** .
      Our
      software provides telephone subscribers with the first remote accessed automated
      attendant service. Emma answers the subscriber’s phone with a custom greeting
      and listens as a caller speaks a name, department, or location listed
      in
      the subscriber’s voice dialing directory. Emma the Perfect Receptionist then
      routes the call to the person, department or location requested. On outbound
      calls, EMMA uses the same procedure to dial a phone number from a subscriber’s
      directory upon a speech command such as “Call John.”





-4-


**Content
      Suite** This
      service provides for the download of games, graphics, picture messaging and
      polyphonic and monophonic ringtones to consumers phones.





*Competition*





The
      enhanced services market is competitive and marked by rapid technological
      innovations. We expect competition to continue to increase as wireless,
      local, and competitive local telephone companies seek to offer their customers,
      the subscribers, enhanced services and to distinguish themselves from other
      phone companies. Many of our current competitors have longer operating
      histories, greater name recognition, established subscriber bases and
      substantially greater financial, technical, marketing, sales and other resources
      than us. We believe that the principal factors affecting competition in the
      enhanced services market are ease of use, overall technical performance, price
      and reliability. The market for our products and services is constantly
      evolving, and we may not be able to compete successfully against current and
      potential future competitors.





Major
      competitors in the ringback service arena are WiderThan, a subsidiary of SK
      Telecom, NMS, Alcatel, Comverse Technologies, Lucent, and Intervoice. Even
      though we are much smaller and have substantially less resources than these
      other providers we believe we have competitive viability with carriers because
      we were the first provider of a ringback service in the United
      States.





Some
      of
      our competitors in speech driven services are Sprint Corporation, BeVocal,
      TellMe, Comverse Technologies, One Voice Technologies, Glenayre Electronics,
      Inc. and Ztel.   All
      of
      these companies provide directory driven speech services in varying but similar
      form.





*Customer
      Service*





We
      train
      contracting phone companies’ customer service employees to be able to answer
      standard questions related to the varying services we provide through the GAP
      system, from product selection to individual product help. We assist contracting
      phone companies if there are problems with the GAP system platform through
      our
      technical support team. We have a 24 hour, 7 day a week technical support
      line for the  customer
      service representatives or other employees of phone companies who contract
      with
      us to call with service questions. In addition, all our systems are fully
      redundant, but in the case of a component failure back-up components, such
      as
      the Dialogic cards that help operate the system, are inventoried for overnight
      shipment and replacement. We believe that this high level of customer service
      and technical support will help us market the system to a greater number of
      telephone companies.





*Employees*





As
      of
      June 24, 2005, we had 13 full time employees and 1 part time employee. None
      of
      our employees is represented by a labor organization. We maintain various
      employee benefit plans and we believe we have excellent relations with our
      employees.





*Patents,
      Trademarks and Copyright*





The
      Preferred Voice name and logo, the GAP system, the SAM peripheral and the names
      of products and services we offer are trademarks, registered trademarks, service
      marks or registered service marks that we own. We rely on a combination of
      trade
      secret, copyright and non-disclosure/confidentiality agreements to protect
      our
      proprietary rights in our software and technology. There can be no assurance
      that such measures are or will be adequate to protect our proprietary
      technology. Furthermore, there can be no assurance that our competitors will
      not
      independently develop technologies that are substantially equivalent or superior
      to our technology.





Our
      software is licensed to contracting phone companies under license agreements
      containing provisions prohibiting the unauthorized use, copying and transfer
      of
      the licensed program. Policing unauthorized use of our products will be
      difficult, and any significant piracy of our products could materially and
      adversely affect our financial condition and results of operations.





-5-


We
      are
      not aware that any of our software products infringe the proprietary rights
      of
      third parties. There can be no assurance, however, that third parties will
      not
      claim that we have infringed on their proprietary rights with respect to our
      current or future products. We expect that software product developers will
      increasingly be subject to infringement claims. Any such claims, with or without
      merit, could be time-consuming, result in costly litigation, or require us
      to
      enter into royalty or licensing agreements. Such royalty or licensing
      agreements, if required, may not be available on terms we find acceptable,
      which
      could have a material adverse effect on our business, results of operations
      and
      financial condition.





We
      have
      received registered trademarks from the United States Patent and Trademark
      Office for the following: Preferred/telecom, Preferred Voice, Secure Card,
      Use
      Your Voice, BusinessConnect and Safety Talk. We have received notice of
      allowance on our U. S. Patent Application “Method and Apparatus That Provides a
      Reusable Voice Path in Addition to Release Link Functionality for Use with
      a
      Platform Having a Voice Activated Front End”.





We
      have
      applied for patents on our Voice Integrated Platform and Method of Operation
      Thereof, Voice Integrated Platform and Method of Operation Thereof with Release
      Links, Group Plan Manager, and Method of Customizing In-band Signaling for
      a
      Communication in Progress, a Method of Identifying a Subscriber to a Calling
      Party and a Tone Sequence Applicator Employing Either Method. We have applied
      for trademarks related to our Push2Connect and Rockin’ Ringback services. We
      have not yet received confirmation of issuance of such patents or registration
      of such trademarks.





*Core
      Technology and System Enhancement*





We
      have
      spent the last seven years developing and enhancing our proprietary software
      in
      conjunction with differing hardware platforms and development of switch
      integration to create our GAP system. We estimate that we have spent approximately
      $435,000 during the last two fiscal years in direct core technology enhancement.
      We continually evaluate and adjust our GAP system. The ever changing telephony
      and computer industry requires companies like ours to continue developing new
      or
      improved methods to process applications and as new technology emerges new
      processes are created to better deploy our services. In the past two fiscal
      years we achieved the conversion to our high-density database structure that
      will allow for a very efficient and scalable network based service deployment
      platform, we completed the integration of web-enabled services in our My Phone
      Services Suite, and we deployed the first ringback service through a telephony
      carrier in the United States. We currently have eight employees in our
      software/hardware development and deployment department.





*Certain
      Risk Factors Related to Our Business*





*Decline
      in Voice Activated Dialing Customers.*





We
      are
      experiencing declines in revenues from our voice dial service primarily due
      to
      acquisition activity of our carrier customers by carrier companies that do
      not
      want to continue to provide voice dial and are phasing the service out as they
      convert the end user subscribers to their networks. We are yet to derive enough
      revenue from our services to meet our monthly operating needs and we no longer
      believe that the voice dial product alone can provide us with sufficient
      revenues to meet such requirements. We therefore are dependant upon our ability
      to contract with carrier companies for our new My Phone Services Suite line
      of
      service that we only began to market in October of 2004. Accordingly, we have
      a
      limited sales history upon which our business and prospects may be evaluated
      based upon this new service offering. One should consider our prospects in
      light
      of this risk. Some of the risks and difficulties we face are reliance on the
      few
      phone companies with which we have current deployment of our services; creating
      recognition and widespread acceptance of our new service offering; significant
      capital outlays related to deployment of our services prior to recognition
      of
      any revenue; reliance on significant equity investment to continue operations;
      and the need to retain key management and software development personnel in
      a
      competitive labor market. Our inability to address these risks and difficulties
      could harm our business.





*Our
      limited funding may restrict our operations and our ability to implement our
      strategy, and the availability of additional resources is
      uncertain.*





Our
      business model requires us to devote significant financial resources to the
      continued enhancement and maintenance of our GAP system and integrated
      applications. If we are not able to successfully manage our existing resources
      or to secure additional funding and other resources in a timely manner, our
      ability to successfully provide these services and applications and to generate
      sufficient revenues will be restricted.





We
      must
      conserve cash because we continue to experience negative cash flows from
      operations. We cannot guarantee that, in the future, we will be able to raise
      sufficient money through sales of debt or equity. The unavailability or timing
      of increased revenues and financing could prevent or delay the continued
      provision of our services and applications and may require us to curtail our
      operations.





-6-


*Our
      ability to grow our business will be harmed if we cannot retain our current
      key
      personnel.*




Our
      ability to continue to compete in the enhanced services market and grow our
      business is dependent in large part on a number of key senior management, senior
      software developers and engineers, and sales employees. We do not have written
      employment agreement with any of our executive officers, key technical or
      managerial personnel. See “Executive Compensation—Employment Agreements.” The
      loss of any of our key employees’ services could have a negative effect on our
      ability to grow and achieve profitability.





*Our
      ability to generate revenue could be negatively affected if we, and those who
      contract with us, are unable to create a large enough market for the services
      we
      offer through our GAP system to justify the expenditures we need to make to
      implement and continue to enhance such services.*





Our
      business model depends on our ability to derive revenue from our revenue sharing
      contracts which allows contracting phone companies to sell the applications
      of
      our GAP system platforms to their subscribers. As a result, our future
      financial performance will depend in large part on the continued market
      acceptance of our enhanced services and primarily our new entertainment
      applications, our ability to market additional applications of our GAP system
      software and our ability to adapt and modify the GAP system to meet the evolving
      needs of phone companies who use our system. Revenues from our GAP system
      services depend in part on the generation of significant numbers of subscribers.
      It is uncertain whether we or our phone company customer will be able to develop
      and maintain at reasonable cost a significant subscriber base for our services.
      Competition and consumer adoption make the life cycle of our products and
      services difficult to estimate. The failure of our services to gain widespread
      acceptance, whether as a result of competition, technological change or
      otherwise, could have a material adverse effect on our ability to generate
      revenue and our business could be harmed.





*If
      we
      fail to continue to attract and retain strategic relationships with phone
      companies who provide the medium through which we market our services and
      service subscribers, we may be unable to sell our services and generate
      revenues, and our business could be harmed.*





We
      will
      continue to distribute our services through phone companies. The effectiveness
      of generating subscriber sales from strategic relationships with phone companies
      is dependent on the marketing and sales efforts of those phone companies with
      whom we contract, and their dedication of resources to providing new innovative
      products and enhanced services to their subscribers.





In
      addition, we cannot provide any assurance that we will be able to effectively
      manage potential conflicts in our strategic relationships, that economic
      conditions or industry demand will not adversely affect the phone companies
      with
      whom we contract or that such phone companies will not devote greater resources
      to market and support the services of other companies. Our future performance
      also will depend in part on our ability to attract additional phone companies
      that will be able to market and support our products effectively, especially
      in
      markets in which we have not previously sold our products or services. We also
      rely on phone companies to provide their subscribers who utilize our services
      customer support for our services. If those phone companies fail to provide
      adequate customer support, their subscribers who subscribe to our services
      could
      cease using our services which could harm our customer goodwill, adversely
      affect our ability to sell our services, and, therefore, impair our ability
      to
      generate revenue.





*We
      rely on our intellectual property rights to our proprietary technology, however,
      protection of our intellectual property rights is uncertain and could be costly.*





Our
      success depends to a large extent upon our proprietary technology. We regard
      our
      software applications as proprietary and rely primarily on a combination of
      contract, copyright, trademark and trade secret law to protect our proprietary
      rights. We have no patents on our products currently in commercial use, although
      we are in the process of applying for patents and registering trademarks on
      several of our products and service applications. The source code for our
      proprietary applications is protected by trade secret and copyright laws. It
      is
      our policy to enter into confidentiality agreements with our employees to
      protect our software, documentation and other written materials under trade
      secret and copyright laws.





-7-


Despite
      our efforts to protect our proprietary rights, unauthorized parties may attempt
      to copy or otherwise use our products or technology, to obtain and use
      information that we regard as proprietary or to independently develop similar
      or
      superior products or technology. Policing unauthorized use of our products
      is
      difficult, and while we are unable to determine the extent to which piracy
      of
      our software products exists, we expect that software piracy will be a
      persistent problem. In addition, we may make our source code or products
      available to our strategic partners, which may increase the likelihood that
      our
      products are misappropriated or misused.





*We
      may expend significant resources to defend against claims of infringement by
      third parties and if we are not successful, we could lose rights to our
      technology and be required to enter into costly license or royalty
      agreements.*





We
      are
      not aware that any of our products, trademarks or other proprietary rights
      infringe the proprietary rights of others. However, we cannot provide any
      assurance that a third party will not assert infringement claims against us
      in
      connection with our current or future products. As the number of software
      products increases and the functions of these products overlaps, we expect
      that
      software developers may increasingly become subject to infringement claims.
      Any
      infringement claim, with or without merit, may be time consuming and expensive
      to defend, cause product and service delays or require us to enter into royalty
      or licensing agreements that may not be acceptable to us.





*Our
      products can have a long sales and implementation cycle and, as a result, our
      quarterly operating results and our stock price may fluctuate.*





The
      sales
      cycle for the closing of one of our revenue sharing agreements is generally
      six
      months but may be shorter or longer depending on the size and complexity of
      the
      phone company customer and such customer’s telecommunications network. We may
      spend significant time educating and providing information to prospective phone
      company customers regarding the use and benefits of our services. During this
      education period, we may expend substantial sales, marketing and management
      resources.





After
      we
      sign a revenue sharing agreement with a contracting phone company, it may take
      substantial time and resources to deploy and integrate our software and hardware
      into contracting telephone companies’ existing systems. Our current average time
      from signing of a contract to deployment is approximately four months. Our
      agreement specifies acceptance criteria, and we do not recognize service revenue
      until each installation is accepted and services are provided and billed to
      the
      phone company’s subscribers. In the case of carriers who have signed our
“opt-out” contracts, those carriers do not charge subscribers for the first
      month of service in order to provide the subscribers with the opportunity to
      opt
      out of the Safety Dialing service. Therefore, we will not recognize any revenue
      from the first month of service we provide under the “opt-out” contracts. See
“Business—Opt-Out Contract.” We also have in the past and may in the future
      experience other unexpected delays in recognizing revenue. Consequently, the
      length of our sales and implementation cycles makes it difficult to predict
      the
      quarter in which revenue recognition may occur and may cause service revenue
      and
      operating results to vary significantly from period to period. These facts
      could
      cause our stock price to be volatile or to decline.





*Our
      Marketing Agreements allow contracting phone companies to reject the GAP system
      after installation and testing is completed and are generally terminable after
      five years.*





Our
      Marketing Agreements allow contracting phone companies to reject the GAP system
      after installation and testing is completed if they provide us with written
      notice of problems revealed to the phone company in its testing period. These
      agreements also allow either us or the participating phone companies to
      terminate the contract on thirty (30) days’ written notice if we are unable to
      cure any material deficiency of the GAP system within thirty (30) days of when
      we commence testing. If a number of the local telephone companies and cell
      phone
      companies with whom we have contracted choose to reject the GAP system, our
      business, financial conditions and results of operations could be materially
      and
      adversely affected. In addition, our marketing agreements are generally
      terminable on sixty (60) days notice after three (3) to five (5) years. If
      a
      number of telephone companies choose to terminate the agreements at that time,
      our revenues would substantially decline and results of operations could be
      substantially harmed.





*Certain
      Risks Related to Our Industry*





*The
      market for our services may not continue to develop, which would substantially
      impede our ability to generate revenues.*





Our
      future financial performance depends in large part on growth in demand for
      our
      enhanced services. If the market for enhanced services and applications does
      not
      develop or if we are unable to develop other enhanced services capable of
      capturing a significant portion of that market either directly or through the
      phone companies with whom we contract, our revenues and our results of
      operations will be adversely affected.





-8-


The
      market for enhanced services including speech recognition services is still
      evolving. Negative consumer perceptions regarding reliability, cost, ease-of-use
      and quality of speech-based products affects consumer demand and may impact
      the
      growth of the prospective phone company market. In order to achieve commercial
      acceptance, we will have to continue to educate prospective phone company
      customers about the uses and benefits of our services in general and our GAP
      system. As a result, we cannot guarantee that the market for enhanced service
      applications will grow or that consumers will accept any of the services or
      applications provided through our GAP system platform.





