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, 1999

[ ]  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. Employer
 Incorporation 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:                   Name of Each Exchange
           Title of Each Class                     on Which Registered
           -------------------                    ---------------------
                 NONE                                    N/A


Securities registered under Section 12(g) of the Exchange Act:
                                                  COMMON STOCK, $0.001 PAR VALUE
                                                  ------------------------------
(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          No       X
                       ------        -------

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. [ ]

State issuer's revenues for its most recent fiscal year:  $180,383.00

The  aggregate  market  value  of  the  voting  and  non-voting  stock  held  by
non-affiliates  of the  registrant  as of November  17,  1999 was  approximately
$9,750,926. 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 October 31, 1999, there were 11,440,990 shares of the common stock, $0.001
par value, of the registrant issued and outstanding.

Transitional Small Business Disclosure Format: Yes        No   X
                                                  ------    -------


<PAGE>

                              PREFERRED VOICE, INC.


                                                                           Page
PART I
     Item 1.  Description of Business.....................................   1
     Item 2.  Description of Properties...................................   8
     Item 3.  Legal Proceedings...........................................   8
     Item 4.  Submission of Matters to a Vote of Security Holders.........   8

PART II
     Item 5.  Market for Common Equity and Related Stockholder Matters....   9
     Item 6.  Management's Discussion and Analysis or Plan of Operations..  11
     Item 7.  Financial Statements........................................  16

PART III
     Item 9.  Directors, Executive Officers, Promoters and Control
              Persons; Compliance with Section 16(a) of the Exchange Act..  17
     Item 10. Executive Compensation......................................  18
     Item 11. Security Ownership of Certain Beneficial
              Owners and Management.......................................  18
     Item 12. Certain Relationships and Related Transactions..............  20
     Item 13. Exhibits, List and Reports on Form 8-K......................  22



SIGNATURES................................................................  24

INDEX TO EXHIBITS.........................................................  25






<PAGE>




                                     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

     The Company  integrates and markets speech  recognition  technologies to be
used by telecommunications providers, to enhance a provider's overall package of
voice services.  The Company's key product,  the Voice Integrated Platform ("VIP
System" or the  "System"),  successfully  integrates  the Philips  Speech  Pearl
Natural Dialog, Philips Speech Processing's speech recognition technology,  with
the  Company's  proprietary  software  application.  The System is  designed  to
utilize    standard    industrial    grade   hardware   and   a   rack-mountable
microprocessor-based  computing system,  with a Windows NT operating system. The
System has been developed for  collocation at the  telecommunication  provider's
central  office  switch.  With the VIP System,  a provider's  subscriber can use
natural   conversational   speech  to  access  a  variety  of  enhanced  service
applications.   The  Company  believes  that  the  Philips  speech   recognition
technology   that  its  System   incorporates   is  superior  to  other  similar
technologies  and that its VIP System's  enhanced  services will become standard
telephony options offered by telecommunications providers in the 21st century.

     The Company was  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 1995.  The Company  began as a long
distance  telecommunications  carrier  with  a  variety  of  enhanced  services,
however,  in  February  1997 the  Company  sold to  Brite  Voice  Systems,  Inc.
("Brite") a number of assets,  including the Company's  end-user  customer base.
The Company  elected to sell these  assets  because it believed  that the growth
prospects of this aspect of the  business  were  limited.  The Company has since
focused  on  enhanced   telephone   services  that  feature  speech  recognition
technology,  believing  that there are larger market  opportunities  in offering
enhanced speech recognition services to telecommunications providers.


The Market and Market Strategy

     Incumbent Local Exchange Carriers  ("ILECs") comprise the largest market of
telecommunications  providers.  Of the  approximate  1,700  ILECs in the  United
States,  1,400 have less than 50,000 lines each. These ILECs comprise fifteen to
twenty  percent of the ILEC market and  approximately  40 million  lines.  ILECs
already have an existing  subscriber base, and the Company believes that most of
them  desire to add  enhanced  service  options to  increase  revenue  and deter
potential competition.  The Federal  Communications  Commission reported that in
1998  alone,  the local  telephone  common  carriers  spent over $12  billion on
upgrading to digital central office switches, which enable them to provide their
subscribers  the latest  enhanced  services.  Many ILECs have  already  begun to
utilize  outboard  platforms for certain call  processing  services,  as well as
voice mail,  however,  the Company  believes that the  convenience of its System
will draw many ILECs to use its collocated Systems.

     Wireless  Communications  Carriers  ("WCCs")  have an  estimated 80 million
subscribers nationwide.  The Federal Communications  Commission ("FCC") has sold
spectrum for up to eight  operators per market in each of the 722 FCC designated
wireless  markets in the United  States.  A report from  Cahners  In-Stat  Group
estimates  that by the year 2002,  medium and large  businesses  will spend over
$117  billion on  wireless  equipment  and  services,  more than  double the $54
billion they spent in 1998.  The WCCs need to  capitalize  on this  growth.  The
Company believes that WCCs want to differentiate  themselves from each other and
be

                                        1



<PAGE>




competitive  so that many are  beginning  to offer  their  subscribers  enhanced
services,  including voice messaging and voice activated services.  In addition,
WCCs are under pressure from  regulatory  authorities to provide  wireless phone
subscribers a safer method for using their phones while driving.

     The Company's customers are telecommunications  providers,  primarily ILECs
and  WCCs,  with a greater  marketing  effort  to be made to  competitive  local
exchange carriers ("CLECs") in the future.  These companies are already offering
some  enhanced  services  to  their  subscribers,   such  as  voice  mail,  call
forwarding,  call waiting and caller identification  systems. In order to remain
competitive,  however,  ILECs,  CLECs and WCCs are  providing  subscribers  more
enhanced services.  The Company believes that its VIP System,  with its enhanced
speech recognition service, provides a solution to satisfy this need.

     Government regulation requires telecommunications providers to look for new
solutions  to  provide  disabled  persons  equal  access to their  systems.  The
Company's  System  may be able  to  provide  a  solution  for  telecommunication
providers'  obligations to the disabled.  Section 255 of the  Telecommunications
Act of 1996 requires a provider of telecommunications service to ensure that its
service is accessible to and usable by individuals with disabilities, if readily
achievable.  The Company's VIP System with its voice  activated  services  would
allow people with limited manual dexterity,  limited reach or strength,  limited
or no vision,  or other  disabilities  to access the national  telecommunication
network.  The Texas  legislature  also passed an act  "relating to expanding the
specialized  telecommunications  devices  assistance  program and  contracts for
special features of the telecommunications  relay access service." This act took
effect on September 1, 1999 and expands an existing  voucher  program,  allowing
the Public  Utilities  Commission and the Texas Commission for the Deaf and Hard
of  Hearing  to  issue  vouchers  and  provide  other  financial  assistance  to
individuals  with   disabilities   that  impair  the  individuals'   ability  to
effectively access the telephone network. The act allows the vouchers to be used
to purchase certain specialized services.  Originally,  this law applied only to
the hearing  disabled,  but the  legislature  amended the  original  act so that
people  with other  disabilities,  without  the use of their hands or vision for
example,  could also  receive  vouchers  for  qualifying  services.  The Company
intends to pursue  authorization  for the VIP  System's  services as  qualifying
services. The Company believes that its System is the only economically feasible
voice dialing and activated service that many  telecommunications  providers can
make available to people with a disability.

     There is also  government  regulation  being proposed  regarding the use of
wireless phones while driving. A report published by the National  Conference of
State  Legislatures  in 1999  stated  that at least 22  states  since  1995 have
proposed bills concerning cellular  telephones in automobiles.  Although none of
the bills have  passed,  legislation  is still  pending at this time in Georgia,
Illinois, New Jersey, Pennsylvania and New York. All of these states, except for
New Jersey  which  prohibits  use of a car phone while  driving,  have  proposed
legislation that restricts the use of hand-held  telephones while driving. In at
least one  municipality,  use of a cell phone while driving is prohibited unless
both hands are on the steering wheel. Legislation of this sort requires cellular
telephone  companies  to  provide  enhanced  services  so  that  they  can  keep
generating  revenue from their subscribers who make many of their calls while on
the road.  The Company  believes  that its voice  activated  dialing and message
services, along with the hands-free speaker phones and headsets available in the
market,  will  provide  WCCs  with  a  means  of  complying  with  the  proposed
regulations  and make WCCs using the Company's  product and services  leaders in
the industry.

     Primary Markets
     ---------------

     THE ILECS. The Company believes that its revenue sharing market strategy is
the most economically viable method for many ILECs to provide speech recognition
enhanced services to their  subscribers.  The ILECs and WCCs are the two primary
markets in which the Company has focused its marketing  efforts,  offering these
telecommunications  providers a revenue sharing opportunity. The Company focuses
on these  markets  because  the  providers  in these  markets  have an  existing
customer  base.  In the first phase of the  marketing  process,  the Company has
identified  and contacted 528 ILECs with more than 5,000 access lines.  In phase
two,  the  Company  intends to  concentrate  on those  ILECs with 3,000 to 5,000
access lines and in phase three the Company will focus its marketing  efforts on
those ILECs with 3,000 or fewer  access  lines.  The Company  does not intend to
market to the larger  telephone  companies  until it establishes a strong market
presence in the medium and smaller telephone company market.