*If
      we
      are unable to respond to rapid changes in technology, our systems could become
      obsolete and we could lose revenue.*





The
      telecommunications services market is characterized by rapid technological
      change, changing consumer needs, frequent new product introductions and evolving
      industry standards. The introduction of products or services embodying new
      technologies and the emergence of new industry standards could render our
      enhanced service applications obsolete and unmarketable. Our success will depend
      upon our ability to timely develop and introduce new products, services and
      applications, as well as enhancements to our existing product, services and
      applications, to keep pace with technological developments and emerging industry
      standards and address the changing needs of those phone companies to whom we
      are
      providing our services and applications and their subscribers. We may not be
      successful in developing and marketing new products and services that respond
      to
      technological changes or evolving industry standards. We may experience
      difficulties that could delay or prevent the successful development,
      introduction and marketing of new products, services and applications. In
      addition, our new products, services and applications may not adequately meet
      the requirements of the marketplace or achieve market acceptance.





*Our
      phone company customers are subject to a regulatory environment and to industry
      standards that may change in a manner adverse to our
      interests.*





Our
      phone
      company customers are subject to a number of government regulations and industry
      standards. Our products, services and applications must comply with these
      regulations and standards. Changes to these standards may require us to make
      periodic changes to our products and services.





**Item
      2: Description of Properties**





Our
      executive offices are located in Dallas, Texas. We lease 3,588 square feet
      of
      space in a facility as a tenant. The term of the lease is through December
      31,
      2008 and the rent is presently $4,485 per month.





**Item
      3: Legal Proceedings**





None


**Item
      4: Submission****of Matters to a Vote of Security Holders**





There
      have been no matters submitted for vote to the security holders, through the
      solicitation of proxies or otherwise in the fourth quarter of the fiscal year
      covered by this report.





-9-


**PART
      II**





**Item
      5. Market for Common Equity and Related Stockholder
      Matters**





The
      Common Stock is listed on the OTC Electronic Bulletin Board. The following
      table
      indicates the quarterly high and low bid price for the Common Stock on the
      OTC
      Electronic Bulletin Board for the fiscal year ending March 31, 2005 and March
      31, 2004. Such inter-dealer quotations do not necessarily represent actual
      transactions and do not reflect retail mark-ups, mark-downs or
      commissions.





OTC
      ELECTRONIC BULLETIN BOARD BID PRICE





**Fiscal
                2004**
            
            HIGH
            
            LOW1stQuarter
            
            $
            0.16
            
            $
            0.062ndQuarter
            
            $
            0.16
            
            $
            0.053rdQuarter
            
            $
            0.12
            
            $
            0.0554thQuarter
            
            $
            0.11
            
            $
            0.076





**Fiscal
                2005**1stQuarter
            
            $
            0.33
            
            $
            0.092ndQuarter
            
            $
            0.18
            
            $
            0.133rdQuarter
            
            $
            0.25
            
            $
            0.114thQuarter
            
            $
            0.18
            
            $
            0.10


On
      June
      24, 2005, the closing bid price of the Common Stock as reported on the OTC
      Electronic Bulletin Board was **$** 0.18.





As
      of  June
      24,2005,
      there were approximately 650
      holders of record of the Common Stock. We believe the number of beneficial
      owners is substantially greater than the number of record holders because
      brokers for the benefit of individual investors hold a significant amount of
      outstanding common stock in street name.





We
      have
      not declared or paid any cash or other dividends on the Common Stock to date
      for
      the last two (2) fiscal years and have no intention of doing so in the
      foreseeable future.





*Recent
      Sales of Unregistered Securities*





We
      also
      hereby incorporate all the transactions listed in the “Certain Relationships and
      Related Transactions” section as recent sales of unregistered securities that
      should be listed as such pursuant to Item 701 of Regulation S-B.


On
      November 22, 2002, we issued Richard K. Stone a warrant to purchase 55,000
      shares of our common stock at an exercise price of $1.25 per share on or before
      November 22, 2006 related to his position as an officer and employee of the
      company.





On
      March
      31, 2004 we issued 200,000 shares of our common stock and a warrant to purchase
      250,000 shares of common stock of the Company at an exercise price of $0.10
      per
      share on or before December 31, 2005 to Landgem Office I Ltd, the Company’s
      landlord, in exchange for an amendment to the Company’s office lease agreement
      whereby the Company gave back 7,176 rentable square feet of office space and
      the
      landlord forgave $20,890.52 of past due rent.





On
      May
      18, 2004 we issued a number of warrants to employees related to their employment
      contribution during fiscal year ended March 31, 2004. We issued each of Tom
      Sanders, Dipen Patel, Bobby Clark, Jr., and Monica Bareis a warrant to purchase
      50,000 shares of our common stock and Stacey Nelson a warrant to purchase 25,000
      shares of our common stock at an exercise price of $.12 per share to be
      exercised on or before May 18, 2009.





All
      of
      the transactions referred to above are exempt from registration under the
      Securities Act pursuant to Section 4(2) of the Securities Act. These
      transactions did not involve an underwriter and no underwriting discounts or
      commissions were paid. Each transaction was a privately negotiated transaction
      without general solicitation or advertising with persons or entities that we
      believed were “sophisticated investors” within the meaning of the Securities Act
      and had access to all information concerning our company that each such person
      or entity deemed necessary to make an informed investment decision with respect
      to the transaction. Appropriate legends were affixed to the share certificates
      or warrants issued stating that the securities issued could not be sold or
      transferred without registration of the securities under the Securities Act
      or
      an opinion of counsel acceptable to the company that such sale or transfer
      is
      exempt from registration under the Securities Act.





-10-


On
      March
      31, 2005, we completed the sale of 97.5 units (“Units”) with each Unit
      consisting of a 3-year, 6% Convertible Debenture in the principal amount of
      $10,000.00, and 50,000 5-year warrants to purchase a share of Common Stock,
      $.001 par value per share, of the Company at an exercise price of $.12. The
      convertible notes bear simple interest at 6% per annum payable on each March
      31,
      commencing March 31, 2006 and on each conversion date. Each investor has the
      right to convert the convertible notes after the date of issuance and at any
      time, until paid in full, at the election of the investor into fully paid and
      nonassessable shares of our common stock. The conversion price per share is
      initially $0.10, but is subject to customary adjustments for stock splits,
      stock
      dividends, reclassifications and similar transactions. In addition, the
      conversion price of the convertible notes will be adjusted in the event that
      the
      Company issues any common stock, including securities convertible into common
      stock and options or warrants to purchase common stock, at a price of less
      than
      $0.10 per share. No conversion may take place until such time as the Company
      receives shareholder approval for increase in its authorized shares equal to
      or
      above 65,000,000 shares. The unconverted amount, if any, of the convertible
      notes is payable in full on March 31, 2008. We issued an aggregate of 4,875,000
      common stock purchase warrants exercisable until five years from the initial
      closing date at an initial exercise price of $0.12 per share. The exercise
      price
      of the warrants is subject to adjustments similar to those applicable to the
      convertible notes.  The
      investors’ accreditation was determined by representations made by the
      respective investors regarding their accreditation in an investor questionnaire
      that accompanied each investor’s subscription agreement for the units purchased
      in the offering and we filed a Form D with the SEC and in those states where
      such filing was required. T.R. Winston & Company Incorporated acted as
      placement agent in connection with the sale of the Units and was granted
      warrants to purchase a number of shares of the Company’s $.001 par value common
      stock equal to five percent (5%) of the total funds raised in the offering,
      exercisable for five years thereafter at $.12 per share. The company is required
      to file a registration statement on the shares of common stock issuable upon
      conversion of the debentures and the exercise of the warrants if at least a
      majority of the units requests it and more than 55% of the securities are
      included.





On
      May
      18, 2004, we completed the sale of 220 units consisting of Fifty Thousand
      (50,000) shares of the common stock of the Company and a warrant to purchase
      Twenty-Five Thousand shares of common stock at a purchase price of $5,000.00
      per
      unit for an aggregate of $1.1 million. The Warrants are exercisable for 5 years
      at an exercise price of $.12 per share of common stock, subject to adjustments
      to the exercise price and number of shares issued on exercise on standard
      events, such as recapitalization or reorganization. The investors’ accreditation
      was determined by representations made by the respective investors regarding
      their accreditation in an investor questionnaire that accompanied each
      investor’s subscription agreement for the units purchased in the offering. T.R.
      Winston & Company Incorporated acted as placement agent in connection with
      the sale of the Units and was granted warrants to purchase a number of shares
      of
      the Company’s $.001 par value common stock equal to five percent (5%) of the
      total funds raised in the offering, exercisable for five years thereafter at
      $.12 per share.





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





The
      following description of “Management’s Plan of Operation” constitutes
      forward-looking statements for purposes of the Securities Act and the Exchange
      Act and as such involves known and unknown risks, uncertainties and other
      factors which may cause our actual results, performance or achievements to
      be
      materially different from future results, performance or achievements expressed
      or implied by such forward-looking statements. The words “expect”, “estimate”,
“anticipate”, “predict”, “believes”, “plan”, “seek”, “objective” and similar
      expressions are intended to identify forward-looking statements or elsewhere
      in
      this report. Important factors that could cause our actual results, performance
      or achievement to differ materially from our expectations are discussed in
      detail in Item 1 above. All written or oral forward-looking statements
      attributable to us are expressly qualified in their entirety by such factors.
      We
      undertake no obligation to publicly release the result of any revisions to
      these
      forward-looking statements that may be made to reflect events or circumstances
      after the date hereof or to reflect the occurrence of unanticipated events.
      Notwithstanding the foregoing, we are not entitled to rely on the safe harbor
      for forward looking statements under 27A of the Securities Act or 21E of the
      Exchange Act as long as our stock is classified as a penny stock within the
      meaning of Rule 3a51-1 of the Exchange Act. A penny stock is generally defined
      to be any equity security that has a market price (as defined in Rule 3a51-1)
      of
      less than $5.00 per share, subject to certain exceptions.





The
      following discussion should be read in conjunction with the Financial
      Statements, including the notes thereto.





-11-


*Overview*





We
      began
      operations in May 1994 as a traditional 1+ long-distance reseller. Recognizing
      the declines in telecommunications service prices and the decreasing margins
      being experienced in long distance sales, we decided to sell our long distance
      customer base and assets in early 1997. Since June of 1997, we have focused
      on
      the development, testing, and deployment of voice activated telecommunications
      services that would allow any consumer the ability to “dial” their calls using
      their voice. In this last fiscal year we developed and deployed two service
      applications that do not utilize voice recognition and will continue to evaluate
      each product and the incorporation of voice in each product as it is developed.





We
      currently provide services through two distribution channels master distributors
      and telecommunications carriers. Our telecommunications distribution channel
      is
      directly with Incumbent Local Exchange Carriers, or local telephone companies,
      Wireless Communication Carriers, or cell phone companies, and Competitive Local
      Exchange Carriers, or competitive local telephone companies. This avenue of
      distribution is extremely attractive because these companies already have the
      subscriber bases and the infrastructure to service large numbers of subscribers.
      We have service deployment in Miami, Florida, with a master distributor but
      to
      date revenues generated from that channel have been minimal.





Our
      contracts in most instances are revenue sharing contracts whereby we provide
      hardware, software applications and support in exchange for a portion of revenue
      generated from the service provided by our customer to their subscribers. Our
      sales force focuses on marketing our revenue sharing agreements and, to date,
      we
      are providing service to fourteen (14) wireless carriers nationwide. As of
      March
      31, 2005, these fourteen contracts were generating revenues of approximately
      $52,000 per month from our primary product voice dial. The revenue sharing
      agreement is the primary method by which we intend to contract with customers
      to
      generate revenue going forward.





We
      have
      concentrated our efforts in searching for services that our current carrier
      customers and potential carrier customers would like to provide their customers.
      We determined that there was a growing trend in mobile entertainment. We
      therefore contracted with a leading content provider to distribute their library
      of downloadable wireless games, picture messages, graphics and ring-tones.
      Our
      first content project was launched on June 18, 2004 with a full turnkey solution
      for the carrier that includes secure customer login from the carrier website,
      viewing of content, download of content, and creation of a billing record for
      the carriers billing system. This initial introduction to mobile entertainment
      led us to research the viability of additional personalized entertainment
      services that could be delivered through our network. On October 22, 2004 we
      announced the first commercial launch of a ringback service in the United States
      with the launch of our Rockin’ Ringback service. Our personalized ringback
      service provides a network-based personalized service that enables users to
      choose an audio file that callers will listen to while the phone is ringing.
      We
      believe that since we already have a relationship with the carrier and are
      integrated with these carriers customer service departments and billing
      departments that we have an opportunity to introduce new products with minimal
      integration effort. We will continue to research and either develop or acquire
      additional services that can be deployed through our platform. As of June 24,
      2005 we had one carrier customer providing My Phone Services Suite service
      in
      their marketplace, one customer anticipating launch in late second quarter,
      and
      two carriers in test phase on the ringback service.





We
      have
      focused the last twelve months on converting our systems structure to a robust
      data base system which will allow for scalability and addition of new services
      to the platform in shorter development cycles than were possible under our
      previous structure. On September 15, 2004 we announced the release of “My Phone
      Services Suite”, which incorporates our network address book, network voice
      dialing, Push2Connect, and Rockin Ringback services into one user-centric
      service that allows the subscriber to personalize the look and feel of their
      communications service especially for their personality. Revenue from these
      new
      products is expected to be slow with no guarantees of market and/or customer
      acceptance. We also believe that we will continue to see increased competition
      that along with many other factors may have an impact on the company and its
      products.





The
      implementation of our business plan is subject to risks inherent in the
      establishment and deployment of technology. We believe our services are services
      that any consumer who uses a phone can utilize. Our services are generic to
      cell
      phone users as well as land line users, children as well as adults. In order
      for
      us to succeed, we must:





·
            secure
                adequate financial and human resources to meet our requirements,
                including
                adequate numbers of technical support staff to provide service for
                our
                phone company customers;


·
            establish
                and maintain relationships with phone companies;


·
            make
                sure the GAP system works with the telephone switches of all of the
                major
                manufacturers;


-12-
  ·
              achieve
                  user acceptance for our services;


·
            generate
                reasonable margins on our services;


·
            continue
                to deploy and install GAP systems on a timely and acceptable schedule;


·
            respond
                to competitive market developments;


·
            mitigate
                risk associated with our technology by obtaining patents and copyrights
                and other protections of our intellectual property; and


·
            continually
                update and add to our product offerings to meet the needs of consumers.





Failure
      to achieve these objectives could adversely affect our business, operating
      results and financial condition. Increased competition from other providers
      of
      similar services and the impact of features available in cell phones can and
      have impacted our business.





*Results
      of Operations*





We
      currently provide our services to phone companies through revenue sharing
      agreements that provide
      revenue splits ranging from seventy percent (70%) to thirty percent (30%)
      depending on the amount of revenue obtained by the phone company through sale
      of
      our voice services to their subscribers. We typically bear the cost of the
      equipment to be installed at each phone company’s location including any upgrade
      requirements, installation, and service training. In some instances we
      contribute to the phone company’s marketing campaigns. We license our software
      to contracting phone companies as we found that the revenue sharing arrangement
      embodied in our form Marketing Agreement could potentially provide a higher
      rate
      of return on investment to us over the life of our standard
      contract.





We
      recorded a net loss of $998,354, or $.04 per share, for the fiscal year ended
      March 31, 2005, compared to a net loss of $326,937, or $.02 per share, for
      the
      fiscal year ended March 31, 2004, and a net loss of $1,251,953, or $.07 per
      share, for the year ended March 31, 2003. The decreased loss from fiscal year
      end 2003 to 2004 was a result of our efforts to reduce excess capacity in our
      network facilities and general overhead during our product and architecture
      upgrade. The increase in loss experienced from fiscal year end 2004 to 2005
      was
      due to reduced revenues and increased market activity related to introduction
      of
      our new product suite.





*Total
      Revenue*





Total
      revenue for the fiscal year ended March 31, 2005 was $912,599 compared to
      $1,631,785 and $2,124,876 for the fiscal years ended March 31, 2004 and 2003
      respectively. The decrease of revenue reflects loss of subscribers in our
      opt-out program. Of the revenues booked for each fiscal year end, 99% was
      generated from revenue sharing agreements, and 1% from direct sale service
      fees
      for “Emma the Perfect Receptionist” and “Smart Line”.