                                        2



<PAGE>





     The  Company's  VIP System  platform is  designed to work in the  telephone
company's central office,  collocated alongside an ILEC's central office switch.
Unlike many other enhanced service companies' boxes, the Company's VIP System is
connected  to the ILEC's  switch via industry  standard  T-1 circuits  utilizing
direct inward dial trunks.

     The  Company  will  provide  and  install  the VIP System  without  charge.
However,  the Company enters into a revenue  sharing  arrangement  with the ILEC
based upon the revenue  generated through sales of the enhanced  services.  Most
contracts require that the ILEC generate at least $2,000 per month per System or
for the ILEC to pay the difference if that amount is not reached,  otherwise the
contract may be terminated.

     The ILECs are responsible for billing and collecting revenue generated from
the VIP System's enhanced services. However, the VIP System can produce customer
information  for marketing or billing use. In addition,  the Company will assist
each  telecommunications  provider to market the services by  providing  various
co-branded  advertising  materials  the Company has designed and by training the
ILEC's sales force and customer service staff.

     The Company has signed test agreements with Sleepy Eye Telephone Company in
Minnesota dated May 27, 1999 and Northeast  Pennsylvania Telephone Company dated
May 18,  1999.  These test  agreements  provide  that the Company will provide a
System to each ILEC for a sixty day period during which time the Company will be
responsible  for all  testing  and  customer  provisioning  while  the ILECs are
responsible for providing  collocation  space for the System and for billing and
collection services. At the end of the test period, the ILEC may choose to enter
into the Standard Contract as set forth below.

     The Company  has  already  executed  agreements  providing  for a long-term
revenue sharing arrangement with the following companies on the following dates:

               o    Southwest Texas  Telephone  Company in Texas dated September
                    21, 1999 (4,000 subscribers)

               o    Kaplan Telephone Company in Louisiana dated October 13, 1999
                    (4,000 subscribers)


     THE WCCS. Of the  approximately  722 wireless markets in the United States,
there are 416 rural service areas and 306  metropolitan  service areas that have
multiple  providers  serving the same  markets.  The Company  believes that many
wireless providers want to offer the benefits of speech recognition  services to
their  subscribers  in order to maintain their customer base, but the WCCs often
find such services to be cost prohibitive. As with the ILECs, the Company offers
WCCs the VIP System and  installation  without  charge.  The Company recoups its
costs in the revenue sharing arrangements it has negotiated with the WCCs. These
arrangements  are based on the same  percentages  used with the ILECs. The WCCs,
like the ILECs,  are responsible  for the billing and  collecting,  and like the
ILECs they will also receive  assistance  from the Company in marketing  the VIP
System  enhanced  services.  The Company has already  entered into revenue share
arrangements with the following companies:

               o    Rural Cellular Corporation dated September 25, 1999 (240,000
                    subscribers)

               o    Kaplan Telephone Company in Louisiana dated October 13, 1999
                    (6,000 subscribers)

               o    Midwest  Wireless  Communications  dated  November  8,  1999
                    (125,000 subscribers)


     STANDARD  ILEC/WCC  CONTRACT.  The Company uses the same  standard  form of
Software License Agreement and Marketing Agreement for each ILEC and WCC that it
services. The Software License Agreement grants each participating ILEC or WCC a
license to use the Company's  software and all  subsequent  improvements  in the
ILEC's or WCC's local calling areas.  The Company  retains title to the software
and requires that the ILEC's and WCC's keep

                                        3



<PAGE>




all information related to the software  confidential.  The term of the Software
License Agreement coincides with that of the Marketing Agreement.

         The Marketing  Agreements have provisions to remain in effect for up to
ten years.  In the Marketing  Agreement,  the Company  agrees to install the VIP
System at the switch location for the participating  ILECs and WCCs and commence
testing following  installation.  The participating ILECs and WCCs then have the
right to accept or reject  the  System  after  testing  is  completed.  Once the
participating  ILEC or WCC has  accepted  the System,  it is required to use its
best efforts to promote the sale of the Company's  services to subscribers.  The
participating  provider  is  responsible  for  billing  and  collection  on  the
services,  but  the  pricing  is  jointly  agreed  upon by the  Company  and the
provider.  The ILECs and WCCs agree that they will not install  any system,  for
testing or otherwise,  that competes with the VIP System in the area  designated
under  the  Marketing  Agreement.   The  Company  agrees  to  provide  marketing
materials,  technical  support  and  training  to the  ILECs  and WCCs and their
personnel.  The Company also provides in the Marketing Agreement that it may use
the System to provide  services directly to its own subscribers in the ILEC's or
WCC's designated area.

         Secondary Markets
         -----------------

         The  Company has also  marketed  its  services  to CLECs.  CLECs face a
distinct  challenge because they must rely on ILECs to provide the final link in
the communications path to subscribers or expend significant  resources to build
their own network.  The Company is not currently  focusing on CLECs because most
CLECs do not currently  have the customer base to support the Company's  revenue
sharing agreement. The Company,  however, has contracted to sell thirty-nine VIP
System boxes to KMC Telecom Holdings,  Inc. ("KMC") for installation and use. In
exchange for an initial  licensing fee for each market,  the Company's  contract
with KMC grants KMC a license to use the Company's  software and all  subsequent
improvements  of the  software  in  certain  designated  markets.  The number of
markets  covered by the agreement may be expanded up to a defined maximum number
on prior written notice to the Company. As with the ILEC and WCC agreements, the
Company  agrees to install and test the System,  after which time KMC can accept
or reject the  System.  The  Company has agreed not to install VIP Systems or to
license such systems to others in the designated  markets.  The Company also has
agreed to provide KMC  technical  support and  training for KMC  personnel.  Two
years after the Systems are accepted in a licensed market, KMC must begin paying
monthly fees for use of the Systems.  Throughout the term of the agreement,  KMC
may also be required to pay a support fee for training and related  support done
by the Company in the  designated  markets.  If the  Company  desires to provide
services directly to its own subscribers in the designated markets,  the Company
must pay KMC $1.25 per month per subscriber.

         In  addition  to its  agreement  with KMC,  the  Company  has  signed a
collocation agreement with NEXTLINK Texas, Inc. ("NEXTLINK") to place VIP System
platforms in their central office switch locations in the Dallas area. Under the
Company's agreement with NEXTLINK,  the Company is granted a license to install,
operate and maintain its VIP System in a certain portion of NEXTLINK's switching
center in exchange for the Company's payment of certain initial and monthly fees
for such  collocation.  The  Company  has placed  boxes in the Dallas  area that
service direct subscribers of the Company's services.

         In conjunction with the collocation agreements,  the Company has signed
Master  Distributor  Agreements  with several  companies to market the Company's
services directly to the end user in six large metropolitan areas. The companies
and the  markets  they  cover are Best  Voice,  Inc.  in Miami,  Florida;  Voice
Retrieval,  Inc. in Dallas, Texas; Answering Service Inc. in Detroit,  Michigan;
Amerivoice Telecommunications, Inc. in Milwaukee, Wisconsin; In Touch Solutions,
L.L.C.  in Myrtle Beach,  South  Carolina;  Voicenet New Media,  Inc. in Boston,
Massachusetts and Nomis Communications,  Inc. in Houston, Texas. The Company has
not yet  installed  VIP Systems in these areas.  The form of Master  Distributor
Agreement that has been signed by all participating  master  distributors allows
the  distributor to market and sell the Company's  services  directly to the end
user and through other  distributors whom the master  distributor is to identify
and contact.  The master  distributor  receives certain marketing  materials and
collateral   support  from  the  Company.   The  Company  may  authorize   other
distributors  in the master  distributor's  market  area,  but will direct those
distributors to work with the master distributor,  who pays a fee to acquire the
right to sell the Company's  services in a specific market. The Company provides
the master  distributor  with  commissions for accounts  acquired based upon the
revenues billed and collected for such accounts. These agreements typically have
an initial term of three years. The Company is not actively  marketing  directly
to subscribers.

                                        4



<PAGE>




         The  Company  has been  engaged in Beta  testing the VIP System in CLEC
environments  for 18 months.  In  particular  the Company had to work on systems
that  would be able to readily  produce  billable  call  records.  Although  the
Company  had  received  assurances  from the CLECs with whom it was  testing its
equipment  that  they  would  be able  to  produce  call  records,  the  Company
experienced various problems. In addition to working with the CLECs, the Company
has approached  various switch  manufacturers  about solutions to such problems.
The Company  believes that it has solutions for the billing  problems and is now
completing  the Beta testing phase.  The Company  expects to be able to roll out
pricing for its  offerings to its master  distributors  in the first  quarter of
2000 so that they may begin their selling efforts.