We
      anticipate that revenues from our revenue sharing agreements on our voice dial
      product will continue to deteriorate gradually in the fiscal year ending March
      31, 2006. We do anticipate that revenues from the My Phone Services Suite to
      begin gradually and build as new customers to the service integrate and market
      the product to their subscriber base.





*Cost
      of Sales*





Cost
      of
      sales for the fiscal year ended March 31, 2005 was $479,068 compared to $517,304
      and $761,185 for the fiscal years ended March 31, 2004 and 2003, respectively.
      For the fiscal year ended March 31, 2005, 100 % of the costs were for network
      infrastructure, such as collocations, connectivity, system access, and
      long-distance. For the fiscal year ended March 31, 2004, 90% of the costs were
      for network infrastructure, such as collocations, connectivity, system access,
      and long-distance and 10% was for voice activated dialing market awareness
      programs in carrier customer territories. For the fiscal year ended March 31,
      2003, 85% of the costs were for network infrastructure, such as collocations,
      connectivity, system access, and long-distance and 15% was for voice activated
      dialing market awareness programs in carrier customer territories. We believe
      costs of sales for network infrastructure will continue to remain steady through
      the next fiscal year as we utilize current capacity but will increase gradually
      if and when new customers are added.





*Selling,
      General and Administrative*





Selling,
      general and administrative expenses for the fiscal year ended March 31, 2005
      were $1,490,377 compared to $1,597,665 and $2,805,827 for the fiscal years
      ended
      March 31, 2004 and 2003, respectively. The decrease from 2003 to 2004 and then
      again from 2004 to 2005 was from an overall reduction in excess network and
      lease facilities.





-13-


We
      expect
      that selling, general and administrative expenses will increase slightly through
      the fiscal year ending March 31, 2006, as we do have overhead expansion needs
      necessary to increase our sales, marketing and development activities.





*Core
      Technology Enhancements Software Applications and Hardware*





We
      have
      not expensed any research and development costs for any of the periods stated
      on
      our financial statements, but we have accumulated costs of $1,264,836 for
      enhancement of our core software and hardware technology as of March 31, 2005
      in
      comparison to $994,199 as of March 31, 2004. The increase in expenditures is
      due
      to the continued enhancement of our core technology.





*Extraordinary
      Items*





We
      have
      recognized income from the extinguishment of debt and negotiated vendor
      settlements of $64,573 $90,098, and $230, respectively, for the fiscal years
      ended March 31, 2005, 2004, and 2003. The Company settled a lawsuit on November
      18, 2002 that required the company to pay $150,000 to KMC Telecom Holdings,
      Inc.
      a former customer. We have recognized $342,579 of previously deferred revenue
      related to the customer’s deposit.





*Income
      Taxes*





As
      of
      March 31, 2005, we had cumulative federal net operating losses of approximately
      $17.9 million, which can be used to offset future income subject to federal
      income tax through the fiscal year 2025. Net operating loss limitations may
      be
      imposed if changes in stock ownership of the company create a change of control
      as provided in Section 382 of the Internal Revenue Code of 1986.





*Liquidity
      and Capital Resources*





Our
      cash
      and cash equivalents at March 31, 2005 were $1,135,164, an increase of
      $1,070,490 from $64,674 at March 31, 2004. The Company has relied primarily
      on
      the issuance of stock, debentures and warrants to fund its operations since
      January of 1997 when we sold our long-distance resale operation.





Net
      cash
      used for operating activities was $706,908 for the year ended March 31, 2005
      compared to $55,328 for the year ended March 31, 2004. Net cash used for
      investing activities was $270,638 for the year ended March 31, 2005 compared
      to
      cash provided by investing activities of $77,742 for the year ended March 31,
      2004. Net cash provided by financing activities was $2,048,036 for the year
      ended March 31, 2005 compared to net cash used by financing activities of
      $13,500 for the year ended March 31, 2004.





On
      March
      31, 2005, pursuant to Section 4(2) of the Securities Act and Regulation D
      thereunder, we completed the sale of 97.5 units (“Units”) with each Unit
      consisting of a 3-year, 6% Convertible Debenture in the principal amount of
      $10,000.00, and 50,000 5-year warrants to purchase a share of Common Stock,
      $.001 par value per share, of the Company at an exercise price of $.12 for
      an
      aggregate of $975,000.





On
      May
      18, 2004, pursuant to Section 4(2) of the Securities Act and Regulation D
      thereunder, we closed an offering of 220 units consisting of Fifty Thousand
      (50,000) shares of the common stock of the Company and a warrant to purchase
      Twenty-Five Thousand shares of common stock at a purchase price of $5,000 per
      unit for an aggregate of $1,100,000.





We
      began
      collecting revenues from our revenue sharing agreements in January of 2001.
      These revenues are approximately $52,000 per month and we expect these to remain
      at approximately that level until we deploy additional products into the
      marketplace.





We
      have
      also issued stock or convertible securities to fulfill certain obligations
      or
      motivate various people. We have issued warrants to purchase shares of our
      common stock in connection with services provided by various individuals and
      entities in their capacity as members of our Board of Directors, Council of
      Advisors, various forms of consulting services, capital raising (such as a
      private offering), and marketing distributors. These warrants are always priced
      at the fair market value of our common stock on the date of issuance.




-14-


*Off-Balance
      Sheet Arrangements*





We
      do not
      have any off-balance sheet arrangements that have or are reasonably likely
      to
      have a current or future effect on our financial condition, changes in financial
      condition, revenues or expenses, results of operations, liquidity, capital
      expenditures or capital resources that are material to investors.





*Future
      Obligations*





We
      project our working capital needs to be approximately $1,200,000 over the next
      twelve months for corporate overhead and equipment purchases to continue to
      deploy our services to carrier customers. Management believes that current
      cash
      and cash equivalents and cash that may be generated from operations will be
      sufficient to meet these anticipated capital requirements and to finance
      marketing initiatives for the next twelve months. Such projections have been
      based on revenue trends from current customers and customers which are already
      under contract utilizing the revenue rates that we have experienced over the
      past six months with our currently installed customers and projected cash
      requirements to support installation, sales and marketing, and general overhead.
      We may be forced to raise additional capital through the issuance of new shares,
      the exercise of outstanding warrants, or reduce our current overhead. However,
      any projections of future cash needs and cash flows are subject to substantial
      uncertainty. If further funding is required, and we are unable to secure such
      funding, we would be forced to rely on existing cash and cash from operations
      which would greatly impact our ability to complete our product development
      and
      product rollout until such time as necessary funds are secured.





**Item
      7. Financial Statements**





PREFERRED
      VOICE, INC.


FINANCIAL
      STATEMENTS


MARCH
      31,
      2005, 2004 and 2003





Independent
                Auditors’ Report
            F-1Financial
                StatementsBalance
                Sheets
            F-2Statements
                of Operations
            F-4Statement
                of Stockholders’ Equity (Deficit)
            F-5Statement
                of Cash Flows
            F-6Notes
                to Financial Statements
            F-8


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





There
      have been no changes in or disagreements with our accountants on accounting
      and
      financial disclosures.


**Item
        8A. Controls and Procedures**





1. Evaluation
      of disclosure controls and procedures. As of the end of the reporting period,
      March 31, 2005, we carried out an evaluation, under the supervision and with
      the
      participation of Chief Executive Officer, who also acts as our Chief Financial
      Officer, of the effectiveness of the design and operation of our disclosure
      controls and procedures pursuant to Rule 13a-15(e) of the Securities Exchange
      Act of 1934 (the "Exchange Act"), which disclosure controls and procedures
      are
      designed to insure that information required to be disclosed by a company in
      the
      reports that it files under the Exchange Act is recorded, processed, summarized
      and reported within required time periods specified by the SEC's rules and
      forms. Based upon that evaluation, the Chief Executive Officer concluded that
      our disclosure controls and procedures are effective in timely alerting them
      to
      material information relating to the Company required to be included in the
      Company's period SEC filings.





2. Changes
      in
      internal controls. There were no changes in our internal controls over financial
      reporting identified in connection with our evaluation that occurred during
      our
      last fiscal quarter ended March 31, 2005 that materially affected, or was
      reasonably likely to materially affect our internal control over financial
      reporting.





**Item
      8B. Other Information**





None





-15-


**PART
      III**





**Item
      9. Directors, Executive Officers, Promoters and Control Persons;**


**Compliance
      with Section** **16(a)****of the Exchange Act**





**Directors,
      Executive Officers, Promoters and Control Persons**





The
      Board
      of Directors currently consists of five (5) people. Directors serve until the
      next annual meeting and until their successors are elected and qualified. The
      following table sets forth information about all of our Directors and executive
      officers and all persons nominated or chosen to become such:





**Name
                and Business Address**
            
            **Age**
            
            **Office**
            
            **Year
                First**
              **Elected
                Director**Mary
                G. Merritt
            
            48
            
            Director,
                Chief Executive Officer, Executive Vice President-Finance and
                Secretary/Treasurer
            
            1994G.
                Ray Miller
            
            65
            
            Director
            
            1994Scott
                V. Ogilvie
            
            51
            
            Director
            
            2000Latif
                M. Nathani1
            
            37
            
            Director
            
            2004Todd
                Parker
            
            41
            
            Director
            
            2005Bernard
                F. Bareis
            
            44
            
            Vice
                President and Chief Technology Officer
            
            N/A







1
            Mr.
                Nathani was our Chief Executive Officer from May 14, 2004 until February
                21, 2005.





*Ms.
      Merritt* is a
      founder of Preferred Voice and has been a director since May 1994. She has
      served as Chief Executive Officer since February 2005, Chief Operating Officer
      from May 2004, and has served as Executive Vice President - Finance and
      Secretary/Treasurer since inception. She served as President of Star of Texas,
      Inc., from 1989 to May 1994. She also served as Controller of United Medicorp
      for several months during 1992. Ms. Merritt is a certified public accountant
      and
      was employed by Ernst & Whinney from 1981 to 1989.





*Mr.
      Miller* is a
      founder of Preferred Voice. He has served as a Director of the company since
      May
      1994; he was Chief Executive Officer from June 1994 until June 2002 and
      President from April 1997 to May 2001. Previously, Mr. Miller founded United
      Medicorp Inc. in 1989 and served through February 1992 as Chairman of the Board
      and Chief Executive Officer. United Medicorp is a publicly-held corporation
      which manages medical insurance claims. Prior to that, Mr. Miller served in
      executive capacities with International Telecharge, Inc., an operator services
      company; Automatic Radius Management, Inc., a security alarm service company;
      and U.S. Telephone, Inc., a long distance carrier.





*Mr.
      Ogilvie* was
      elected as a director of Preferred Voice in February 20, 2000. Mr. Ogilvie
      is a
      Managing Director with Capital Investment Company and has been so since
      September of 2000. From January 1998 to 2000, Mr. Ogilvie was employed by
      Classic Residence by Hyatt as Managing Director of Development-Western Division.
      From 1993 through 1998, Mr. Ogilvie was a partner in the John Buck Company,
      a
      full service real estate brokerage, development and property management
      company.





*Mr.
      Nathani* has
      served as a Director of the company since May 2004; he was Chief Executive
      Officer from May of 2004 until February of 2005. Prior to joining Preferred
      Voice, Mr. Nathani served as Director of Marketing and Business Development
      for
      the Natural Interactive Services Division of Microsoft Corporation where he
      co-founded the Systems Management Server product group and the Speech products
      business group. He also had the unique experience of being an engineer on the
      Windows NT 3.1 team and a marketer in the Microsoft Office 95/97 team. Before
      Microsoft, Nathani founded the successful eMemories.com that was later acquired
      by eCompanies.





*Mr.
      Parker* was
      elected as a Director of the company on March 31, 2005. Mr. Parker is a Managing
      Partner with Hidden River LLC, a merger and acquisition firm
      specializing in the wireless industry, and has been so since 2002. From early
      2000 until early 2002, Mr. Parker was founder and CEO of HR One, a human
      resource software business. Prior to that, and from 1989 until 2000, Mr. Parker
      held various management positions at AirTouch Communications/Pacific
      Telesis.





-16-


*Mr.
      Bareis* joined
      Preferred Voice in March of 2003 and is currently serving as Vice President
      and
      Chief Technology Officer bringing over 20 years experience in multidisciplinary
      expertise in engineering and operations for data and voice communications
      technology companies. From June of 1998 to July of 2000 Mr. Bareis was Vice
      President of Engineering and Operations for PremiseNET, Inc., a company that
      developed IP-based telecommunications switching and routing products and
      interactive voice response systems. From there and until February of 2002,
      he
      was Vice President and General Manager of Mayan Networks, Inc., a company that
      developed optical communications switching and multiplexing equipment. From
      February of 2002 until his joining Preferred Voice, Mr. Bareis owned his own
      telecommunications consulting service business.





We
      are
      not aware of any “family relationships” (as defined in Item 401(c)of
      Regulation S-- Bpromulgated by the SEC) among directors, executive officers, or persons
      nominated or chosen by us to become directors or executive
      officers.





Except
      as
      set forth above, we are not aware of any event (as listed in Item 401(d) of
      Regulation S-Bpromulgated by the SEC)that
      occurred during the past five years that are material to an evaluation of the
      ability or integrity of any director, person nominated to become a director,
      executive  officer,promoter
      or control person of the company.





**Item
      10. Executive Compensation**





The
      following tables set forth the compensation paid by the Company to certain
      executive officers during the fiscal years ended March 31, 2005, 2004, and
      2003.





**Annual
      Compensation**


**Long
                Term**
              **Compensation****Name/Principal
                Position**
            
            **Year**
              **Ending**
              **March
                31**
            
            **Salary**
            
            **Bonus**
            
            **Other**
              **Annual**
              **Compensation**
            
            **Securities**
              **Underlying
                Options**
              **Warrants
                Granted**Mary
                G. Merritt
              Chief
                Executive Officer, EVP - Finance
            
            
            2005
              2004
              2003
            
            $
              $
              $
            99,430
              89,250
              105,750
            
            
            ―
              ―
              $250
            
            
            ―
              ―
              ―
            
            
            300,000
              150,000
              54,000Bernard
                F. Bareis
              Vice
                President and Chief Technical Officer
            
            
            2005
              2004
              2003
            
            $
              $
              $
            129,375
              125,000
              5,208
            
            
            ―
              ―
              ―
            
            
            ―
              ―
              ―
            
            
            250,000
              150,000
              ―Latif
                Nathani1
            
            
            2005
            
            $
            127,500
            
            
            ―
            
            
            ―
            
            
            3,000,000


1
              Mr.
                  Nathani was our Chief Executive Officer from May 14, 2004 until
                  February
                  21, 2005.


2
            No
                other stock options or convertible securities were granted to the
                aforementioned executive officers during the fiscal years ended March
                31,
                2005, 2004, and 2003.





**Option/SAR
      Grants in Fiscal Year 2005**





**Name**
            
            **Number
                of**
              **Securities
                Underlying**
              **Options/SARs
                Granted**
            
            **%
                of Total Options/SARs Granted toEmployees**
              **in
                Fiscal Year**1
            
            **Exercise
                or Base**
              **Price
                ($/Sh)**
            
            **Expiration
                Date**Mary
                G. Merritt
            
            
            100,000
            
            
            8.7
            %
            $
            0.12
            
            
            4/2/2009Bernard
                Bareis
            
            
            150,000
            
            
            13
            %
            $
            0.12
            
            
            4/9/2009Latif
                Nathani2
            
            
            ―
            
            
            ―
            
            
            ―
            
            
            ―


1
              Based
                  on a total of 1,150,000 shares underlying options issued during
                  the fiscal
                  year ended March 31, 2005.


2
              Mr.
                  Nathani was our Chief Executive Officer from May 14, 2004 until
                  February
                  21, 2005.


-17-
 **Aggregated
                      Option Exercises in Fiscal Year 2005 and March 31, 2005 Option
                      Values****Shares
                    Acquired**
                  
                  **Value**
                  
                  **Number
                    of Securities Underlying Unexercised Option****at
                    March 31, 2005 (#)**
                  
                  **Value
                    of Unexercised In-the-Money Options**
                    **at
                      March 31, 2005 ($)****1****Name**
                  
                  **On
                      Exercise**
                  
                  **Realized**
                  
                  **Exercisable**
                  
                  **Unexercisable**
                  
                  **Exercisable**
                  
                  **Unexercisable**Mary
                      G. Merritt
                  
                  
                  208,333
                  
                  
                  0
                  
                  
                  145,667
                  
                  
                  0
                  
                  $
                  24,763
                  
                  
                  --Bernard
                      Bareis
                  
                  
                  --
                  
                  
                  --
                  
                  
                  300,000
                  
                  
                  0
                  
                  $
                  51,000
                  
                  
                  --Latif
                      Nathani2
                  
                  
                  --
                  
                  
                  --
                  
                  
                  --
                  
                  
                  --
                  
                  
                  --
                  
                  
                  --


1
              Fair
                  market value of the common stock is based upon the average of the
                  closing
                  bid and asked prices as reported by the OTC Bulletin Board for
                  March 31,
                  2005.


2
              Mr.
                  Nathani was our Chief Executive Officer from May 14, 2004 until
                  February
                  21, 2005.


**Equity
      Compensation Plan**


Plan
                Category
            
            Number
                of Securities To be Issued Upon Exercise of
              Outstanding
                Options,
              Warrants
                and Rights(a)
            
            Weighted-Average
                Exercise Price of Outstanding Options,
              Warrants
                and Rights(b)
            
            Number
                of Securities Remaining Available For Future Issuance Under
              Equity
                Compensation Plans
              (excluding
                securities in column (a))(c)Equity
                CompensationPlans
                Approved bySecurity
                Holders
            
            
            1,618,667
            
            $
            0.12
            
            
            183,000Equity
                CompensationPlans
                Not Approved bySecurity
                Holders
            
            
            0
            
            
            0
            
            
            0Total
            
            
            1,618,667
            
            $
            0.12
            
            
            183,000


**Item
      11. Security Ownership of Certain Beneficial Owners and
      Management**





The
      following table sets forth, as of the close of business on  June
      24,2005,
      information as to the beneficial ownership of shares of the Company common
      stock
      for all directors, each of the named executive officers (as defined in Item  402(a)(2)of
      Regulation  S-Bpromulgated by the Commission), for all directors and executive officers as
      a
      group, and any person or “group” (as that term is defined in Item 403 of
      Regulation S-Bpromulgated by the Commission) who or which is known to the Company to be the
      beneficial owner of more than 5% of the outstanding shares of Company common
      stock. In addition, except as set forth below, the Company does not know of
      any
      person or group who or which owns beneficially more than 5% of its outstanding
      shares of Company common stock as of the close of business on June 24,
      2005.







-18-


**Beneficial
      Ownership**  (1),
      (2)


**Name
              of Beneficial Owner**
            
            **Number
                of**
              **Shares**
            
            **Percentage**G.
                Ray Miller(3)
            
            
            328,204
            
            
            1.09
            %Mary
                G. Merritt(4)
            
            
            2,256,213
            
            
            7.40
            %Latif
                Nathani(5)
            
            
            756,000
            
            
            2.47
            %Scott
                Ogilvie(6)
            
            
            190,000
            
            
            *Todd
                Parker(7)
            
            
            875,000
            
            
            2.92
            %Bernard
                F. Bareis(8)
            
            
            554,000
            
            
            1.83
            %Leslie
                Melzer(9)
            
            
            2,571,500
            
            
            8.4
            %Paragon
                Ranch, Inc.(10)
            
            
            2,012,500
            
            
            6.62
            %JMG
                Capital Partners, L.P.(11)
            
            
            4,426,584
            
            
            14
            %JMG
                Triton Offshore Fund Ltd.(12)
            
            
            4,423,584
            
            
            13.99
            %J.
                Steven Emerson(13)
            
            
            6,361,000
            
            
            19.46
            %Bristol
                Investment Fund, Ltd.(14)
            
            
            2,549,000
            
            
            8.26
            %G.
              Tyler Runnels(15)
            
            
            4,313,155
            
            
            13.39
            %All
                Directors and executive officers as a group (six persons)(16)
            
            
            5,186,191
            
            
            16.41
            %





*
            Less
                than one percent (1%).


1)
            SEC
                rules provide that, for purposes hereof, a person is considered the
                “beneficial owner” of shares with respect to which the person, directly or
                indirectly, has or shares the voting or investment power, irrespective
                of
                his/her/its economic interest in the shares. Unless otherwise noted,
                each
                person identified possesses sole voting and investment power over
                the
                shares listed, subject to community property
                laws.


2)
            Based
                on 29,815,826 shares outstanding on June 24, 2005. Shares of common
                stock
                subject to options that are exercisable within 60 days of June 24,
                2005,
                are deemed beneficially owned by the person holding such options
                for the
                purposes of calculating the percentage of ownership of such person
                but are
                not treated as outstanding for the purpose of computing the percentage
                of
                any other person.


3)
            Includes
                180,000 shares issuable upon exercise of warrants.


4)
            Includes
                530,000 shares issuable upon exercise of warrants, 145,667 issuable
                upon
                exercise of employee stock options, 30,000 shares held by minor children,
                and 24,639 shares held by Pegasus Settlement
                Trust.


5)
            Includes
                750,000 shares issuable upon exercise of
                warrants.


6)
            Includes
                190,000 shares issuable upon exercise of
                warrants.


7)
            Includes
                125,000 shares issuable upon exercise of warrants.


8)
            Includes
                100,000 shares issuable upon exercise of warrants, 300,000 shares
                issuable
                upon exercise of employee stock options and 154,000 shares issuable
                upon
                exercise of employee stock options held by his
                spouse.


9)
            Includes
                192,500 issuable upon exercise of warrants, 1,425,000 shares held
                by
                Paragon Ranch, Inc. and 587,500 shares issuable upon exercise of
                warrants
                held by Paragon Ranch, Inc.


10)
            Includes
                587,500 shares issuable upon exercise of warrants. Paragon Ranch’s address
                is 5445 DTC Parkway, Suite 1020, Greenwood Village, CO 80111. Paragon
                Ranch has advised us that Leslie Melzer, Vice President of Paragon
                Ranch,
                and Richard L. Gooding, President of Paragon Ranch, share voting
                power
                over the shares held by Paragon
                Ranch.


11)
            Includes
                1,800,000 shares issuable upon exercise of warrants. JMG Capital
                Partners’
                address is11601
                Wilshire Blvd, Suite 2180, Los Angeles, California 90025. JMG Capital
                Partners has advised us that Jonathan M. Glaser is the member-manager
                of
                JMG Capital Management, LLC, which is the general partner of JMG
                Capital
                Partners, and is the natural person with sole voting power over the
                shares
                held by JMG Capital Partners.


12)
            Includes
                1,800,000 shares issuable upon exercise of warrants. JMG Triton Offshore
                Fund Ltd.’s address is Citco Building, Wickhams Cay, Road Town, Tortola,
                British Virgin Islands. We have been informed by JMG Triton Offshore
                Fund
                Ltd. that Jonathan M. Glaser is the member-manager of Pacific Assets
                Management, LLC, which is the general partner of JMG Triton Offshore
                Fund
                Ltd., and he is the natural person who has sole voting power over
                the
                shares held by JMG Triton Offshore Fund
                Ltd.


13)
            Includes
                3,431,200 shares held in Mr. Emerson’s retirement accounts and 2,880,000
                shares issuable upon exercise of warrants held in Mr. Emerson’s retirement
                accounts.


14)
            Includes
                1,000,000 shares issuable upon exercise of warrants. Bristol Investment
                Fund, Ltd’s address is Caledonian House, Jennett Street, Georgetown, Grand
                Cayman, Cayman Islands. Bristol Capital Advisors, LLC ("BCA") is
                the
                investment advisor to Bristol Investment Fund, Ltd. ("Bristol").
                As
                manager of BCA and a director of Bristol, Paul Kessler has voting
                and
                investment power over the shares held by Bristol. Mr. Kessler disclaims
                beneficial ownership of such
                shares.


15)
            Includes
                781,460 shares issuable upon exercise of warrants, 1,145,503 shares
                held
                by The Runnels Family Trust and 857,000 shares issuable upon exercise
                of
                warrants held by The Runnels Family Trust, and 630,000 shares held
                by High
                Tide, LLC and 750,000 shares issuable upon exercise of warrants held
                by
                High Tide, LLC for which Mr. Runnels has sole voting power over the
                shares
                held by High Tide, LLC.


16)
            Includes
                the shares described in footnotes 3 through 8.







-19-


**Item
      12. Certain Relationships and Related Transactions**





On
      April
      2, 2004 we issued G. Ray Miller, Scott Ogilvie, and Leslie Melzer each warrants
      to purchase 100,000 shares of our common stock at an exercise price of $.12
      per
      share on or before April 2, 2007 related to their positions as directors of
      the
      company.




In
      a
      private offering we closed on May 18, 2004, JMG Capital Partners, JMG Triton
      Offfshore Fund, J. Steven Emerson IRA II, Runnels Family Trust, High Tide,
      LLC.,
      and Mary Merritt purchased 1,500,000, 1,500,000, 3,000,000, 650,000, 500,000
      and
      500,000 shares of our common stock, respectively, and warrants to purchase
      750,000, 750,000, 1,500,000, 325,000, 250,000 and 250,000 shares of our common
      stock, respectively, at an exercise price of $.12 per share. The warrants are
      exercisable at any time prior to May 18, 2009. These shares and warrant were
      issued to each entity or individual at the same price as that paid by other
      investors in the offering.





On
      May
      18, 2004 we issued Mary Merritt and Bernard Bareis a warrant to purchase 175,000
      and 100,000 respectively, shares of our common stock at an exercise price of
      $.12 per share to be exercised on or before May 18, 2009. The warrants were
      issued related to their management contribution during fiscal year ended March
      31, 2004.





On
      May
      18, 2004 we issued Latif Nathani four warrants each for 750,000 shares of our
      common stock at an exercise price of $.12 to be exercisable at any time after
      three months from grant, at an exercise price of $.15 to be exercisable at
      any
      time after six months from grant, at an exercise price of $.18 at any time
      after
      nine months from grant, and at an exercise price of $.20 at any time after
      the
      one year anniversary of grant. All of the warrants expire on May 18, 2009 or
      60
      days after Mr. Nathani ceases to be a Director, whichever is earlier. On
      February 21, 2005, Mr. Nathani resigned his position as Chief Executive Officer
      and relinquished all rights to the warrants described above.





On
      February 21, 2005, we issued Latif Nathani a warrant to purchase 500,000 shares
      of our common stock at an exercise price of $.12 per share to be exercised
      on or
      before May 18, 2009 for his position as a director of the company. Additionally,
      Mr. Nathani was issued four warrants each for 125,000 shares of our common
      stock
      at an exercise price of $.13 to be exercisable at any time after three months
      from grant, at an exercise price of $.16 to be exercisable at any time after
      six
      months from grant, at an exercise price of $.19 at any time after nine months
      from grant, and at an exercise price of $.22 at any time after the one year
      anniversary of grant. All of the warrants expire on February 21, 2010 or 60
      days
      after Mr. Nathani ceases to be a Director, whichever is earlier.





On
      March
      31, 2005 we issued Todd Parker four warrants each for 125,000 shares of our
      common stock at an exercise price of $.17 to be exercisable at any time after
      three months from grant, at an exercise price of $.17 to be exercisable at
      any
      time after six months from grant, at an exercise price of $.17 at any time
      after
      nine months from grant, and at an exercise price of $.17 at any time after
      the
      one year anniversary of grant. All of the warrants expire on March 31, 2010
      or
      60 days after Mr. Parker ceases to be a Director, whichever is earlier.





On
      March
      31, 2005, the company entered into securities purchase agreements with JMG
      Capital Partners, JMG Triton Offfshore Fund, J. Steven Emerson IRA II, Runnels
      Family Trust, High Tide, LLC and Bristol Investment Fund Ltd. for the issuance
      of 6% convertible debentures in the aggregate amount of $850,000. The notes
      bear
      interest at 6%, mature on March 31, 2008, and are convertible into the company’s
      common stock at the holders’ option at $.10 per common share. In addition the
      company issued an aggregate of 4,250,000 warrant to purchase shares of our
      common stock, at an exercise price of $.12 per share on or before March 31,
      2010. These convertible debentures and warrant were issued to each entity or
      individual at the same price as that paid by other investors in the offering.





All
      of
      the transactions referred to in this section involving the issuance of shares
      of
      our common stock or warrants are exempt from registration under the Securities
      Act pursuant to Section 4(2) of the Securities Act. Each transaction was a
      privately negotiated transaction without general solicitation or advertising
      with persons or entities that we believed were “sophisticated investors” within
      the meaning of the Securities Act and had access to all information concerning
      our company that each such person or entity deemed necessary to make an informed
      investment decision with respect to the transaction.








-20-


**Item
      13. Exhibits**





*(a)*
            *Exhibits*





Exhibit
                Number
              
              Description
                  of Exhibit3.1(1)
              
              Certificate
                  of Incorporation, filed on August 3, 1992 with the Secretary of
                  State of
                  Delaware (Exhibit 3.1)3.2(1)
              
              Certificate
                  of Amendment, filed on May 2, 1994 with the Secretary of State
                  of Delaware
                  (Exhibit 3.2)3.3(1)
              
              Certificate
                  of Amendment, filed on March 21, 1995 with the Secretary of State
                  of
                  Delaware (Exhibit 3.3)3.4(2)
              
              Certificate
                  of Amendment, filed on July 27, 1995 with the Secretary of State
                  of
                  Delaware (Exhibit 3.5)3.5(3)
              
              Certificate
                  of Amendment, filed on March 7, 1997 with the Secretary of State
                  of
                  Delaware (Exhibit 3.5)3.6(1)
              
              Bylaws
                  of the registrant (Exhibit 3.4)10.1(4)
              
              Form
                  of Warrant Certificate and Schedule of Warrant Certificates (Exhibit
                  10.1)10.2(5)
              
              Volume
                  License Agreement between Philips Speech Processing North America,
                  a
                  division of Philips Electronics North America Corporation and Preferred
                  Voice, Inc. (Exhibit 10.31)10.3(6)
              
              Form
                  of Subscription Agreement between Preferred Voice, Inc. and certain
                  purchasers of Preferred Voice, Inc. common stock (Exhibit
                  10.1)10.4(6)
              
              Form
                  of Warrant Certificate (Exhibit 10.2)10.5(6)
              
              Warrant
                  No. 122 issued to Stifel, Nicolaus & Company, Inc. (Exhibit
                  10.3)10.6(5)
              
              Second
                  Amendment to Lease between Dallas Office Portfolio, L.P., as successor
                  in
                  interest to Greenville Avenue Properties, Ltd. and Preferred Voice,
                  Inc.
                  (Exhibit 10.3)10.7(1)
              
              Preferred/telecom,
                  Inc. 1994 Stock Plan for Incentive and Non-Qualified Stock Options
                  (Exhibit 10.5)10.8(7)
              
              2000
                Stock Plan for Incentive Stock Options and Other Equity Participation
                (Exhibit 10.1)10.9(8)
              
              Form
                of Subscription Agreement by and between Preferred Voice, Inc. and
                certain
                signatories thereto (Exhibit 10.1)10.10(8)
              
              Form
                of Warrant Certificate, issued by Preferred Voice, Inc. pursuant
                to the
                Subscription Agreement filed as Exhibit 10.9 hereto (Exhibit
                10.2)10.11(9)
              
              Patent
                License Agreement by and between Preferred Voice, Inc. and
                KoninKlijkePhilips Electronics N.V.*(Exhibit 10.2)10.12(10)
              
              Form
                of Subscription Agreement, by and between Preferred Voice, Inc. and
                certain signatories thereto (Exhibit 10.1)10.13(11)
              
              Form
                  of Subscription Agreement, by and between Preferred Voice, Inc.
                  and
                  certain signatories thereto (Exhibit 10.1)23^
              
              Consent
                  of Philip Vogel & Co. PC****31.1
              
              Section
                302 Certification32.1^
              
              Certification
                  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.





^  Filed
      herewith.


(1)
                Incorporated
                    by reference to the exhibit shown in parenthesis to our Registration
                    Statement on Form S-1, filed with the Securities and Exchange
                    Commission
                    on June 15, 1995.