         The Company  utilizes  direct mail,  telemarketing,  and personal sales
calls to contact  and market its  product  and  services  to  telecommunications
providers in the targeted markets:

Product and Services

         The Company's  proprietary  speech-interaction  software, a part of the
VIP  System,  is able to  provide  the  ILECs  and  WCCs  with a host of  speech
recognition  enhanced  services to help comply with  applicable  regulations and
increase revenues.

         The Product
         -----------

         The Company has  developed  what it believes to be a unique system that
integrates Philips' Speech Pearl Natural Dialog speech recognition  software and
the Company's  proprietary  software called the VIP System. The Company believes
that its new  hardware  and  software  system  provides  the wide variety of new
speech recognition  enhanced services being sought by providers in a deregulated
telecommunications  industry. With the VIP System, a telecommunications provider
can offer its  subscribers a variety of speech  recognition  and call processing
services.  The VIP System will work in conjunction with the switching  platforms
of a number of commonly used technologies,  including the Lucent 5ES(2),  Nortel
DMS-100/500, and Siemens/Stromberg Carlson Switches.

         The VIP System is an intelligent call processing system that is capable
of identifying  subscribers.  All access lines are connected in such a way as to
allow the VIP System to identify the provider.  The System has the capability of
archiving  call traffic  information  that may be retrieved  and  collected  for
marketing and billing purposes.  The VIP System is also equipped with technology
capable of  monitoring,  reloading and restarting the VIP System in the event of
system failure.

         Traditional call processing systems engage at least two ports during an
entire call to process incoming and outgoing  information while the conversation
takes place.  The VIP System utilizes  release link technology  which allows the
call  to  be  processed   rapidly   using  speech   recognition   or  dual  tone
multi-frequency  (DTMF) dialing. After dialing, the System drops off of the call
as the call is  routed to the  correct  phone  number  by the  telecommunication
provider's  switch. The VIP System speech  recognition  software  recognizes the
words  of the  caller  and  the  Company's  proprietary  software  looks  up the
telephone number in that subscriber's  directory and then hands the call back to
the switch for dialing  and other call  processing  functions.  With the release
link  technology,  the VIP System  can  process  over 7,000  calls per hour in a
single 48 port system.

         The VIP System's speech recognition  software works in conjunction with
over 15 separate enhanced service  applications the Company has created with its
own  software,  some of which are  discussed  below.  The  Company  uses  speech
recognition  technology  created by Philips Speech Processing to process natural
dialogue  speech for the Company's  operating and software  systems.  The speech
recognition  software,  which is based on  phonetics,  may be  programmed  to be
speaker dependent or speaker  independent.  The software recognizes spoken words
or  sentences  and  completes  the call as  instructed.  The speech  recognition
software allows callers to use continuous  digit speech without  requiring users
to change the  cadence of their  speech or speak  between  beeps to fit a speech
recognition  template or prompt.  The  Company  has not yet signed a  definitive
licensing agreement to use the Philips Speech Pearl Natural Dialog software, but
has signed a letter of intent regarding the terms of such an agreement.



                                        5



<PAGE>


         The Services
         ------------

         The  following  speech  recognition  enhanced  services  are  currently
available  through the VIP System for delivery to subscribers  by  participating
providers:

         EMMA THE  PERFECT  RECEPTIONIST.  The  Company's  VIP  System  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.

         SMART LINE.  This  application  allows a subscriber to receive calls at
any  phone.  The  subscriber  must  notify  the System of a change in his or her
location by giving voice  commands to the System.  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.

         MY ONE SPECIAL NUMBER.  Using the "locate"  technology that facilitates
the Smart  Line,  the  Company's  VIP System  allows a child to reach his or her
parents, wherever they are, with one telephone number. Each child is given a tag
by the  participating  telecommunications  provider or by the Company  with "One
Special  Number" on it. A teacher,  daycare  provider or the child can call that
number,  and the call will immediately be routed to the parent without requiring
the child to remember  multiple  telephone numbers because the parent is able to
remotely program the "locate" phone number.

         ** TALK.  Star Star Talk is a speech  recognition  service  that may be
accessed  by a  residential  or business  telephone  customer.  First,  a person
placing a call lifts the receiver and presses ** on the keypad to access the VIP
System.  Then the subscriber  speaks a name,  number or location from his or her
personal directory or a common directory,  such as the local telephone company's
directory.  The System then routes the call to the appropriate  party.  There is
also an option  for the  disabled  to access  the VIP  System.  By  lifting  the
receiver or turning on the speakerphone and waiting three seconds, the telephone
switch will  automatically  activate the VIP System,  and the System will prompt
the subscriber to speak a name, number or location to be dialed.

         SAFETY TALK.  With this service,  a person placing a call on his or her
wireless phone presses the appropriate speed dial code to access the VIP System.
The customer then speaks a name, number or location from the personal  directory
that he or she  previously  created.  The  System  then  routes  the call to the
appropriate  party. This service  eliminates the need for the subscriber to look
up or dial a phone number while driving.

         CORPORATE FAX. By pressing one button, multiple users of a subscriber's
fax will be able to speak  the name of a person  or  entity to whom they wish to
fax a document. The speech recognition software will dial the appropriate number
listed in the Company's directory and complete the call.

         CORPORATE DIRECT. This application is designed for subscriber companies
with multiple wireless phone users. A subscriber dials one number and speaks the
name of the  person or  location  to which  the  caller  wishes to be  connected
initiating the voice activated dialing feature for completion of the call.

         INTELLIGENT   CALL  SCREENING.   The  VIP  System  also  provides  call
screening,  which gives the subscriber the name of the caller,  not just a phone
number.  The  Company's  technology  informs the  subscriber  who is calling and
allows  the  subscriber  to choose  to  accept or deny the call.  If the call is
denied, the VIP System will forward the call to the subscriber's voice mail.

         ELECTRONIC  TALKING PHONE BOOK.  This service allows a provider to load
its entire database of business and  residential  customers into the VIP System.
Any person making a call in a participating provider's area is able to press 411
or dial a local  access  number and speak the city and name of the  business  or
person listed. Like the current live directory assistance systems, the automated
system  provides  the  caller  with the  number  and gives them the option to be
connected. This application may be used as a substitute for an ILEC's, CLEC's or
WCC's  current 411 service and provides the ILECs,  CLECs and WCCs with a method
for  reducing  their  costs for  directory  service  operators.  As with the 41l
service,  the ILECs, CLECs and WCCs may also use the service to increase revenue
by charging a nominal fee

                                        6



<PAGE>




for the connection of a call. In the  Electronic  Talking Phone Book, the ILECs,
CLECs and WCCs may also enter a list of the  businesses  in the Yellow  Pages of
the phone book. If such a service is offered,  a subscriber could ask for a list
of a certain  type of business,  such as airlines,  and EMMA would read back the
appropriate  names. As with the 411 service,  the VIP System could then complete
the call for the customer for an extra charge.

         SECURE CARD. The Secure Card is a speech  recognition  voice  activated
long distance calling card. A Secure Card subscriber will be able to dial an 800
access number and speak a security  code,  and the System will place a call from
their personal voice directory.  This card adds a low-cost long-distance service
to the list of options provided to subscribers.

Competition

          The  speech  recognition  services  market is  competitive  with rapid
technological  innovations.  The  Company  expects  competition  to  continue to
increase  as ILECs,  WCCs,  and CLECs  seek to offer  their  customers  enhanced
services and to distinguish themselves from other telecommunications  providers.
Many of the  Company's  current  competitors  have longer  operating  histories,
greater name recognition,  established customer bases and substantially  greater
financial, technical, marketing, sales and other resources than the Company. The
Company believes that the principal factors affecting  competition in the speech
recognition  services  market are ease of use,  overall  technical  performance,
price,  and reliability.  The Company  believes that it competes  effectively in
these areas.

         Some of the  Company's competitors  are  Wildfire  Communications, Inc.
("Wildfire"),  General Magic, Inc. ("General Magic"),  and Webley Systems,  Inc.
("Webley").  Wildfire  and  Webley,  both  private  companies,  market a virtual
assistant that uses voice activated and speech recognition software to track and
answer  voice  mail,  e-mail  and fax.  General  Magic has  developed  a similar
service,  but it has used it to focus on providing  voice  services  through the
Internet.  Accessline  Technologies,  Inc., Call Sciences Ltd. and  Intellivoice
Communications,  Inc. are also voice  service  providers  offering  applications
primarily for use on the Internet and wireless  phone systems.  These  companies
focus on marketing services directly to the end user.

         Intervoice-Brite,  Inc.  ("Intervoice")  is  the  leading  supplier  of
customer premise  equipment that provides call processing and voice  recognition
services.  Intervoice  has a significant  market share and markets to businesses
and network  operators.  Intervoice's  revenues have steadily increased over the
past several years.  Intervoice  markets  directly to subscribers  and to larger
ILECs.  The  Company,  on the other hand,  markets to small to medium  ILECs and
WCCs;  therefore,  the Company does not believe that Intervoice is a significant
competitor at this time.

         Other  competitors  offering  voice  recognition  applications  include
Glenayre Electronics,  Inc., Centigram Communications,  Periphonics Corporation,
Nortel Networks, Octel (a division of Lucent) and Aspect Communications,  all of
which price their systems for marketing to larger telephone  companies.  Compaq,
IBM and Lucent also have voice and call  processing  systems that they market to
larger  telephone  companies,  but it is a small  portion  of  their  respective
businesses. Companies such as AT&T, MCI/Worldcom, Inc., Sprint Corporation and a
number of wireless phone  companies  provide their customers with voice mail and
call  forwarding  features,  applications  that the Company will be marketing in
conjunction  with its speech  recognition  applications.  The  Company  does not
intend to market to the larger telephone companies until it establishes a strong
market presence in the medium and smaller telephone company markets.

         The Company  expects that  additional  competition  will develop.  That
competition may include large companies with  substantially  greater  financial,
marketing  and technical  resources  than those  available to the Company.  Such
competition  could  adversely  affect the revenues and operating  results of the
Company.


Customer Service

         The Company has developed an automated  customer  service  called "Help
Me" that can assist  subscribers  with their  services.  If a  subscriber  has a
question  regarding  any  of  the  applications  to  which  the  subscriber  has
subscribed,  the automated  "Help Me" has scripted  instructions  which tell the
subscriber how to use the different applications.

                                        7



<PAGE>




"Help Me" will be programmed to pull up the  particular  scripted  directions to
explain how to use the services which the subscriber has chosen.

         In   addition,   the  Company   intends  to  train   employees  of  the
participating  telecommunication  providers'  customer  service  force to answer
certain  questions  related to the services.  Therefore,  the  telecommunication
providers'  employees,  with the  assistance of the "Help Me" service,  would be
able to answer the common questions subscribers will have about their service.

         The  Company  intends to assist the ILECs,  CLECs and WCCs if there are
problems with the VIP System platform.  The Company intends to have a 24 hour, 7
day a week  customer  service  line  for  the  ILEC  and  WCC  customer  service
representatives or other employees to call with service questions.  In addition,
the Company has designed a monitoring system that will continuously poll the VIP
System  to assure  that it is  operating  correctly.  If the  monitoring  system
detects any  problems  with the VIP  System,  it will set off an alarm that will
send a signal by modem,  simultaneously  paging and calling a representative  of
the Company so the problem can be immediately corrected.  In addition, the ILECs
and WCCs will be provided  back-up  components,  such as the Dialogic cards that
help  operate  the System,  to install in the event a System  ceases to function
properly.  The Company  believes  that this high level of  customer  service and
support  will  help  them  market  the  VIP  System  to  a  greater   number  of
telecommunications providers.

Employees

         As of November 17, 1999, the Company had 15 employees,  all of whom are
full time.


Patents, Trademarks and Copyright

         The Company  relies on a  combination  of trade  secret,  copyright and
non-disclosure  agreements to protect its proprietary rights in its software and
technology. There can be no assurance that such measures are or will be adequate
to protect the Company's proprietary  technology.  Furthermore,  there can be no
assurance  that  the  Company's   competitors  will  not  independently  develop
technologies  that are  substantially  equivalent  or superior to the  Company's
technology.

         The  Company's  software  will be licensed to customers  under  license
agreements containing  provisions  prohibiting the unauthorized use, copying and
transfer of the licensed  program.  Policing  unauthorized  use of the Company's
products will be difficult,  and any  significant  piracy of its products  could
materially and adversely affect the Company's financial condition and results of
operations.

         The Company relies on the Philips Speech Pearl Natural Dialog software.
The  Company  has not yet signed a  definitive  licensing  agreement  to use the
software,  but has  signed a letter  of  intent  regarding  the terms of such an
agreement.   The  Speech  Pearl  Natural  Dialog  software  is  integrated  with
internally  developed software and used in the Company's products to perform key
functions.  There can be no assurances that the developers of such software will
otherwise  continue to make the product available to the Company on commercially
reasonable  terms,  will enter into a definitive  agreement  with the Company or
will continue to remain in business. The inability to obtain and maintain any of
the Company's  software licenses could result in delays or reductions in product
shipments until equivalent software can be developed,  identified,  licensed and
integrated,  which could  adversely  affect the  Company's  business,  operating
results and financial condition.

         The Company is not aware that any of its software products infringe the
proprietary rights of third parties.  There can be no assurance,  however,  that
third  parties  will not claim  infringement  by the Company with respect to its
current or future products. The Company expects 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,  cause
product  shipment  delays or  require  the  Company  to enter  into  royalty  or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms  acceptable  to the Company or at all,  which could have a
material  adverse  effect on the Company's  business,  results of operations and
financial condition.


                                        8



<PAGE>




         The Company has received  registered  trademarks from the United States
Patent and Trademark  Office for the following:  Preferred/telecom,  Secure Card
and Use Your Voice.


Research and Development

         The  Company  has  spent the last two years  developing its proprietary
software in conjunction with testing the Philips Speech  Processing  software to
create the VIP System.  The Company  estimates that it has spent $413,109 during
the last two fiscal years on such research and development activities.


                        ITEM 2: DESCRIPTION OF PROPERTIES

         The  Company's  executive  offices  are located in Dallas,  Texas.  The
Company leases 6,123 square feet of space in a facility as a tenant. The term of
the lease is through  December 31, 2003 and the rent is presently  $6,662.67 per
month  through  December 31, 1999,  after which point it will be increased  each
year thereafter.


                            ITEM 3: LEGAL PROCEEDINGS

         As of October 31,  there were no  material  legal  proceedings  pending
against the Company.


           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
<PAGE>
                                     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,
1999 and  March  31,  1998.  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 1998                          HIGH                          LOW
1st Quarter                          $4.00                         $0.875
2nd Quarter                          $2.25                         $0.781
3rd Quarter                          $1.00                         $0.510
4th Quarter                          $2.062                        $1.25
FISCAL 1999
1st Quarter                          $3.25                         $1.865
2nd Quarter                          $2.875                        $1.00
3rd Quarter                          $1.25                         $0.75
4th Quarter                          $2.75                         $0.687

         On November 17, 1999,  the bid price of the Common Stock as reported on
the OTC Electronic Bulletin Board was $1.625.

         As of  September  30,  1999,  there were  approximately  830 holders of
record of the Common Stock.

         The Company has not declared or paid any cash or other dividends on the
Common  Stock to date for the last two (2)  fiscal  years and in any  subsequent
period for which financial information is required and has no intention of doing
so in the foreseeable future.


Recent Sales of Unregistered Securities

The Company also hereby incorporates 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 April 23, 1998, the Company issued Invest, Inc. a warrant to purchase 100,000
shares of common stock of the Company at an exercise price of $1.00 per share on
or before November 12, 1999. On October 5, 1999, Invest's warrants were extended
to November 12, 2000 and were repriced to $1.25.

On  September  3, 1998,  the Company  issued  Eugene Starr a warrant to purchase
2,500  shares of common  stock of the Company at an exercise  price of $3.00 per
share on or before September 3, 2000.

On September 3, 1998,  George Michael and Tom Bolger,  formerly MBRK,  agreed to
convert  $55,987.00  of the amount owed by the Company to them,  as vendors,  in
exchange  for shares of the  Company.  The  Company  issued Mr.  Michael 107,474
shares of common stock at $0.50 per share for the respective portion of the debt
owed to him. The Company issued Mr. Bolger 4,500 shares of common stock at $0.50
per share for the respective portion of the debt owed to him.

On September  30,  1998,  the Company  issued JMG Capital  Partners a warrant to
purchase  25,000  shares of common stock of the Company at an exercise  price of
$1.00 per share on or before September 30, 2001.

On September 30, 1998, the Company  issued Triton Capital  Investments a warrant
to purchase 25,000 shares of common stock of the Company at an exercise price of
$1.00 per share on or before September 30, 2001.


                                       10
<PAGE>


On November 1, 1998,  the Company issued J. Steven Emerson a warrant to purchase
50,000  shares of common stock of the Company at an exercise  price of $1.00 per
share on or before November 1, 2001.

On December 30, 1998, the Company issued In Touch Solutions, L.L.C. a warrant to
purchase  25,000  shares of common stock of the Company at an exercise  price of
$1.00 per share on or before December 30, 2000.

On December 30, 1998, the Company issued  Answering  Service,  Inc. a warrant to
purchase  30,000  shares of common stock of the Company at an exercise  price of
$1.00 per share on or before December 30, 2000.

On December 30, 1998, the Company issued Amerivoice  Telecommunications,  Inc. a
warrant to purchase  40,000 shares of common stock of the Company at an exercise
price of $1.00 per share on or before December 30, 2000.

On December 30, 1998, the Company issued  Voicenet New Media,  Inc. a warrant to
purchase  25,000  shares of common stock of the Company at an exercise  price of
$1.00 per share on or before December 30, 2000.

On December 30, 1998, the Company issued Best Voice,  Inc. a warrant to purchase
25,000  shares of common stock of the Company at an exercise  price of $1.00 per
share on or before December 30, 2000.

On December 30, 1998, the Company issued Nomis Communications, Inc. a warrant to
purchase  25,000  shares of common stock of the Company at an exercise  price of
$1.00 per share on or before December 30, 2000.