(2)
            Incorporated
                by reference to the exhibit shown in parenthesis to Amendment No.
                1 to our
                Registration Statement, filed with the Securities and Exchange Commission
                on August 7, 1995.


(3)
            Incorporated
                by reference to the exhibit shown in parenthesis to our Annual Report
                on
                Form 10-KSB for the period ended March 31, 1999, filed by us with
                the
                Securities and Exchange Commission.


(4)
            Incorporated
                by reference to the exhibit shown in parenthesis to our Registration
                Statement on Form SB-2, filed with the Securities Exchange Commission
                on
                March 8, 2001


(5)
            Incorporated
                by reference to the exhibit shown in parenthesis to Amendment No.
                1 to
                Form 10-KSB for the period ended March 31, 2000, filed by us with
                the
                Securities and Exchange Commission.


(6)
            Incorporated
                by reference to the exhibit shown in parenthesis to our Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission on September
                15, 2000.


(7)
            Incorporated
                by reference to the exhibit shown in parenthesis to our Quarterly
                Report
                on Form 10-QSB for the quarter ended December 31, 2000, filed by
                us with
                the Securities and Exchange
                Commission.


(8)
            Incorporated
                by reference to the exhibit shown in parenthesis to our Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission on May
                7,
                2001.


(9)
            Incorporated
                by reference to the exhibit shown in parenthesis to our Quarterly
                Report
                on Form 10-QSB for the quarter ended September 30,
                2001, filed
                by us with the Securities and Exchange
                Commission.


(10)
            Incorporated
                by reference to the exhibit shown in parenthesis to our Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission
                on
                November 21, 2001.


(11)
            Incorporated
                by reference to the exhibit shown in parenthesis to our Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission
                on May
                18, 2004.


(12)
            Incorporated
                by reference to the exhibit shown in parenthesis to our Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission
                on
                February 24, 2005.


(13)
            Incorporated
                by reference to the exhibit shown in parenthesis to our Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission
                on April
                5, 2005.






-21-


**Item
      14. Principal Accountant Fees and Services**





Our
      independent auditors, Philip Vogel & Co., P.C., have no direct or indirect
      interest in the Company and have been the Company’s Independent Registered
      Public Accounting Firm since 1995. The following table sets forth the fees
      billed and estimated fees for professional audit services provided by such
      firm
      for the fiscal years ended March 31, 2004 and 2005:





2004
              
              2005Audit
                  Fees (a)
              
              $
              26,550
              
              $
              30,300Audit-Related
                  Fees (b)
              
              $
              0
              
              $
              0Tax
                  Fees (c)
              
              $
              0
              
              $
              0All
                  Other Fees
              
              $
              0
              
              $
              0


(a)
            Includes
                fees for services related to the audits of our annual financial statements
                and the reviews of our interim financial statements and assistance
                with
                SEC filings.


(b)
            Includes
                fees for services related to transaction due diligence and consultations
                with respect to compliance with Section 404 of the Sarbanes-Oxley
                Act.


(c)
            Includes
                fees for services related to tax compliance, preparation and planning
                services (including U.S. federal, state and local returns) and tax
                examination assistance.





Our
      Audit
      Committee has established a policy whereby the outside auditors are required
      to
      seek pre-approval on an annual basis of all audit, audit-related, tax and other
      services by providing a prior description of the services to be performed.
      For
      the year ended March 31, 2005, 100% of all audit-related services, tax services
      and other services were pre-approved by the Audit Committee, which concluded
      that the provision of such services by Philip Vogel & Co., P.C. was
      compatible with the maintenance of that firm’s independence in the conduct of
      its auditing functions.





-22-


**SIGNATURES**





In
      accordance with Section 13 or 15(d)of the
      Securities Exchange Act of 1934, the registrant has duly caused this annual
      report on Form 10-KSB to be signed on its behalf by the undersigned thereto
      duly
      authorized.





**PREFERRED
                VOICE, INC.**
              **(Registrant)**Date: July
              14, 2005
            By:
            /s/ Mary
              G. MerrittMary
              G. Merritt, Chairman


Pursuant
      to the requirements of the Securities Exchange Act of 1934, this annual report
      on Form 10-KSB has been signed below by the following persons on behalf of
      the
      registrant and in the capacities and on the dates indicated.





SIGNATURE
            
            TITLE
            
            DATE/s/
              Mary G. Merritt
            
            Chairman
              and Chief Executive Officer
            
            July
                14,2005Mary
                G. Merritt
            
            (Principal
                Executive Officer) Secretary, Treasurer,Executive
              Vice President of Finance and Director(Principal
              Financial
              and Accounting Officer)/s/
              Latif M. Nathani
            
            Director
            
            July
                14,2005Latif
                M. Nathani/s/
              G. Ray Miller
            
            Director
            
            July
                14,2005G.
                Ray Miller/s/
              Todd Parker
            
            Director
            
            July
                14,2005Todd
                Parker/s/
              Scott Ogilvie
            
            Director
            
            July
                14,2005Scott
                Ogilvie





-23-


**INDEPENDENT
      AUDITORS’ REPORT**







**The
      Board of Directors**


**and
      Shareholders**


**Preferred
      Voice, Inc.**





We
      have
      audited the accompanying balance sheets of Preferred Voice, Inc. as of March
      31,
      2005 and 2004, and the related statements of operations, stockholders' equity
      (deficit) and cash flows for the years ended March 31, 2005, 2004 and 2003.
      These financial statements are the responsibility of the Company's management.
      Our responsibility is to express an opinion on these financial statements based
      on our audits.





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





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Preferred Voice, Inc. as of March
      31, 2005 and 2004, and the results of its operations and its cash flows for
      the
      years ended March 31, 2005, 2004 and 2003, in conformity with accounting
      principles generally accepted in the United States of America.





**PHILIP
      VOGEL & CO. PC**




**Certified
      Public Accountants**





**Dallas,
      Texas**





**May
      11, 2005**








F-1




**PREFERRED
      VOICE, INC.**


**BALANCE
      SHEETS**


**MARCH
      31, 2005** **AND 2004**




**2005**
              
              **2004****Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              1,135,164
              
              $
              64,674Accounts
                  receivable, net of allowance for doubtfulaccounts
                  of $5,325 and $6,325, respectively
              
              
              100,920
              
              
              133,542Prepaid
                  expense
              
              
              2,759
              
              
              2,851Total
                  current assets
              
              $
              1,238,843
              
              $
              201,067Property
                  and equipment:Computer
                  equipment
              
              $
              1,629,844
              
              $
              1,575,228Furniture
                  and fixtures
              
              
              32,046
              
              
              32,046Office
                  equipment
              
              
              61,044
              
              
              61,044$
              1,722,934
              
              $
              1,668,318Less
                  accumulated depreciation
              
              
              1,143,905
              
              
              847,415Net
                  property and equipment
              
              $
              579,029
              
              $
              820,903Other
                  assets:Capitalized
                  software development costs, net of accumulatedamortization
                  of $955,436 and $872,672, respectively
              
              $
              224,881
              
              $
              121,528Deposits
              
              
              4,485
              
              
              4,485Trademarks
                  and patents, net of accumulatedamortization
                  of $9,709 and $1,819, respectively
              
              
              104,307
              
              
              78,532Total
                  other assets
              
              $
              333,673
              
              $
              204,545Total
                  assets
              
              $
              2,151,545
              
              $
              1,226,515





F-2




**2005**
              
              **2004****Liabilities
                  and stockholders' equity**Current
                  liabilities:Accounts
                  payable
              
              $
              203,209
              
              $
              202,079Accrued
                  operating expenses
              
              
              60
              
              
              239Accrued
                  vacation
              
              
              5,667
              
              
              8,565Accrued
                  payroll and payroll taxes
              
              
              39,830
              
              
              30,241Accrued
                  lawsuit settlement
              
              
              -
              
              
              132,293Current
                  portion- notes payable
              
              
              13,315
              
              
              49,041Total
                  current liabilities
              
              $
              262,081
              
              $
              422,458Long-term
                  liabilities:Notes
                  payable
              
              $
              14,144
              
              $
              27,459Debentures
                  payable - net of discounts
              
              
              547,583
              
              
              -Total
                  long-term liabilities
              
              $
              561,727
              
              $
              27,459Commitments
                  and contingencies (Note I and M)Stockholders'
                  equity:Common
                  stock, $.001 par value;50,000,000
                  shares authorized; 29,607,493and
                  18,607,493 shares issued, respectively
              
              $
              29,607
              
              $
              18,607Additional
                  paid-in capital
              
              
              19,384,794
              
              
              17,846,301Accumulated
                  deficit
              
              
              (18,085,158
              )
              
              (17,086,804
              )Treasury
                  stock- 22,500 shares at cost
              
              
              (1,506
              )
              
              (1,506
              )Total
                  stockholders' equity
              
              $
              1,327,737
              
              $
              776,598Total
                  liabilities and stockholders' equity
              
              $
              2,151,545
              
              $
              1,226,515




F-3




**PREFERRED
      VOICE, INC.**


**STATEMENTS
      OF OPERATIONS**


**FOR
      THE YEARS ENDED** **MARCH
      31, 2005** **,
      2004 AND 2003**




**2005**
              
              **2004**
              
              **2003**Net
                  sales
              
              $
              912,599
              
              $
              1,631,785
              
              $
              2,124,876Cost
                  of sales
              
              
              479,068
              
              
              517,304
              
              
              761,185Gross
                  profit
              
              $
              433,531
              
              $
              1,114,481
              
              $
              1,363,691General
                  and administrative expenses
              
              $
              1,490,377
              
              $
              1,597,665
              
              $
              2,805,827Loss
                  from operations
              
              $
              (1,056,846
              )
              $
              (483,184
              )
              $
              (1,442,136
              )Other
                  income (expense):Interest
                  income
              
              $
              -
              
              $
              247
              
              $
              5,419Interest
                  expense
              
              
              (6,081
              )
              
              (15,603
              )
              
              (5,016
              )Gain
                  (loss) on sale of assets
              
              
              -
              
              
              84,048
              
              
              (1,021
              )Extinguishment
                  of debt
              
              
              -
              
              
              81,685
              
              
              230Negotiated
                  settlements
              
              
              64,573
              
              
              8,413
              
              
              342,579Lawsuit
                  settlement
              
              
              -
              
              
              -
              
              
              (150,000
              )Other
                  expense
              
              
              -
              
              
              (2,543
              )
              
              (2,008
              )Total
                  other income (expense)
              
              $
              58,492
              
              $
              156,247
              
              $
              190,183Loss
                  from operations before income taxes
              
              $
              (998,354
              )
              $
              (326,937
              )
              $
              (1,251,953
              )Provision
                  for income taxes
              
              
              -
              
              
              -
              
              
              -Net
                  loss
              
              $
              (998,354
              )
              $
              (326,937
              )
              $
              (1,251,953
              )Per
                  share amounts:Net
                  loss per share
              
              $
              (0.04
              )
              $
              (0.02
              )
              $
              (0.07
              )


F-4




**PREFERRED
      VOICE, INC.**


**STATEMENTS
      OF STOCKHOLDERS’ EQUITY**


**FOR
      THE YEARS ENDED** **MARCH
      31, 2005** **,
      2004 AND 2003**


**Shares
                  of common stock**
              
              **Amounts****Common**
              
              
              
              **Additional**
              
              
              
              **Total****stock
                  $0.001**
              
              **Treasury**
              
              **paid-in**
              
              **Accummulated**
              
              **stockholders'****Authorized**
              
              **Issued**
              
              **Outstanding**
              
              **In
                  treasury**
              
              **par
                  value**
              
              **stock**
              
              **capital**
              
              **deficit**
              
              **equity**Balance
                  - March 31, 2002
              
              
              50,000,000
              
              
              18,407,493
              
              
              18,384,993
              
              
              22,500
              
              $
              18,407
              
              $
              (1,506
              )
              $
              17,817,465
              
              $
              (15,507,914
              )
              $
              2,326,452Net
                  loss for the year ended March 31, 2003
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,251,953
              )
              
              (1,251,953
              )Balance
                  - March 31, 2003
              
              
              50,000,000
              
              
              18,407,493
              
              
              18,384,993
              
              
              22,500
              
              $
              18,407
              
              $
              (1,506
              )
              $
              17,817,465
              
              $
              (16,759,867
              )
              $
              1,074,499Conversion
                  of accounts payable tocommon
                  stock
              
              
              -
              
              
              200,000
              
              
              200,000
              
              
              -
              
              
              200
              
              
              -
              
              
              20,691
              
              
              -
              
              
              20,891Warrants
                  issued to non-employees
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              8,145
              
              
              -
              
              
              8,145Net
                  loss for the year ended March 31, 2004
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (326,937
              )
              
              (326,937
              )Balance
                  - March 31, 2004
              
              
              50,000,000
              
              
              18,607,493
              
              
              18,584,993
              
              
              22,500
              
              $
              18,607
              
              $
              (1,506
              )
              $
              17,846,301
              
              $
              (17,086,804
              )
              $
              776,598Issuance
                  of common stock net of fees $2,923
              
              
              -
              
              
              11,000,000
              
              
              11,000,000
              
              
              -
              
              
              11,000
              
              
              -
              
              
              1,086,077
              
              
              -
              
              
              1,097,077Exercise
                  of employee stock options - sharesnot
                  issued as of 3/31/2005
              
              
              -
              
              
              -
              
              
              208,333
              
              
              -
              
              
              -
              
              
              -
              
              
              25,000
              
              
              -
              
              
              25,000Proceeds
                  from the issuance of the debenturesallocated
                  to the warrants
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              427,416
              
              
              -
              
              
              427,416Net
                  loss for the year ended March 31, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (998,354
              )
              
              (998,354
              )Balance
                  - March 31, 2005
              
              
              50,000,000
              
              
              29,607,493
              
              
              29,793,326
              
              
              22,500
              
              $
              29,607
              
              $
              (1,506
              )
              $
              19,384,794
              
              $
              (18,085,158
              )
              $
              1,327,737




F-5




**PREFERRED
      VOICE, INC.**


**STATEMENTS
      OF CASH FLOWS**


**FOR
      THE YEARS ENDED** **MARCH
      31, 2005** **,
      2004 AND 2003**


**2005**
              
              **2004**
              
              **2003**Cash
                  flows from operating activities:Cash
                  received from customers
              
              $
              945,221
              
              $
              1,718,949
              
              $
              2,065,305Cash
                  paid to suppliers and employees
              
              
              (1,646,048
              )
              
              (1,756,421
              )
              
              (3,167,992
              )Interest
                  received
              
              
              -
              
              
              247
              
              
              5,419Interest
                  paid
              
              
              (6,081
              )
              
              (18,103
              )
              
              (5,016
              )Net
                  cash used by operating activities
              
              $
              (706,908
              )
              $
              (55,328
              )
              $
              (1,102,284
              )Cash
                  flows from investing activities:Capital
                  expenditures
              
              $
              (270,638
              )
              $
              (48,757
              )
              $
              (148,413
              )Proceeds
                  from sale of assets
              
              
              -
              
              
              125,824
              
              
              1,740Employee
                  (advances) repayments
              
              
              -
              
              
              675
              
              
              1,963Net
                  cash provided (used) by investing activities
              
              $
              (270,638
              )
              $
              77,742
              
              $
              (144,710
              )Cash
                  flows from financing activities:Proceeds
                  from issuance of stock
              
              $
              1,097,077
              
              $
              -
              
              $
              -Proceeds
                  from issuance of convertible debt and warrants
              
              
              975,000
              
              
              -
              
              
              -Proceeds
                  from exercise of stock options
              
              
              25,000
              
              
              -
              
              
              -Repayment
                  of note payable
              
              
              (49,041
              )
              
              (13,500
              )
              
              -Net
                  cash provided (used) by financing activities
              
              $
              2,048,036
              
              $
              (13,500
              )
              $
              -Net
                  increase (decrease) in cash and cash equivalents
              
              $
              1,070,490
              
              $
              8,914
              
              $
              (1,246,994
              )Cash
                  and cash equivalents:Beginning
                  of period
              