                                       11



<PAGE>




On February 10, 1999,  the Company  issued Edwin G. Bowles a warrant to purchase
25,000  shares of common stock of the Company at an exercise  price of $1.00 per
share on or before February 10, 2001.

On March 31,  1999,  the Company  issued  Kathryn  Jergens a warrant to purchase
25,000  shares of common stock of the Company at an exercise  price of $0.84 per
share on or before March 31, 2004.

All of the transactions referred to in this section are exempt from registration
under the  Securities  Act pursuant to Section 4(2) of the Securities Act except
those securities that were sold to Capital Growth Fund, Ltd. ("Capital"), Bisbro
Investments,  Ltd. ("Bisbro") or Universal Asset Fund, Ltd.  ("Universal") which
were offered pursuant to Regulation S.


                                       12



<PAGE>





       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 the actual results, performance or achievements of
the Company 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 the
actual results,  performance or achievement of the Company to differ  materially
from the Company's  expectations  include the  following:  1) one or more of the
assumptions   or  other  factors   discussed  in  connection   with   particular
forward-looking statements or elsewhere in this report prove not to be accurate;
2) the Company is  unsuccessful  in  increasing  sales  through its  anticipated
marketing  efforts;  3) mistakes in cost  estimates  and cost  overruns;  4) the
Company's  inability to obtain  financing for general  operations  including the
marketing of the Company's  products;  5) non-acceptance of one or more products
of  the  Company  in the  marketplace  for  whatever  reason;  6) the  Company's
inability to supply any product to meet market demand; 7) generally  unfavorable
economic  conditions  which  would  adversely  effect  purchasing  decisions  by
distributors,  resellers or consumers;  8)  development  of a similar  competing
product at a similar  price  point;  9) the  inability  to negotiate a favorable
licensing  agreement  for the speech  recognition  technology  or to  adequately
protect the Company's intellectual property; 10) a failure by the Company or its
third party vendors to  accurately  assess and prepare for any problems that may
arise  related to the year 2000;  (11) if the Company  experiences  labor and/or
employment problems such as the loss of key personnel,  inability to hire and/or
retain  competent   personnel,   etc.;  and  12)  if  the  Company   experiences
unanticipated problems and/or force majeure events (including but not limited to
accidents, fires, acts of God etc.), or is adversely affected by problems of its
suppliers,  shippers,  customers or others. All written or oral  forward-looking
statements attributable to the Company are expressly qualified in their entirety
by such factors.  The Company  undertakes no obligation to publicly  release the
result of any revisions to these forward-looking statements which may be made to
reflect  events  or  circumstances  after  the date  hereof  or to  reflect  the
occurrence of unanticipated events.

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

Overview

         The  Company  began  operations  in  April  1995  as a  traditional  1+
long-distance  reseller. The need to distinguish itself from other resellers led
it  to  concentrate  on  enhanced  services  utilizing  voice  recognition  call
completion technology.  The Company contracted with Brite to develop a switching
platform  that  incorporated  its service  applications  with voice  recognition
technology  acquired  through a licensing  agreement with Voice Control Systems,
Inc.

         Recognizing the declines in  telecommunications  service prices and the
decreasing margins being experienced in long distance sales, the Company decided
to sell its long distance  customer  base and assets in early 1997.  The Company
also  concluded that the  underlying  architecture  used by Brite to develop its
services  would not be  flexible  enough  to  continue  to  create a variety  of
services in the future.  Therefore,  the Company  reduced its staff and overhead
and began its focus on developing its own proprietary software.

         From June of 1997 until April of 1998,  all corporate  activities  were
focused on the  development and testing of services to be deployed to the public
through a platform  the  Company  calls the VIP  System.  In late April 1998 the
first operational VIP System was collocated in a switch environment. The initial
sales activity  focused its efforts on introducing  the concept of voice dialing
to  prospective  customers to gauge  consumer  response with respect to pricing,
features and viability of the services provided.

         In December of 1998, the Company realized that the resources  necessary
to sell and market its services  directly to subscribers would require extensive
amounts of working  capital  and began  researching  venues  which  already  had
inherent  customer  bases.  The  first  distribution  channel  that the  Company
explored  was  master  distributors  in various  cities  and  states  around the
country.  The Company  believes this will be a source of customer  addition once
the  Company  is in the  position  to  locate  its  VIP  Systems  in the  master
distributor marketing areas. The second is through

                                       13



<PAGE>




revenue sharing directly with ILECs,  WCCs, and CLECs.  This avenue is extremely
attractive to the Company because these entities already have customer bases and
the infrastructure to service large number of customers.

         The Company is at a very early stage of implementing its business plan.
It is  subject  to  risks  inherent  in  the  establishment  and  deployment  of
technology  with  which  the  consumer  has  very  little  experience.  As voice
recognition  becomes  more  prevalent  in  everyday  life,  such as in  computer
programs,  reservation systems and  telecommunications  information systems, the
public will be more apt to accept and utilize  its many  features.  In order for
the Company to succeed it must secure adequate  financial and human resources to
meet   its   requirements;    establish   and   maintain    relationships   with
telecommunications   providers;   facilitate  integration  with  various  switch
environments;  establish a lead time for  delivery  of  hardware;  achieve  user
acceptance for its services; generate reasonable margins on its services; deploy
and  install  VIP  Systems  on a timely  and  acceptable  schedule;  respond  to
competitive  developments;  mitigate risk associated with obtaining  patents and
copyrights  and other  protections of  intellectual  property;  and  continually
update its  software  to meet the needs of end users.  Failure to achieve  these
objectives could adversely effect the Company's business,  operating results and
financial condition.

Results of Operations

         The Company  recorded a net loss of $690,598,  or $0.10 per share,  for
the year ended March 31,  1999,  compared to a net loss of $381,991 or $0.07 per
share,  for the year ended March 31, 1998, and a net loss of $1,708,672 or $0.33
per share,  for the year ended  March 31,  1997.  The net loss per share for the
year ended March 31, 1997  included  the loss for the period and a net loss from
the  discontinued  operations of  $1,365,547  and gains of $527,181 and $253,694
from disposal of a business  segment and  extinguishment  of debt  respectively.
Excluding the effect of these adjustments, the loss per share for the year ended
March 31, 1997, would have been $0.22 per share.

         Total Sales

         Total revenue for the year ended March 31, 1999 was $180,383,  compared
to $6,874 and $0 for the years ended March 31, 1998 and 1997 respectively. Total
revenues  consisted of master distributor fees for specific marketing rights and
service fees for the Company's "Emma the Perfect  Receptionist" and "Smart Line"
services. Revenues in 1998 consisted of service fees.

         The Company  anticipates  that  revenues from  the sale of its services
will grow  gradually in the first half of 2000 as it installs VIP Systems in the
ILECs and WCCs which have already signed revenue  sharing  agreements and as VIP
Systems are purchased and installed at KMC's switch locations.  The Company does
not  anticipate  substantial  revenues  going  forward  from the sale of  master
distributorships,  as it has had in the past year.  However,  the  Company  does
anticipate  significant  revenue  growth in the second  half of the year as more
ILEC, WCC, and CLEC agreements are completed.

         Cost of Sales

         Cost of sales for the year ended March 31, 1999 was  $15,033,  compared
to $2,206 and $0 for the years ended March 31, 1998 and 1997,  respectively.  In
1999  and  1998,  cost of sales  consisted  of  service  costs  associated  with
providing  the  Company's  "Emma the  Perfect  Receptionist"  and  "Smart  Line"
services.

         Selling, General and Administrative

         Selling,  general and administrative  expenses for the year ended March
31, 1999 were  $768,024  compared to $425,304  and  $954,213 for the years ended
March 31, 1998 and 1997, respectively. The increase from 1998 to 1999 was due to
staffing  increases  and  additional  marketing  efforts of the  Company's  Emma
services.  The decrease from 1997 to 1998 was due to the  implementation  of the
Company's 1997  restructuring  plan,  which resulted,  among other things,  in a
substantial decrease in number of employees, lease space and general overhead.

         The Company expects that selling,  general and administrative  expenses
will increase in fiscal year 2000, such expenses to include costs related to the
number of employees,  office space  requirements and general overhead.  However,
the Company believes that such expenses will not increase  proportionately  with
revenue from sales.


                                       14



<PAGE>




         Restructuring

         In the  first  quarter  of  1997,  the  Company  began to  implement  a
restructuring  plan  designed  to  reduce  operating  expenses  and  allow it to
dedicate  all of its cash flows to  software  and service  development.  Drastic
headcount  reduction  and  overhead  elimination  allowed the Company the needed
resources to develop the VIP system and the services it is now marketing.

         Research and Development

         The Company has not expensed any research and development costs for the
years stated on its financial  statements,  but has capitalized cost of $413,109
for  development of its software and hardware for the year ended March 31, 1999,
in  comparison  to $233,093  and $103,086 for the years ended March 31, 1998 and
1997 respectively.

         Extraordinary Items

         The Company has recognized  income from the  extinguishment  of debt of
$88,828 for the year ended  March 31, 1999 and  $217,442  and  $253,694  for the
years ended March 31, 1998 and 1997 respectively.