              
              64,674
              
              
              55,760
              
              
              1,302,754End
                  of period
              
              $
              1,135,164
              
              $
              64,674
              
              $
              55,760








F-6




**2005**
              
              **2004**
              
              **2003**Reconciliation
                  of net loss to netcash
                  used by operating activities:Net
                  loss
              
              $
              (998,354
              )
              $
              (326,937
              )
              $
              (1,251,953
              )Adjustments
                  to reconcile net loss to net cashused
                  by operating activities:Depreciation
                  and amortization
              
              $
              383,383
              
              $
              424,593
              
              $
              448,286Gain
                  on sale of assets
              
              
              -
              
              
              (84,048
              )
              
              1,021Extinguishment
                  of debt
              
              
              -
              
              
              (81,685
              )
              
              -Impairment
                  of intangibles
              
              
              -
              
              
              2,543
              
              
              2,014Fair
                  value of stock warrants issued in exchange for services
              
              
              -
              
              
              8,145
              
              
              -Changes
                  in operating assets and liabilities:(Increase)
                  decrease in accounts receivable
              
              
              32,622
              
              
              87,164
              
              
              (57,766
              )(Increase)
                  decrease in prepaid expenses
              
              
              92
              
              
              1,879
              
              
              23,681(Increase)
                  decrease in deposits
              
              
              -
              
              
              7,832
              
              
              -Decrease
                  in accounts payable
              
              
              1,130
              
              
              (25,697
              )
              
              (34,267
              )Increase
                  (decrease) in accrued expenses
              
              
              (125,781
              )
              
              (69,117
              )
              
              111,319Increase
                  (decrease) in customer deposits
              
              
              -
              
              
              -
              
              
              (344,619
              )Total
                  adjustments
              
              $
              291,446
              
              $
              271,609
              
              $
              149,669Net
                  cash used by operating activities
              
              $
              (706,908
              )
              $
              (55,328
              )
              $
              (1,102,284
              )Supplemental
                  schedule of non-cash investing andand
                  financing activities:Conversion
                  of accounts payable to common stock
              
              $
              -
              
              $
              71,593
              
              $
              -Extinguishment
                  of accrued interest
              
              $
              -
              
              $
              30,819
              
              $
              -Extinguishment
                  of notes payable
              
              $
              -
              
              $
              50,866
              
              $
              -Proceeds
                  allocated to warrants related to issuance ofconvertible
                  debt and warrants
              
              $
              427,416
              
              $
              -
              
              $
              -


F-7




**PREFERRED
      VOICE**


**NOTES
      TO FINANCIAL STATEMENTS**








**Note
      A - General organization:**





Preferred
      Voice, Inc. (the "Company") is a Delaware corporation incorporated in 1992.
      On
      February 25, 1997, the Company’s stockholders approved changing the name of the
      Company to better reflect the nature of the Company’s business. The Company
      commenced business on May 13, 1994, and was in the development stage until
      August 1, 1995. The Company provides voice recognition services to the
      telecommunications industry throughout the United States and maintains its
      principal offices in Dallas, Texas.





**Note
      B - Summary of significant accounting policies:**





**Use
      of estimates**





The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the amounts reported in the financial statements and accompanying notes.
      Actual results could differ from these estimates.





**Cash
      and cash equivalents**





For
      purposes of reporting cash flows, cash and cash equivalents include all amounts
      due from banks with original maturities of three months or less.





The
      Company maintains cash balances at a financial institution located in Dallas,
      Texas, which at times may exceed federally insured limits. The Company has
      not
      experienced any losses in such accounts and believes it is not exposed to any
      significant credit risk on cash and cash equivalents.





**Receivables
      and credit policies**





The
      Company has adopted the provisions of the American Institute of Certified Public
      Accountants (AICPA) Statement of Position (SOP) No. 01-06, *Accounting
      by Certain Entities (Including Entities with Trade Receivables) That Lend to
      or
      Finance the Activities of Others* .
      This
      SOP provides certain presentation and disclosure changes for entities with
      trade
      receivables and is effective for periods beginning January 1, 2002, and
      thereafter.





Accounts
      receivable are uncollateralized customer obligations due under normal trade
      terms requiring payment within 30 days from the invoice date. Unpaid accounts
      receivable with invoice dates over 30 days old bear no interest.





Accounts
      receivable are stated at the amount billed to the customer. Customer account
      balances with invoices dated over 90 days are considered
      delinquent.





Payments
      of accounts receivable are allocated to the specific invoices identified on
      the
      customer’s remittance advice or, if unspecified, are applied to the earliest
      unpaid invoice.





**Property
      and equipment**





The
      cost
      of property and equipment is depreciated over the estimated useful lives of
      the
      related assets. Depreciation is computed on the straight-line method for
      financial reporting purposes and the double declining method for income tax
      purposes. Maintenance and repairs are charged to operations when incurred.
      Betterments and renewals are capitalized.





The
      useful lives of property and equipment for purposes of computing depreciation
      are as follows:





Computer
                equipment
            
            
            5
                yearsFurniture
                and fixtures
            
            
            5
                yearsOffice
                equipment
            
            
            5
                years





Depreciation
      expense for the years ended March 31, 2005, 2004 and 2003 was $296,490, $299,705
      and $283,737, respectively.





F-8


**Note
      B - Summary of significant accounting policies
      (continued):**





**Capitalized
      software development**





The
      Company has adopted the provisions of FASB No. 86 *,
      Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
      Marketed* ,
      to
      account for its internally developed software costs since the Company is
      dependent on the software to provide the voice recognition services. Under
      the
      provisions of FASB No. 86, costs incurred prior to the product’s technological
      feasibility are expensed as incurred. The capitalization of software development
      costs begins when a product’s technological feasibility has been established and
      ends when the product is available for use and released to customers.
      Capitalized software development costs include direct costs incurred subsequent
      to establishment of technological feasibility for significant product
      enhancements. Amortization is computed on an individual product basis using
      the
      straight-line method over the estimated economic life of the product, generally
      three years.





During
      the years ended March 31, 2005, 2004 and 2003, software development costs
      capitalized were $186,117, $17,623 and $71,228, respectively. The amortization
      of capitalized software development costs for the years ended March 31, 2005,
      2004 and 2003 was $82,764, $121,127 and $162,730, respectively.





The
      estimated aggregate amortization expense for capitalized software development
      costs for each of the five succeeding fiscal years is as follows:


Amortization
        of capitalized softare costs


**Year
                  ending****March
                  31,**
              
              **Amount**2006
              
              $
              90,4512007
              
              
              87,6022008
              
              
              46,8272009
              
              
              -2010
              
              
              -Total
              
              $
              224,880





**Trademarks
      and patents**





Trademarks
      and patents are recorded at cost. Amortization is computed on the straight-line
      method over the identifiable lives of the trademarks and patents. The Company
      has adopted the provisions of Statement of Financial Accounting Standards (SFAS)
      No. 142, *Goodwill
      and Other Intangible Assets* ,
      effective for periods beginning January 1, 2002, and thereafter. SFAS 142
      addresses financial accounting and reporting for acquired goodwill and other
      intangible assets and supersedes APB Opinion No. 17, *Intangible
      Assets* .
      Specifically, the statement addresses how intangible assets that are acquired
      should be accounted for in financial statements upon their acquisition, as
      well
      as how goodwill and other intangible assets should be accounted for after they
      have been initially recognized in the financial statements. The statement
      requires intangible assets to be reviewed for impairment whenever events or
      changes in circumstances indicate that their carrying amounts may not be
      recoverable and that a loss shall be recognized if the carrying amount of an
      intangible exceeds its fair value. As of March 31, 2005, the Company has tested
      its intangible assets for impairment and does not believe these amounts to
      be
      impaired.





The
      amortization of trademarks and patents for the years ended March 31, 2005,
      2004
      and 2003 was $4,129, $3,761 and $1,819, respectively.





The
      Company abandoned the pursuance of a certain trademarks during the years ended
      March 31, 2004 and 2003. The result was an impairment loss of $2,543 and $2,014
      for the years ended March 31, 2004 and 2003 respectively, that is included
      in
      other expenses.





F-9


**PREFERRED
        VOICE**
 **NOTES
        TO FINANCIAL STATEMENTS**






**Note
      B - Summary of significant accounting policies
      (continued):**





The
      estimated aggregate amortization expense for trademarks and patents for each
      of
      the five succeeding fiscal years is as follows:


Amortization
        of trademarks and patents
  **Year
                  ending****March
                  31,**
              
              **Amount**2006
              
              $
              4,1292007
              
              
              4,1292008
              
              
              4,1292009
              
              
              4,1292010
              
              
              4,129Total
              
              $
              20,645




**Advertising
      expense**





The
      Company expenses advertising costs when the advertisement occurs. Total
      advertising expense amounted to $14,735, $11 and $18,110 for the years ended
      March 31, 2005, 2004 and 2003, respectively.





**Fair
      value of financial instruments**





The
      Company defines the fair value of a financial instrument as the amount at which
      the instrument could be exchanged in a current transaction between willing
      parties. Financial instruments included in the Company’s financial statements
      include cash and cash equivalents, trade accounts receivable, other receivables,
      other assets, notes payable and long-term debt. Unless otherwise disclosed
      in
      the notes to the financial statements, the carrying value of financial
      instruments is considered to approximate fair value due to the short maturity
      and characteristics of those instruments. The carrying value of long-term debt
      approximates fair value as terms approximate those currently available for
      similar debt instruments.





**Concentration
      of business, market and credit risks**





In
      the
      normal course of business, the Company extends unsecured credit to its customers
      with payment terms generally 30 days. Because of the credit risk involved,
      management provides an allowance for doubtful accounts that reflects its opinion
      of amounts that will eventually become uncollectible. In the event of complete
      nonperformance by the Company’s customers, the maximum exposure to the Company
      is the outstanding accounts receivable balance at the date of
      nonperformance.





During
      the years ended March 31, 2005, 2004 and 2003, approximately $319,000 (33.1%),
      approximately $429,000 (23.53%) and $271,243 (12.8%), respectively, of the
      Company’s total sales were derived from three customers, two customers and one
      customer respectively. At March 31, 2005 and 2004, approximately $38,000 (36%)
      and $20,000 (14%), respectively, accounted for a material portion of accounts
      receivable. There was no single customer who accounted for a material portion
      of
      accounts receivable at March 31, 2003.





**Revenue
      recognition**




For
      recognizing revenue, the Company applies the provisions of SEC Staff Accounting
      Bulletin (SAB) No. 104, *Revenue
      Recognition* which
      was
      issued in December 2003. In most cases, the services being performed do not
      require significant production, modification or customization of the Company’s
      software or services; therefore, revenues are recognized when evidence of a
      completed transaction exists, generally when services have been rendered. In
      situations where the Company receives an initial payment for future services,
      the Company defers recognition of revenue, and recognizes the revenue over
      the
      life of the respective contract. SAB No. 104 codified, revised and rescinded
      certain sections of Staff Accounting Bulleting (SAB) No. 101, *Revenue
      Recognition in Financial Statements* ,
      in
      order to make this interpretive guidance consistent with current authoritative
      accounting guidance and SEC rules and regulations.





F-10


**PREFERRED
        VOICE**
 **NOTES
        TO FINANCIAL STATEMENTS**






**Note
      B - Summary of significant accounting policies
      (continued):**





During
      the year ended March 31, 2005, the majority of the Company’s revenue consisted
      of revenue sharing receipts. Revenue sharing income is recognized when the
      voice
      dialing services are provided, generally monthly. Revenue sharing income for
      the
      years ended March 31, 2005, 2004 and 2003 was $850,108, $1,572,008 and
      $2,025,359, respectively.





**Income
      taxes**





Income
      taxes are accounted for under the asset and liability method. Deferred tax
      assets and liabilities are recognized for the future tax consequences
      attributable to differences between the financial statement carrying amounts
      of
      existing assets and liabilities and their respective tax basis. Deferred tax
      assets and liabilities are measured using enacted tax rates that will apply
      in
      the years in which those temporary differences are 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.





**Stock
      based compensation**





Prior
      to
      January 1, 1996, the Company accounted for its stock option plans in accordance
      with the provisions of Accounting Principles Board (APB) Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related interpretations. As such, compensation expense would be recorded on
      the
      date of grant only if the current market price of the underlying stock exceeds
      the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, *Accounting
      for Stock-Based Compensation* ,
      which
      permits entities to recognize, as expense over the vesting period, the fair
      value of all stock-based awards on the date of grant. Alternatively, SFAS No.
      123 allows entities to continue to apply the provisions of APB Opinion No.
      25
      and provide proforma net income and proforma earnings per share disclosures
      for
      employee stock option grants made in 1996 and future years as if the
      fair-valued-based method defined in SFAS No. 123 had been applied. The Company
      has elected to continue to apply the provisions of APB Opinion No. 25 and
      provide the proforma disclosure provisions of SFAS No. 123.





In
      addition, the Company has adopted the provisions of Financial Accounting
      Standards Board Interpretation (FIN) 44, *Accounting
      for Certain Transactions Involving Stock Compensation* ,
      which
      became effective July 1, 2000. FIN 44 clarifies the application of APB Opinion
      No. 25 for certain issues. Among other issues, this interpretation clarifies
      the
      definition of an employee for purposes of applying APB Opinion No. 25, the
      criteria for qualification of a plan as compensatory, the consequences of
      modifications to the terms of the plan, and the treatment of stock compensation
      issued to service providers who are not employees. The issuance of this
      interpretation does not change the current accounting policies of the Company,
      and has had no effect on the accompanying financial statements.





In
      December 2002, the Financial Accounting Standards Board issued SFAS No. 148, *Accounting
      for Stock-Based Compensation - Transition and Disclosure* ,
      which
      amends SFAS No. 123. SFAS No. 148 provides alternative methods of transition
      for
      a voluntary change to the fair value based method of accounting for stock-based
      compensation. In addition, SFAS No. 148 amends the disclosure requirements
      of
      SFAS No. 123 to require more prominent and more frequent disclosures in
      financial statements about the effects of stock-based compensation. The
      transition guidance and annual disclosure provisions are effective for years
      ending after December 15, 2002. The interim disclosure provisions are effective
      financial reports containing financial statement for interim periods beginning
      after December 15, 2002. The transition rules of this standard are not
      applicable since the Company continues to account for stock-based compensation
      under the guidance of APB Opinion 25. The other requirements of this standard
      have been adopted by the Company for periods beginning January 1, 2003.
      Disclosures required by this statement are in Notes G and H.





**Loss
      per share**





The
      Company adopted the provisions of Statement of Financial Accounting Standards
      (SFAS) No. 128, *Earnings
      per Share* .
      SFAS
      No. 128 reporting requirements replace primary and fully-diluted earnings per
      share (EPS) with basic and diluted EPS. Basic EPS is calculated by dividing
      net
      income or loss (available to common stockholders) by the weighted average number
      of common shares outstanding for the period. Diluted EPS reflects the potential
      dilution that could occur if securities or other contracts to issue common
      stock, such as stock options, warrants, convertible preferred stock and
      convertible debentures, were exercised or converted into common stock. Since
      the
      Company incurred a loss from operations for the years ended March 31, 2005,
      2004
      and 2003, no computation of diluted EPS has been performed.





F-11


**PREFERRED
        VOICE**
 **NOTES
        TO FINANCIAL STATEMENTS**






**Note
      B - Summary of significant accounting policies
      (continued):**





Loss
      per
      share is based on the weighted average number of shares outstanding of
      28,293,604, 18,384,993 and 18,384,993 for the years ended March 31, 2005, 2004
      and 2003, respectively.





**Reporting
      comprehensive income and operating segments**





The
      Company has adopted the provisions of SFAS No. 130, *Reporting
      Comprehensive Income* and
      SFAS
      No. 131, *Disclosures
      about Segments of an Enterprise and Related Information* .
      SFAS
      No. 130 requires that an enterprise report, by major components and as a single
      total, the change in its net assets during the period from non-owner sources.
      SFAS No. 131 establishes annual and interim reporting standards for an
      enterprise’s operating segments and related disclosures about its products,
      services, geographic areas and major customers. Adoption of these statements
      has
      had no impact on the Company’s financial position, results of operations, cash
      flow or related disclosures.





Comprehensive
      income is the total of (1) net income plus (2) all other changes in net assets
      arising from nonowner sources, which are referred to as other comprehensive
      income. In accordance with SFAS No. 130, the Company presents a statement of
      operations that includes other comprehensive income when applicable. An analysis
      of changes in components of accumulated other comprehensive income is presented
      in the statement of changes in stockholders’ equity. There were no transactions
      related to other comprehensive income for the two years ended March 31,
      2005.





**Impairment
      of long-lived assets and long-lived assets to be disposed
      of**





The
      Company previously adopted the provisions of SFAS No. 121, *Accounting
      for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
      Of* .
      This
      statement requires that long-lived assets and certain identified intangibles
      be
      reviewed for impairment whenever events or changes in circumstances indicate
      that the carrying amount of an asset may not be recoverable. Recoverability
      of
      assets to be held and used is measured by a comparison on the carrying amount
      of
      an asset to future net cash flows expected to be generated by the asset. If
      such
      assets are considered to be impaired, the impairment to be recognized is
      measured by the amount by which the carrying amount of the assets exceeds the
      fair value of the assets. Assets to be disposed of are reported at the lower
      of
      the carrying amount or fair value less costs to sell. An impairment loss in
      the
      amount of $-0-, $2,543 and $2,014 was recognized during the years ended March
      31, 2005, 2004, and 2003, respectively.





The
      Company adopted the provisions of SFAS No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* effective
      for periods beginning January 1, 2002 and thereafter. SFAS 144 replaces SFAS
      121
      and, among other matters, addresses financial accounting and reporting for
      the
      impairment or disposal of long-lived assets. SFAS 144 retains the basic
      provisions of SFAS 121, but broadens its scope and establishes a single model
      for long-lived assets to be disposed of by sale. Management does not believe
      the
      adoption of SFAS 144 will have any effect on the financial statements of the
      Company.





**Gain
      from extinguishment of debt**





In
      April
      2002, the FASB issued SFAS No. 145, *Rescission
      of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
      Technical Corrections* effective for period beginning May 15, 2002 and thereafter. The Company adopted
      the provision of SFAS No. 145 for the fiscal year ending March 31, 2003.
      SFAS No. 145, among other matters, addresses financial accounting and reporting
      for the extinguishment of debt, concluding that debt extinguishments are often
      routine, recurring transactions and concluded that classifying the associated
      gains and losses as extraordinary items in all cases would be inconsistent
      with
      the criteria of ABP Opinion 30. The adoption resulted in a reclassification
      of
      extraordinary gains into ordinary loss, with no effect on net loss for the
      year
      ended March 31, 2003.





**Recent
      accounting pronouncements**





In
      December 2004, the Financial Accounting Standards Board issued SFAS No.
      123, *"Share-Based Payment,"* which is
      a revision of SFAS No. 123, *"Accounting
      for Stock-Based Compensation,"* and
      supersedes APB No. 25, *"Accounting
      for Stock Issued to Employees."* This
      Statement will require the Company to recognize compensation costs related
      to
      stock-based payment transactions (i.e. granting of stock options and warrants)
      in the financial statements. With limited exceptions, the amount of compensation
      cost will be measured based on the grant-date fair value of the equity or
      liability instruments issued.





F-12


**PREFERRED
        VOICE**
 **NOTES
        TO FINANCIAL STATEMENTS**






**Note
      B - Summary of significant accounting policies
      (continued):**





In
      addition, liability awards will be remeasured each reporting period.
      Compensation cost will be recognized over the period that an employee provides
      services in exchange for the award. This new standard will be effective for
      awards that are granted, modified or settled in cash during annual financial
      periods beginning after December 15, 2005. In addition, this new standard will
      apply to unvested options granted prior to the effective date. This standard
      will be adopted during the third quarter of 2005; however, management has not
      yet determined what impact this statement will have on the Company's financial
      position or results of operations.





In
      December 2004, the Financial Accounting Standards Board issued SFAS No.
      153, *"Exchanges of Non-monetary Assets an amendment of APB No. 29."* This
      Statement amends APB Opinion No. 29, *"Accounting
      for Non-monetary Transactions"* to
      clarify the accounting for non-monetary exchanges of similar productive assets
      and replaces it with a general exception from fair value accounting for
      exchanges of non-monetary assets that do not have commercial substance. A
      non-monetary exchange has commercial substance if the future cash flows of
      the
      Company are expected to change significantly as a result of the exchange. This
      Statement will be applied prospectively and is effective for non-monetary asset
      exchanges occurring in fiscal periods beginning after June 15, 2005. Management
      does not believe adoption of this Statement will have a material impact on
      the
      Company's financial position or results of operations.





**Note
      C - Notes payable:**





Notes
      payable consist of the following:


**2005**
              
              **2004**Note
                  payable, 10% interest rate. Principal and interest was payable
                  on
                  September 30, 2003. Convertible into shares of the Company's common
                  stock
                  at a conversion rate of $2.00 of indebtedness per share of common
                  stock.
                  Note is unsecured
              
              $
              -
              
              $
              36,500Note
                  payable, 6% interest rate. Principal and interest payable monthly.
                  Note
                  maturity date is March 1, 2007. Note is unsecured
              
              
              27,459
              
              
              40,000$
              27,459
              
              $
              76,500Less
                  current portion
              
              
              13,315
              
              
              49,041Total
              
              $
              14,144
              
              $
              27,459




Maturities
      under note payable agreements are as follows:


**Year
                  ending****March
                  31,**
              
              **Amount**2006
              
              $
              13,3152007
              
              
              14,144Total
              
              $
              27,459


Interest
      expense charged to operations related to the notes payable was $6,081, $4,788
      and $5,016 for the years ended March 31, 2005, 2004 and 2003,
      respectively.





F-13


**PREFERRED
        VOICE**
 **NOTES
        TO FINANCIAL STATEMENTS**





**Note
      D - Convertible debt and warrants:**





On
      March
      31, 2005, the Company closed a Securities Purchase Agreement and issued $975,000
      in principal amount of 6% Convertible Debentures due March 31, 2008 (the
      "Debentures"), to a group of institutional and high net worth investors. The
      Debentures pay an interest rate of 6% on an annual basis and are convertible
      into 9,750,000 shares of the Company’s common stock at a price of $0.10 per
      share when the company receives shareholder approval for an increase in its
      authorized shares equal to or above 65,000,000 shares at which time the Company
      will record the intrinsic value of the beneficial conversion of $257,500 as
      interest expense. The investors also received warrants to purchase an additional
      4,875,000 shares of common stock with an exercise price of $0.12 per share.





The
      Company has allocated the proceeds from the issuance of the Debentures to the
      warrants and the Debentures based on their relative fair market values at the
      date of issuance. The value assigned to the warrants of $427,416 has been
      recorded as an increase in additional paid in capital. The assignment of a
      value
      to the warrants results in a loan discount being recorded for the same amount.
      The discount is being amortized over the original three year term of the
      Debentures as additional interest expense. Amortization for the year ended
      March
      31, 2005, was $-0-. The loan costs incurred on the issuance of the Debentures
      amounted to $2,430.





**Note
      E - Common stock:**





**Stock
      purchase warrants**





At
      March
      31, 2005 the Company had outstanding warrants to purchase 16,378,000 shares
      of
      the Company's common stock at prices that ranged from $0.10 per share to $3.53
      per share. The warrants are exercisable at any time and expire through March
      31,
      2010. At March 31, 2005, 16,378,000 shares of common stock were reserved for
      that purpose.





**Common
      stock reserved**





At
      March
      31, 2005, shares of common stock were reserved for the following
      purposes:


Exercise
                  of future grants of stock options and stock appreciation rights
                  under the
                  1994 stock option plan
              
              
              5,000Exercise
                  of future grants of stock options and stock appreciation rights
                  under the
                  2000 stock option plan
              
              
              1,791,667Exercise
                  of stock warrants
              
              
              16,378,00018,174,667





**Note
      F - Employee stock option plans:**





**1994
      Plan**





On
      November 1, 1994, the Company adopted a stock award and incentive plan (“1994
      Plan”) which permits the issuance of options and stock appreciation rights to
      selected employees and independent contractors of the Company. The 1994 Plan
      expired October 31, 2004, therefore, no other shares may be issued. As there
      are
      5,000 shares still outstanding the Plan will not expire as a whole, until the
      expiration of the outstanding shares in April 2005. The 1994 Plan reserved
      450,000 shares of common stock for grant and provided that the term of each
      award be determined by the committee of the Board of Directors (Committee)
      charged with administering the plan.





Under
      the
      terms of the 1994 Plan, options granted may be either nonqualified or incentive
      stock options, and the exercise price, determined by the Committee, may not
      be
      less than the fair market value of a share on the date of grant. Stock
      appreciation rights granted in tandem with an option shall be exercisable only
      to the extent the underlying option is exercisable and the grant price shall
      be
      equal to the exercise price of the underlying option. At March 31, 2005, options
      to





F-14


**PREFERRED
        VOICE**
 **NOTES
        TO FINANCIAL STATEMENTS**






**Note
      F - Employee stock option plans (continued):**





purchase
      5,000 shares at an exercise price of $0.50 per share were outstanding. No stock
      appreciation rights had been granted at March 31, 2005.





As
      of
      March 31, 2005, 112,868 of these options have been exercised, 533,882 have
      been
      forfeited, 5,000 remain outstanding, and 5,000 were vested and exercisable.
      At
      March 31, 2005, the remaining weighted average contractual life was 5.0
      years.





**2000
      Plan**





On
      September 29, 2000, the Company adopted an incentive stock option and other
      equity participation plan (“2000 Plan”) which permits the issuance of stock
      purchase agreements, stock awards, incentive stock options, non-qualified stock
      options and stock appreciation rights to selected employees and independent
      contractors of the Company. The 2000 Plan reserves 2,000,000 shares of common
      stock for grant and provides that the term of each award be determined by the
      committee of the Board of Directors (Committee) charged with administering
      the
      plan. These stock options vest over a period of two years.





Under
      the
      terms of the 2000 Plan, options granted may be either nonqualified or incentive
      stock options, and the exercise price, determined by the Committee, may not
      be
      less than the fair market value of a share on the date of the grant. Stock
      appreciation rights granted in tandem with an option shall be exercisable only
      to the extent the underlying option is exercisable and the grant price shall
      be
      equal to the exercise price of the underlying option. At March 31, 2005, options
      to purchase 1,613,667 shares at an exercise price of $0.12 to $0.20 per share
      were outstanding. No stock appreciation rights had been granted at March 31,
      2005.





As
      of
      March 31, 2005, 208,333 options have been exercised, 1,019,825 have been
      forfeited, 294,750 expired, 1,613,667 remain outstanding, and 763,667 were
      vested and exercisable. At March 31, 2005, the remaining weighted average
      contractual life was 8.8 years.





**Employee
      warrants**





As
      of
      March 31, 2005, none of the employee warrants have been exercised or forfeited,
      3,055,000 expired, 2,460,000 remain outstanding, and 1,460,000 were vested
      and
      exercisable. At March 31, 2005, the remaining weighted average contractual
      life
      was approximately 4.1 years.








**Note
      G - Proforma information related to employee stock options and
      warrants:**





The
      per
      share weighted-average fair value of stock options granted was determined using
      the Black Scholes Option-Pricing Model. The following weighted-average
      assumptions were used in the pricing model:


**2005**
              
              **2004**
              
              **2003**Expected
                  dividend yield
              
              0.00%
              
              0.00%
              
              0.00%Risk-free
                  interest rate
              
              3.15%
                  - 4.02%
              
              1.00%
              
              2.28%
                  - 4.39%Expected
                  life
              
              5
                  years
              
              1.0
                  - 2.5 years
              
              1.5
                  - 2.5 yearsExpected
                  volatility
              
              185%
                  - 209%
              
              133%
                  - 145%
              
              69%
                  - 191%





F-15


**PREFERRED
        VOICE**
 **NOTES
        TO FINANCIAL STATEMENTS**





**Note
      G - Proforma information related to employee stock options and warrants
      (continued):**





The
      Company applies APB Opinion No. 25 in accounting for its plan (as described
      in
      Note F) and, accordingly, has recognized no compensation expense for stock
      options granted at exercise prices at least equal to the market value of the
      Company’s common stock. Had the Company determined compensation cost based on
      the fair value at the grant date for its stock options under SFAS No. 123,
      the
      Company’s net loss and loss per share would have been increased to the proforma
      amounts indicated below:




**2005**
              
              **2004**
              
              **2003**Net
                  loss:As
                  reported
              
              $
              (998,354
              )
              $
              (326,937
              )
              $
              (1,251,953
              )Less
                  total compensation expense determined under fair value based method
                  for
                  all awards, net of tax effects
              
              
              (179,284
              )
              
              (51,449
              )
              
              (182,750
              )Proforma
                  net loss
              
              $
              (1,177,638
              )
              $
              (378,386
              )
              $
              (1,434,703
              )Loss
                  per common share:As
                  reported
              
              $
              (0.04
              )
              $
              (0.02
              )
              $
              (0.07
              )Proforma
              
              $
              (0.04
              )
              $
              (0.02
              )
              $
              (0.08
              )




F-16


**PREFERRED
        VOICE**
 **NOTES
        TO FINANCIAL STATEMENTS**





**Note
      G - Proforma information related to employee stock options and warrants
      (continued):**





Proforma
      loss reflects only options granted during the years ended March 31, 2005, 2004
      and 2003. Therefore, the full impact of calculating compensation cost for stock
      options under SFAS No. 123 is not reflected in the proforma net loss amounts
      presented above because compensation cost is reflected over the option’s vesting
      period.