         Income Taxes

         As of March 31, 1999, the Company had cumulative  federal net operating
losses of approximately $5.9 million,  which can be used to offset future income
subject to federal income tax through the year 2019.

Liquidity and Capital Resources

         Throughout  fiscal 1998 and 1999,  the Company has continued to sustain
operating  losses  that  have  resulted  in the use of its  cash  reserves.  The
Company's cash and cash  equivalents at March 31, 1999 were $41,750  compared to
$82,284 and $64,858 respectively for the years ended March 31, 1998 and 1997.

         In June of 1997, the Company conducted a Regulation S offering and sold
$480,000 of 12% convertible debentures due December 25, 1997. From this offering
$320,000  was  received  in cash and a note  issued on  November  12,  1996 with
accrued  interest  was  converted  into this  offering.  On February  19,  1998,
$160,000 of the  debentures  was converted  into 183,908 shares of the Company's
common stock.  On September 30, 1998, the remaining  $320,000 was converted into
367,816 shares of the Company's common stock.

         In March of 1998 and again in May of 1998,  the Company  entered into a
sale leaseback  arrangement under which the Company sold two of its VIP Systems,
each for a  $100,000  and  leased  them  back for a period  of three  years.  In
November 1998, the Company agreed to issue 579,971 shares of common stock to the
lessor in  exchange  for the  release  of the then past due lease  payments  and
release of the future liabilities.

         In September of 1998, the Company borrowed $100,000 from a more than 5%
beneficial owner. The note is unsecured and bears interest at 10% per annum with
principal and interest due on various dates through October 16, 1999.

         From June 1998 until January of 1999, three separate  shareholders lent
the Company  varying  amounts  totaling  $193,000.  On June 18,  1999,  the full
$193,000 was converted into 386,000 shares of the Company's common stock.

         From  December of 1998  through  March 31, 1999,  the Company  received
$170,000 from the sale of Master Distributorships to seven different entities.

         On March 31,  1999,  the Company  borrowed  $43,000 from a more than 5%
beneficial owner. The note is unsecured and bears interest at 12% per annum with
the principal and interest due on March 30, 2000. The note is  convertible  into
shares of common stock at a conversion price of $1.00 per share.


                                       15



<PAGE>




         In April  1999,  the  Company  borrowed  $200,000  from three  separate
individuals.  The loans  accrue  interest at 12% per annum due at various  dates
between  April 7, 2000 and April 23, 2000.  On June 28, 1999,  $100,000 of these
notes were used to  exercise  200,000  warrant  shares of the  Company's  common
stock.  $25,000 of a remaining  note plus interest of $1,381 was converted  into
26,381 shares of the  Company's  common  stock,  and the remaining  $75,000 plus
interest of $3,353.76 was repaid to the note holders.

         On June 3, 1999, the Company entered into a software license  agreement
with KMC Telecom  Holdings,  Inc. (KMC).  Under the terms of the agreement,  KMC
paid the Company an initial  license fee of  $570,000.  The  agreement  is for a
period of 10 years and provides for a total of 39  installations  and grants KMC
the ability to add up to 81 additional  installations.  The agreement also calls
for KMC to pay the Company a monthly  license fee ranging  from $1,000 to $3,500
per month for each  software  and  hardware  installation  beginning in the 25th
month after each  installation.  The Company  anticipates  having the initial 39
installations completed by June 2000 which would obligate KMC to pay the Company
monthly license fees of $131,500, subject to certain adjustments, beginning July
2002 and continuing through July 2009.

         On July 1, 1999  pursuant to Section  4(2),  the Company  conducted  an
offering  of 320,000  shares of the  Company's  common  stock at $1.25 per share
providing the Company with $400,000 working capital.

         The Company requires  additional capital to meet its current and future
obligations.  On November 4, 1999, the Company signed a finders agreement with a
Colorado  securities  firm  whereby  the  firm  on a  non-exclusive  basis  will
introduce  the  Company  to  companies  or other  business  opportunities  which
represent potential investment dollars.


Future Obligations

         During the next twelve months,  the Company  plans,  subject to raising
adequate capital, to increase substantially the marketing of its VIP Systems, to
introduce  new  services,  and to continue  refining  the  services it currently
provides.  Subject to the Company's ability to fund the cost, management expects
the Company to hire or contract with  approximately 25 additional persons during
the next twelve  (12)  months,  primarily  to support  its  expanding  marketing
activities and system installations.  At November 17, 1999, the Company employed
fifteen (15) employees.

         The  ability of the  Company  to raise  capital  is, in the  opinion of
management,  the primary  constraint on the implementation of its business plan.
Management  estimates that during the next twelve (12) months,  the Company will
require approximately  $3,000,000 of equity and/or long term debt to finance its
costs of marketing, system deployment, and continued refinement of its services.
In addition,  the Company will be required to obtain  extensions  of its current
debt or raise  additional  funds of  approximately  $943,000 to retire its debt.
There is no assurance that the Company will be able to secure any such financing
or extensions of its current debt.

Year 2000 Compliance

         Many currently  installed  computer  systems and software  products are
coded to accept only two digit  entries in the date code field.  These date code
fields will need to accept four digit entries to distinguish  21st century dates
from 20th century dates. As a result,  many companies'  computer  systems and/or
software  may need to be  upgraded  or  replaced to comply with such "Year 2000"
requirements. Significant uncertainty exists in the software industry concerning
the potential effects associated with such compliance.

         The Company has reviewed its own  software  products and believes  that
there  will be no  adverse  impact  with the Year 2000 date  change.  All of the
Company's  products are designed to record,  store,  and process  calendar dates
occurring  before  and after  January  1, 2000 with the same full year  accuracy
(i.e. four numeric characters instead of two).

         An impact  analysis has been  conducted to identify the risk of failure
within the Company's in-house computer systems.  The Company believes that there
will be no adverse impact with the Year 2000 date change.  However, this risk to
the Company's business relates not only to the Company's  computer systems,  but
also to some degree to those

                                       16



<PAGE>




of the Company's suppliers and customers.  The Company has developed a policy to
ensure that all key  customers,  suppliers  and strategic  partners  operate and
provide  Year 2000  compliant  systems and  software.  The Company is  currently
collecting  certifications  from third parties on compliance.  Also,  there is a
risk that  existing and  potential  customers  may not  purchase  the  Company's
products in the future if the  computer  systems of such  existing or  potential
customers are adversely impacted by the Year 2000 date change.

          Based on the  information  to date, the Company has completed its Year
2000 compliance review and made necessary  modifications.  However, the issue is
complex and no business can guarantee  that there will be no Year 2000 problems.
Some commentators have stated that a significant amount of litigation will arise
out of Year 2000 compliance issues, and the Company is aware of a growing number
of lawsuits against other software vendors.  Because of the unprecedented nature
of such  litigation,  it is uncertain to what extent the Company may be affected
by it.


                                       17



<PAGE>




                          ITEM 7. FINANCIAL STATEMENTS


                                                                            PAGE

Independent Auditors' Report.................................................F-1

Financial Statements:

     Balance Sheets .........................................................F-2

     Statements of Operations ...............................................F-4

     Statement of Stockholders' Deficit......................................F-5

     Statements of Cash Flows................................................F-7

     Notes to Financial Statements....................................F-9 - F-20


                                       18

<PAGE>




                          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, 1999 and 1998, and the related statements of operations, stockholders'
deficit and cash flows for each of the three years in the period ended March 31,
1999.  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  generally   accepted  auditing
standards. 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  also  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. at March
31, 1999 and 1998, and the results of its operations and its cash flows for each
of the three  years in the period  ended  March 31,  1999,  in  conformity  with
generally accepted accounting principles.