Following
      is a summary of the stock award and incentive plans:


**1994
                  stock award and incentive plan (1994 Plan)****2005**
              
              **2004**
              
              **2003**Weighted
              
              
              
              Weighted
              
              
              
              Weightedaverage
              
              
              
              average
              
              
              
              averageNumber
                  of
              
              exercise
              
              Number
                  of
              
              exercise
              
              Number
                  of
              
              exerciseshares
              
              price
              
              shares
              
              price
              
              shares
              
              priceOutstanding
                  at beginningof
                  year
              
              
              5,000
              
              $
              0.50
              
              
              252,000
              
              $
              0.98
              
              
              297,000
              
              $
              1.02Granted
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              (247,000
              )
              
              0.50
              
              
              (45,000
              )
              
              1.25Expired
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Outstanding
                  at end of year
              
              
              5,000
              
              $
              0.50
              
              
              5,000
              
              $
              0.50
              
              
              252,000
              
              $
              0.98Options
                  exercisable at endof
                  year
              
              
              5,000
              
              $
              0.50
              
              
              5,000
              
              $
              0.50
              
              
              247,000
              
              $
              0.95Weighted
                  average fair valueof
                  options granted duringthe
                  year
              
              
              
              
              $
              -
              
              
              
              
              $
              -
              
              
              
              
              $
              -




**2000
                  stock award and incentive plan (2000 Plan)****2005**
              
              **2004**
              
              **2003**Weighted
              
              
              
              Weighted
              
              
              
              Weightedaverage
              
              
              
              average
              
              
              
              averageNumber
                  of
              
              exercise
              
              Number
                  of
              
              exercise
              
              Number
                  of
              
              exerciseshares
              
              price
              
              shares
              
              price
              
              shares
              
              priceOutstanding
                  at beginningof
                  year
              
              
              702,000
              
              $
              0.50
              
              
              1,163,875
              
              $
              1.29
              
              
              1,051,825
              
              $
              1.63Granted
              
              
              1,230,000
              
              
              0.12
              
              
              330,000
              
              
              0.50
              
              
              792,750
              
              
              1.25Exercised
              
              
              (208,333
              )
              
              0.12
              
              
              -
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              (110,000
              )
              
              0.12
              
              
              (497,125
              )
              
              0.73
              
              
              (280,700
              )
              
              1.62Cancelled
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (400,000
              )
              
              1.88Expired
              
              
              -
              
              
              -
              
              
              (294,750
              )
              
              1.20
              
              
              -
              
              
              -Outstanding
                  at end of year
              
              
              1,613,667
              
              $
              0.12
              
              
              702,000
              
              $
              0.50
              
              
              1,163,875
              
              $
              1.29Options
                  exercisable at endof
                  year
              
              
              763,667
              
              $
              0.12
              
              
              543,563
              
              $
              0.50
              
              
              334,563
              
              $
              1.39Weighted
                  average fair valueof
                  options granted duringthe
                  year
              
              
              
              
              $
              0.07
              
              
              
              
              $
              0.03
              
              
              
              
              $
              0.21




F-17


**PREFERRED
        VOICE**
 **NOTES
        TO FINANCIAL STATEMENTS**




**Note
      G - Proforma information related to employee stock options and warrants
      (continued):**





Following
      is a summary of warrants issued to employees:


**2005**
              
              **2004**
              
              **2003**Weighted
              
              
              
              Weighted
              
              
              
              Weightedaverage
              
              
              
              average
              
              
              
              averageNumber
                  of
              
              exercise
              
              Number
                  of
              
              exercise
              
              Number
                  of
              
              exerciseshares
              
              price
              
              shares
              
              price
              
              shares
              
              priceOutstanding
                  at beginningof
                  year
              
              
              215,000
              
              $
              1.44
              
              
              795,000
              
              $
              1.09
              
              
              985,000
              
              $
              1.04Granted
              
              
              5,300,000
              
              
              0.15
              
              
              -
              
              
              -
              
              
              110,000
              
              
              1.25Exercised
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Expired
              
              
              (3,055,000
              )
              
              0.18
              
              
              (580,000
              )
              
              0.95
              
              
              (300,000
              )
              
              1.00Outstanding
                  at end of year
              
              
              2,460,000
              
              $
              0.14
              
              
              215,000
              
              $
              1.44
              
              
              795,000
              
              $
              1.09Warrants
                  exercisable at endof
                  year
              
              
              1,460,000
              
              $
              0.12
              
              
              215,000
              
              $
              1.44
              
              
              795,000
              
              $
              1.09Weighted
                  average fair valueof
                  warrants granted duringthe
                  year
              
              
              
              
              $
              0.10
              
              
              
              
              $
              -
              
              
              
              
              $
              0.04




**Note
      H - Stock warrants:**





During
      the years ended March 31, 2005, 2004 and 2003, the Company issued 250,000,
      250,000 and -0- warrants to certain service providers and business partners
      at
      exercise prices ranging from $0.10 to $3.53. The warrants can be exercised
      at
      any time and expire at various dates through November 20, 2006.





In
      accordance with SFAS No. 123, the Company accounts for warrants issued to
      non-employees at fair value of the warrants at the grant date. For the years
      ended March 31, 2005, 2004 and 2003, the Company recognized $-0-, $8,145 and
      $-0-, respectively, as compensation expense and $-0- as stock issuance cost
      during the years ended March 31, 2005, 2004 and 2003 related to warrants issued
      to non-employees.





As
      of
      March 31, 2005, none of the total warrants issued to non-employees for goods
      and
      services have been exercised; none have been forfeited; 1,067,500 have expired;
      and 550,535 remain outstanding, of which 550,535 were vested and exercisable.
      At
      March 31, 2005, the remaining weighted average contractual life was
      approximately 1.1 years.




For
      the
      years ended March 31, 2005, 2004 and 2003, the Company issued 11,412,500, -0-
      and -0- warrants, respectively, in connection with stock offerings. These
      warrants were not issued in exchange for goods and services; therefore, no
      compensation expense was recognized by the Company during the years ended March
      31, 2005, 2004 and 2003.





As
      of
      March 31, 2005, 1,022,493 of the total warrants issued for stock offerings
      have
      been exercised; none have been forfeited; 292,500 have expired; and 13,367,465
      remain outstanding, of which 13,367,465 were vested and exercisable. At March
      31, 2005, the remaining weighted average contractual life was approximately
      4.2
      years.








F-18


**PREFERRED
        VOICE**
 **NOTES
        TO FINANCIAL STATEMENTS**







**Note
      H - Stock warrants (continued):**





The
      per
      share weighted-average fair value of warrants granted to non-employees in
      exchange for goods and services was determined using the Black Scholes
      Option-Pricing Model. The following weighted-average assumptions were used
      in
      the pricing model:


**2005**
              
              **2004**
              
              **2003**Expected
                  dividend yield
              
              0.00%
              
              0.00%
              
              N/ARisk-free
                  interest rate
              
              3.15%
                  - 4.18%
              
              1.48%
              
              N/AExpected
                  life
              
              5
                  years
              
              1.75
                  years
              
              N/AExpected
                  volatility
              
              201%
                  - 209%
              
              76%
              
              N/A





Following
      is a summary of warrants issued to non-employees in exchange for goods and
      services:


**2005**
              
              **2004**
              
              **2003**Weighted
              
              
              
              Weighted
              
              
              
              Weightedaverage
              
              
              
              average
              
              
              
              averageNumber
                  of
              
              exercise
              
              Number
                  of
              
              exercise
              
              Number
                  of
              
              exerciseshares
              
              price
              
              shares
              
              price
              
              shares
              
              priceOutstanding
                  at beginningof
                  year
              
              
              618,035
              
              $
              1.17
              
              
              756,035
              
              $
              1.76
              
              
              801,035
              
              $
              1.76Granted
              
              
              250,000
              
              
              0.14
              
              
              250,000
              
              
              0.10
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Expired
              
              
              (317,500
              )
              
              0.46
              
              
              (388,000
              )
              
              1.91
              
              
              (45,000
              )
              
              1.12Outstanding
                  at end of year
              
              
              550,535
              
              $
              1.11
              
              
              618,035
              
              $
              1.17
              
              
              756,035
              
              $
              1.76Warrants
                  exercisable at endof
                  year
              
              
              550,535
              
              $
              1.11
              
              
              618,035
              
              $
              1.17
              
              
              756,035
              
              $
              1.76Weighted
                  average fair valueof
                  warrants granted duringthe
                  year
              
              
              
              
              $
              0.03
              
              
              
              
              $
              0.03
              
              
              
              
              $
              -


F-19


**PREFERRED
        VOICE**
 **NOTES
        TO FINANCIAL STATEMENTS**




**Note
      H - Stock warrants (continued):**





The
      following is a summary of warrants issued in connection with stock
      offerings:


**2005**
              
              **2004**
              
              **2003**Weighted
              
              
              
              Weighted
              
              
              
              Weightedaverage
              
              
              
              average
              
              
              
              averageNumber
                  of
              
              exercise
              
              Number
                  of
              
              exercise
              
              Number
                  of
              
              exerciseshares
              
              price
              
              shares
              
              price
              
              shares
              
              priceOutstanding
                  at beginningof
                  year
              
              
              2,247,465
              
              $
              1.75
              
              
              2,532,668
              
              $
              1.64
              
              
              2,532,668
              
              $
              1.64Granted
              
              
              11,412,500
              
              
              0.12
              
              
              -
              
              
              -
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Expired
              
              
              (292,500
              )
              
              1.38
              
              
              (285,203
              )
              
              1.82
              
              
              -
              
              
              -Outstanding
                  at end of year
              
              
              13,367,465
              
              $
              0.36
              
              
              2,247,465
              
              $
              1.75
              
              
              2,532,668
              
              $
              1.64Warrants
                  exercisable at endof
                  year
              
              
              13,367,465
              
              $
              0.36
              
              
              2,247,465
              
              $
              1.75
              
              
              2,532,668
              
              $
              1.64Weighted
                  average fair valueof
                  warrants granted duringthe
                  year
              
              
              
              
              $
              0.12
              
              
              
              
              $
              -
              
              
              
              
              $
              -


Following
      is an overall summary of the stock warrants activity, including warrants issued
      to employees (see Note G):


**2005**
              
              **2004**
              
              **2003**Weighted
              
              
              
              Weighted
              
              
              
              Weightedaverage
              
              
              
              average
              
              
              
              averageNumber
                  of
              
              exercise
              
              Number
                  of
              
              exercise
              
              Number
                  of
              
              exerciseshares
              
              price
              
              shares
              
              price
              
              shares
              
              priceOutstanding
                  at beginningof
                  year
              
              
              3,080,500
              
              $
              1.61
              
              
              4,083,703
              
              $
              1.67
              
              
              4,318,703
              
              $
              1.62Granted
              
              
              16,962,500
              
              
              0.13
              
              
              250,000
              
              
              0.10
              
              
              110,000
              
              
              1.25Exercised
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Expired
              
              
              (3,665,000
              )
              
              0.30
              
              
              (1,253,203
              )
              
              1.44
              
              
              (345,000
              )
              
              1.01Outstanding
                  at end of year
              
              
              16,378,000
              
              $
              0.35
              
              
              3,080,500
              
              $
              1.61
              
              
              4,083,703
              
              $
              1.67Warrants
                  exercisable at endof
                  year
              
              
              15,378,000
              
              $
              0.36
              
              
              3,080,500
              
              $
              1.61
              
              
              4,083,703
              
              $
              1.67Weighted
                  average fair valueof
                  warrants granted duringthe
                  year
              
              
              
              
              $
              0.11
              
              
              
              
              $
              0.03
              
              
              
              
              $
              0.04


F-20


**PREFERRED
        VOICE**
 **NOTES
        TO FINANCIAL STATEMENTS**





**Note
      I - Income taxes:**





The
      Company uses the liability method of accounting for income taxes under the
      provisions of Statement of Financial Accounting Standards No. 109. Under the
      liability method, a provision for income taxes is recorded based on taxes
      currently payable on income as reported for federal income tax purposes, plus
      an
      amount which represents the change in deferred income taxes for the
      year.





Deferred
      income taxes are provided for the temporary differences between the financial
      reporting basis and the tax-reporting basis of the Company's assets and
      liabilities. The major areas in which temporary differences give rise to
      deferred taxes are accounts receivable, accrued liabilities, start-up
      expenditures, accumulated depreciation, and net operating loss carry-forwards.
      Deferred income taxes are classified as current or non-current depending on
      the
      classification of the assets and liabilities to which they relate. Deferred
      income taxes arising from temporary differences that are not related to an
      asset
      or liability are classified as current or non-current depending on the years
      in
      which the temporary differences are expected to reverse.





The
      provision for income taxes as of March 31 consists of:




**2005**
              
              **2004**
              
              **2003**Current
                  income taxes
              
              $
              -
              
              $
              -
              
              $
              -Change
                  in deferred income taxes due totemporary
                  differences
              
              
              -
              
              
              -
              
              
              -$
              -
              
              $
              -
              
              $
              -




The
      provision for income taxes for the years ended March 31, 2005, 2004 and 2003,
      differs from the “expected” tax benefit (computed using the 34% U.S. federal
      corporate rate to income before income taxes) as follows:


**2005**
              
              **2004**
              
              **2003**Computed
                  “expected” tax benefit
              
              $
              (339,000
              )
              $
              (111,000
              )
              $
              (426,000
              )Nondeductible
                  items
              
              
              2,000
              
              
              3,000
              
              
              4,000Temporary
                  differences
              
              
              27,000
              
              
              (6,000
              )
              
              (58,000
              )Net
                  operating loss carry-forward
              
              
              310,000
              
              
              114,000
              
              
              480,000Provision
                  for income taxes
              
              $
              -
              
              $
              -
              
              $
              -


F-21


**PREFERRED
        VOICE**
 **NOTES
        TO FINANCIAL STATEMENTS**





**Note
      I - Income taxes (continued):**





Deferred
      tax (liabilities) assets as of March 31 consist of the following:


**2005**
              
              **2004**
              
              **2003**Accumulated
                  depreciation
              
              $
              (80,000
              )
              $
              (57,000
              )
              $
              (52,000
              )Gross
                  deferred tax liabilities
              
              $
              (80,000
              )
              $
              (57,000
              )
              $
              (52,000
              )Stock
                  warrant compensation
              
              $
              -
              
              $
              3,000
              
              $
              -Accounts
                  receivable
              
              
              -
              
              
              2,000
              
              
              -Accrued
                  liabilities
              
              
              -
              
              
              3,000
              
              
              2,000Net
                  operating loss carry-forward
              
              
              6,091,000
              
              
              5,724,000
              
              
              5,610,000Gross
                  deferred tax assets
              
              $
              6,091,000
              
              $
              5,732,000
              
              $
              5,612,000Valuation
                  allowance
              
              
              (6,011,000
              )
              
              (5,675,000
              )
              
              (5,560,000
              )$
              80,000
              
              $
              57,000
              
              $
              52,000Net
                  deferred tax assets
              
              $
              -
              
              $
              -
              
              $
              -The
                  change in the deferred tax valuationallowance
                  is as follows:
              
              $
              336,000
              
              $
              115,000
              
              $
              403,500


The
      Company has recorded a valuation allowance amounting to the entire deferred
      tax
      asset balance because of the Company's uncertainty as to whether the deferred
      tax asset is realizable. However, if the Company is able to utilize the deferred
      tax asset in the future, the valuation allowance will be reduced through a
      credit to income.





The
      Company has available at March 31, 2005, a net operating loss carry-forward
      of
      approximately $17,914,000, which can be used to offset future taxable income
      through the year 2025. Utilization of net operating loss carry-forwards in
      the
      future may be limited if changes in the Company’s stock ownership create a
      change of control as provided in Section 382 of the Internal Revenue
      Code.





**Note
      J - Commitments:**





The
      Company leases its office facilities and various office equipment under
      operating leases expiring through December 2008. Following is a schedule of
      future minimum lease payments required under the above operating leases as
      of
      March 31, 2005:


**Year
                  ending****March
                  31,**
              
              **Amount**2006
              
              $
              60,9002007
              
              
              55,7052008
              
              
              53,8202009
              
              
              40,3652010
              
              
              -$
              210,790




Total
      rent expense charged to operations was $61,424, $201,949 and $292,940 for the
      years ended March 31, 2005, 2004 and 2003, respectively.





F-22


**PREFERRED
        VOICE**
 **NOTES
        TO FINANCIAL STATEMENTS**





**Note
      K - Extinguishment of debt:**





During
      the year ended March 31, 2004, the Company negotiated settlements of amounts
      owed to certain holders of notes payable by the Company. The negotiated
      settlements resulted in a reduction of the Company’s notes and accrued interest
      payable in the amount of $81,685 for the year ended March 31, 2004.





**Note
      L - Negotiated settlement and lawsuit settlement:**





The
      Company had been the plaintiff and counter-defendant in a lawsuit with a former
      customer. The former customer placed a cash deposit for an order of certain
      items with the Company. After the customer received the first stage of its
      order, the customer wanted to cancel the order. The Company claimed that under
      the terms of the order, the customer was not entitled to a refund of its
      deposits as deferred revenue.





The
      lawsuit proceeded to trial and the jury returned its verdict; but prior to
      any
      judgment being signed by the court, the parties announced that all matters
      in
      dispute between them had been resolved by an agreement. The court accepted
      the
      agreement. The agreement called for the Company to pay $150,000 to the customer.
      On June 4, 2004, the balance due was $132,293 and the agreement was amended
      and
      called for the Company to pay $100,000 in final settlement of all sums due
      under
      obligation, which consisted of the June principal payment and accrued interest.
      For the year ended March 31, 2003, the Company recognized $342,579 of previously
      deferred revenue related to the customer's deposits.





Additionally
      the Company negotiated with its attorney to reduce outstanding debt by $35,100.





**Note
      M -**  **Management’s
      intent:**





Management
      believes that with the capital that was acquired on May 18, 2004 and March
      31,
      2005 as well as cash that may be generated from operations will be sufficient
      to
      meet anticipated capital requirements and to finance continued growth for the
      next fiscal year, after which time the company projects a positive cash flow.
      Management projects working capital needs to be $1,200,000 over the next year
      for corporate overhead and equipment purchases to continue to deploy our systems
      in carrier locations. Such projections have been based on growth from current
      customers and customers which are already under contract utilizing the revenue
      rates from the past six months with currently installed customers and projected
      cash requirements to support installation, sales and marketing, and general
      overhead.





F-23