                                                    PHILIP VOGEL & CO. PC




                                                    Certified Public Accountants

DALLAS, TEXAS

SEPTEMBER 15, 1999



                                       F-1


<PAGE>




                                               PREFERRED VOICE, INC.
<TABLE>
<CAPTION>

                                                  BALANCE SHEETS
                                              MARCH 31, 1999 AND 1998




                                                                                    1999               1998
                                                                               --------------     ---------------
<S>                                                                               <C>                 <C>
         ASSETS

Current assets:
     Cash and cash equivalents                                                    $    41,750         $    82,284
     Accounts receivable, net of allowance for doubtful
         accounts of $-0- in 1999 and $86,166 in 1998                                     860                   0
     Employee receivables                                                               2,500                   0
                                                                                  -----------         -----------

         Total current assets                                                     $    45,110         $    82,284
                                                                                  -----------         -----------


Property and equipment:
     Computer equipment                                                           $   223,046         $   136,061
     Furniture and fixtures                                                            16,934              18,134
     Office equipment                                                                  12,493               9,303
     Computer software                                                                190,063              97,032
                                                                                  -----------         -----------

                                                                                  $   442,536         $   260,530
     Less accumulated depreciation                                                    161,049              83,218
                                                                                  -----------         -----------

         Net property and equipment                                               $   281,487         $   177,312
                                                                                  -----------         -----------

Other assets:
     Prepaid expenses                                                             $   761,018         $   800,000
     Deposits                                                                          81,535              84,410
     Deferred debt issue costs - net                                                        0               2,869
                                                                                  -----------         -----------

         Total other assets                                                       $   842,553         $   887,279
                                                                                  -----------         -----------

                                                                                  $ 1,169,150         $ 1,146,875
                                                                                  ===========         ===========

                                       F-2

<PAGE>

                                                                                    1999               1998
                                                                               --------------     ---------------

         LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
     Accounts payable                                                             $   363,834         $   361,187
     Accrued payroll and payroll taxes                                                226,755             140,236
     Accrued interest payable                                                         248,967             316,940
     Accrued operating expenses                                                        13,041              13,004
     Accrued vacation                                                                   6,570               4,812
     Current maturities of long-term debt                                              53,000           1,160,000
     Deferred gain on sale - leaseback transaction                                          0              23,375
     Note payable                                                                      50,866              50,866
     Notes payable - related parties                                                  100,000             956,746
                                                                                  -----------         -----------

              Total current liabilities                                           $ 1,063,033         $ 3,027,166
                                                                                  -----------         -----------

Long-term liabilities:
     Deferred gain on sale - leaseback transaction                                $         0         $    46,749
     Notes payable - related parties                                                  590,946                   0
     Long-term debt, net of current maturities                                        253,000                   0
                                                                                  -----------         -----------

         Total long-term liabilities                                              $   843,946         $    46,749
                                                                                  -----------         -----------

Commitments and contingencies (Note I)

Stockholders' deficit:
     Common stock, $0.001 par value;
         20,000,000 shares authorized; shares
         issued 9,695,681 and 6,134,330, respectively                             $     9,695         $     6,134
     Additional paid-in capital                                                     5,192,033           3,315,785
     Accumulated deficit                                                           (5,937,689)         (5,247,091)
                                                                                  -----------         -----------

                                                                                  $  (735,961)        $(1,925,172)
     Treasury stock - 385,224 and 385,224
        shares, respectively, at cost                                                   1,868               1,868
                                                                                  -----------         -----------

         Total stockholders' deficit                                              $  (737,829)        $(1,927,040)
                                                                                  -----------         -----------

                                                                                  $ 1,169,150         $ 1,146,875
                                                                                  ===========         ===========
</TABLE>


                                      F-3


<PAGE>




                                               PREFERRED VOICE, INC.
<TABLE>
<CAPTION>

                                             STATEMENTS OF OPERATIONS
                                 FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997




                                                                1999              1998               1997
                                                           -------------    --------------      -------------
<S>                                                          <C>             <C>                 <C>
Sales                                                        $  180,383      $    6,874          $          0

Cost of sales                                                    15,033           2,206                     0
                                                             ----------      ----------          ------------

         Gross profit                                        $  165,350      $    4,668          $          0
                                                             ----------      ----------          ------------

Costs and expenses:
  General and administrative expenses                        $  768,024      $  425,304          $    954,213
  Interest expense                                              176,752         178,797               169,787
                                                             ----------      ----------          ------------

         Total costs and expenses                            $  944,776      $  604,101          $  1,124,000
                                                             ----------      ----------          ------------

Loss from continuing operations before income taxes          $ (779,426)     $ (599,433)         $ (1,124,000)

Provision for income taxes                                            0               0                     0
                                                             ----------      ----------          ------------

Loss from continuing operations before
   extraordinary item                                        $ (779,426)     $ (599,433)         $ (1,124,000)

Discontinued operations (Note L):
  Loss from operations of discontinued business
    segment (less applicable income taxes of $-0-)                    0               0            (1,365,547)

  Gain on disposal of business segment (less applicable
     income taxes of $-0-)                                            0               0               527,181

Extraordinary item:
  Gain from extinguishment of debt (less applicable
     income taxes of $-0-)(Note M)                               88,828         217,442               253,694
                                                             ----------      ----------          ------------

Net loss                                                     $ (690,598)     $ (381,991)         $ (1,708,672)
                                                             ==========      ==========          ============

Per share amounts:
  Loss from continuing operations                            $    (0.11)     $    (0.11)         $      (0.22)
                                                             ==========      ==========          ============
  Loss from operations of discontinued business segment      $     0.00      $     0.00          $      (0.26)
                                                             ==========      ==========          ============
  Gain on disposal of business segment                       $     0.00      $     0.00          $       0.10
                                                             ==========      ==========          ============
  Gain from extinguishment of debt                           $     0.01      $     0.04          $       0.05
                                                             ==========      ==========          ============
     Net loss                                                $    (0.10)     $    (0.07)         $      (0.33)
                                                             ==========      ==========          ============
</TABLE>



                                       F-4


<PAGE>




                                               PREFERRED VOICE, INC.
<TABLE>
<CAPTION>

                                        STATEMENTS OF STOCKHOLDERS' DEFICIT
                                 FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997



                                                                                  Shares of common stock
                                                            ------------------------------------------------------------------
                                                             Authorized         Issued         Outstanding        In treasury
                                                            -------------  --------------   ---------------  -----------------
<S>                                                          <C>              <C>               <C>                <C>
Balance - March 31, 1996                                     20,000,000        8,949,942         8,904,942            45,000

     Issuance of common stock - June 3, 1996                          0          400,000           400,000                 0
     Exercise of stock warrants - June 28, 1996                       0        1,406,200         1,406,200                 0
     Conversion of 8.5% debentures - July 2, 1996                     0           10,000            10,000                 0
     Exercise of stock options - September 8, 1996                    0           45,000            45,000                 0
     Purchase of treasury stock                                       0                0          (280,000)          280,000
     Conversion of 8.5% debentures - September 27, 1996               0           40,000            40,000                 0
     Exercise of stock options - November 27, 1996                    0            9,000             9,000                 0

     Forgiveness of stockholder debt                                  0                0                 0                 0

     One-for-two reverse stock split - February 24, 1997              0       (5,429,720)       (5,267,220)         (162,500)

     Net loss for the year                                            0                0                 0                 0
                                                             ----------       ----------        ----------          --------

Balance - March 31, 1997                                     20,000,000        5,430,422         5,267,922           162,500

     Conversion of 8.5% debenture - June 12, 1997                     0           20,000             20,000                0
     Exercise of stock options - December 15, 1997                    0          450,000            450,000                0
     Issuance of common stock - December 30, 1997                     0           50,000             50,000                0
     Conversion of 12% debenture - March 5, 1998                      0          183,908            183,908                0
     Acquisition of treasury stock                                    0                0           (222,724)         222,724

     Net loss for the year                                            0                0                  0                0
                                                             ----------       ----------        -----------         --------


Balance - March 31, 1998                                     20,000,000        6,134,330          5,749,106          385,224

     Conversion of 7% debentures - June 24, 1998                      0           11,259             11,259                0
     Conversion of 8.5% debenture - June 30, 1998                     0           27,881             27,881                0
     Conversion of 7% debentures - July 31, 1998                      0          209,587            209,587                0
     Conversion of 7% debenture - August 31, 1998                     0           10,450             10,450                0
     Conversion of 10% debentures - August 31, 1998                   0          869,276            869,276                0
     Conversion of related party notes - September 30, 1998           0           48,975             48,975                0
     Conversion of 12% debentures - September 30, 1998                0          367,816            367,816                0
     Conversion of 7% debenture - October 20, 1998                    0           11,373             11,373                0
     Conversion of equipment lease agreement - November 5, 1998       0          579,971            579,971                0
     Conversion of 7% debenture - December 29, 1998                   0           79,662             79,662                0
     Conversion of 7% debenture - December 30, 1998                   0          159,323            159,323                0
     Conversion of 7% debentures - December 31, 1998                  0          603,142            603,142                0
     Conversion of 7% debentures - January 4, 1999                    0          156,554            156,554                0
     Conversion of 7% debentures - January 7, 1999                    0          119,199            119,199                0
     Conversion of 7% debenture - January 8, 1999                     0           20,930             20,930                0
     Conversion of 7% debentures - January 11, 1999                   0          130,060            130,060                0
     Conversion of 7% debenture - January 22, 1999                    0           43,919             43,919                0
     Issuance of common stock in exchange for release
        of trade liability - February 2, 1999                         0          111,974            111,974                0

     Net loss for the year                                            0                0                  0                0
                                                             ----------       ----------        -----------         --------

Balance - March 31, 1999                                     20,000,000        9,695,681          9,310,457          385,224
                                                             ==========       ==========        ===========         ========

</TABLE>

                                       F-5


<PAGE>

<TABLE>
<CAPTION>


                                            AMOUNTS
      --------------------------------------------------------------------------------------------
              Common                        Additional                                Total
           Stock $0.001    Treasury           paid-in           Accumulated        stockholders'
            par value       stock             capital             deficit             deficit
      ------------------- ----------     ----------------   -----------------  -------------------

<S>       <C>             <C>             <C>                <C>                   <C>
          $   8,950       $    (135)      $ 1,916,632        $ (3,156,428)         $ (1,230,981)

               400                0           799,600                   0               800,000
             1,406                0           107,647                   0               109,053
                10                0            14,990                   0                15,000
                45                0                90                   0                   135
                 0          (1,733)                 0                   0               (1,733)
                40                0            59,960                   0                60,000
                 9                0                36                   0                    45

                 0                0           110,000                   0               110,000

           (5,430)                0             5,430                   0                     0

                 0                0                 0          (1,708,672)           (1,708,672)
          --------        ---------       -----------        ------------          ------------

          $  5,430        $  (1,868)      $ 3,014,385        $ (4,865,100)         $ (1,847,153)

                20                0            27,962                   0                27,982
               450                0            35,550                   0                36,000
                50                0            78,072                   0                78,122
               184                0           159,816                   0               160,000
                 0                0                 0                   0                     0

                 0                0                 0            (381,991)             (381,991)
          --------        ---------       -----------        ------------          ------------

          $  6,134        $  (1,868)      $ 3,315,785        $ (5,247,091)         $ (1,927,040)

                11                0            22,626                   0                22,637
                28                0            41,794                   0                41,822
               210                0           290,663                   0               290,873
                10                0            11,380                   0                11,390
               869                0           347,431                   0               348,300
                49                0            16,275                   0                16,324
               368                0           319,632                   0               320,000
                11                0            22,737                   0                22,748
               580                0           219,809                   0               220,389
                80                0            30,988                   0                31,068
               159                0            61,977                   0                62,136
               603                0           234,623                   0               235,226
               157                0            60,900                   0                61,057
               119                0            49,945                   0                50,064
                21                0             8,979                   0                 9,000
               130                0            56,062                   0                56,192
                44                0            24,551                   0                24,595
               112                0            55,876                   0                55,988

                 0                0                 0            (690,598)             (690,598)
          --------        ---------       -----------        ------------          ------------
          $  9,695        $  (1,868)      $ 5,192,033        $ (5,937,689)         $   (737,829)
          ========        =========       ===========        ============          ============

</TABLE>


                                       F-6


<PAGE>





                                               PREFERRED VOICE, INC.
<TABLE>
<CAPTION>
                                             STATEMENTS OF CASH FLOWS
                                 FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997



                                                                              1999             1998               1997
                                                                         --------------   --------------     -------------
<S>                                                                       <C>             <C>                <C>
Cash flows from operating activities:
     Cash received from customers                                         $  179,510      $    23,576        $    810,759
     Cash paid to suppliers and employees                                   (500,572)        (189,734)         (3,540,302)
     Interest received                                                             0            2,376                   0
     Interest paid                                                                 0               (4)            (37,356)
                                                                          ----------      -----------        ------------

         Net cash used by operating activities                            $ (321,062)     $  (163,786)       $ (2,766,899)
                                                                          ----------      -----------        ------------

Cash flows from investing activities:
     Capital expenditures                                                 $ (151,772)     $  (138,621)       $    (18,955)
     Proceeds from sale of assets                                              1,300            5,683             743,000
                                                                          ----------      -----------        ------------

         Net cash provided (used) by investing activities                 $ (150,472)     $  (132,938)       $    724,045
                                                                          ----------      -----------        ------------

Cash flows from financing activities:
     Proceeds from sale of stock                                          $        0      $         0        $  1,111,733
     Proceeds from notes payable                                             351,000          314,850           1,422,831
     Note principal payments                                                 (20,000)            (700)           (392,665)
     Increase in loan costs                                                        0                0             (75,028)
     Purchase of treasury stock                                                    0                0              (1,733)
     Proceeds from sale - leaseback transaction                              100,000                0                   0
                                                                          ----------      -----------        ------------

         Net cash provided by financing activities                        $  431,000      $   314,150        $  2,065,138
                                                                          ----------      -----------        ------------

Net increase (decrease) in cash and cash equivalents                      $  (40,534)     $    17,426        $     22,284

Cash and cash equivalents:
         Beginning of year                                                    82,284           64,858              42,574
                                                                          ----------      -----------        ------------

     End of year                                                          $   41,750      $    82,284        $     64,858
                                                                          ==========      ===========        ============

                                      F-7
<PAGE>

                                                                              1999             1998               1997
                                                                         --------------   --------------     -------------

Reconciliation of net loss to net cash used
          By operating activities:

     Net loss                                                             $ (690,598)     $ (381,991)        $ (1,708,672)
                                                                          ----------      ----------         ------------

     Adjustments to reconcile net loss to net cash
          Used by operating activities:

        Depreciation                                                      $   80,113      $   45,945         $     47,636
        Amortization                                                           2,869           1,900              130,026
        (Gain) loss on sale of assets                                           (186)          4,937             (600,483)
        Provision for losses on accounts receivable                                0             446               88,630

        Changes in assets and liabilities:
         (Increase) decrease in accounts receivable                             (860)         18,207              (49,808)
         (Increase) decrease in employee receivables                          (2,500)          1,500               11,685
         Increase in other receivables                                             0         (25,854)                   0
         (Increase) decrease in certificate of deposit                             0          52,376               (1,922)
         (Increase) decrease in deposits                                       2,875           7,359              (76,917)
         (Increase) decrease in prepaid expenses                              38,982           1,676             (770,759)
         Decrease in deferred contract costs                                       0          50,000                    0
         Increase in patents and trademarks                                        0               0              (10,162)
         Decrease in accounts payable                                         58,635         (46,129)             (40,723)
         Increase in accrued expenses                                        189,608          35,718              214,580
         Increase (decrease) in deferred gain on sale - leaseback                  0          70,124                    0
                                                                          ----------      ----------         ------------

            Total adjustments                                             $  369,536      $  218,205         $ (1,058,217)
                                                                          ----------      ----------         ------------
Net cash used by operating activities                                     $ (321,062)     $ (163,786)        $ (2,766,889)
                                                                          ==========      ==========         ============


Schedule of non-cash investment and financing activities:
     Issuance of common stock in exchange for debt                        $1,879,809      $  304,122         $          0
                                                                          ==========      ==========         ============

</TABLE>



                                      F-8

<PAGE>


                              PREFERRED VOICE, INC.

                          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  products  and
services to the  telecommunications  industry  throughout  the United States and
maintains its principal offices in Dallas,  Texas. The Company has not presented
financial  statements for the period from  incorporation in 1992 through May 13,
1994,  as the Company did not begin its planning and  organizational  activities
until May 13, 1994. 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.  Certain
prior year amounts have been reclassified for comparison purposes.


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CASH AND CASH EQUIVALENTS
-------------------------

     For purposes of reporting  cash flows,  cash and cash  equivalents  include
amounts due from banks.

ACCOUNTS RECEIVABLE
-------------------

     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  has provided an allowance  for  doubtful  accounts  which
reflects its opinion of amounts which 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.

DEPRECIATION
------------

     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 years
      Furniture and fixtures                                             5 years
      Office equipment                                                   5 years
      Software development                                               3 years

INCOME TAXES
------------

     Income  taxes  are  accounted  for  using the  liability  method  under the
provisions of SFAS 109 "Accounting for Income Taxes".


                                      F-9


<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS


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.

REVENUE RECOGNITION
-------------------

     The  Company is engaged as a provider  of  telecommunication  products  and
services.  Generally,  the Company  recognizes  revenue under the accrual method
when their services and products are provided. During the current year, however,
a majority of the Company's  revenue  consisted of distributor  fees. A one-time
only  distributor  fee is  paid  by  master  distributors  in  order  to  obtain
distribution rights to the Company's products and services.  The distributor fee
income was derived from six major customers and was recognized when the contract
became  final.  The  distributor  fee income for the years ended March 31, 1999,
1998 and 1997 was $170,000, $-0- and $-0-, respectively.

ADVERTISING EXPENSE
-------------------

     The Company expenses advertising costs when the advertisement occurs. Total
advertising  expense  amounted to $42,269,  $-0- and $19,182 for the years ended
March 31, 1999, 1998 and 1997, respectively.

LOSS PER SHARE
--------------

     The Company  adopted the  provisions  of Statement of Financial  Accounting
Standards  (SFAS) No. 128,  Earnings per Share,  during the year ended March 31,
1998.  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  (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 were exercised or converted into common stock. The adoption of SFAS
128 did not affect per share amounts for 1997 as previously reported.

     Loss  per  share  is  based  on  the  weighted  average  number  of  shares
outstanding  of 7,205,065  and 5,219,890 and 5,102,314 for the years ended March
31, 1999, 1998 and 1997,  respectively.  The weighted average share amounts have
been restated for the one-for-two  reverse stock split approved by the Company's
Board of Directors on February 24, 1997 (see Note E).

AMORTIZATION
------------

     Fees and  other  expenses  associated  with the  issuance  of  subordinated
convertible  debentures are being amortized on the straight-line method over the
term of the  debentures  beginning  in April,  1995.  Amortization  expense  was
$2,869,  $1,900 and $4,333 for the years  ended March 31,  1999,  1998 and 1997,
respectively.

     The cost of patents and trademarks was being amortized on the straight-line
 method  over a period of 15 years.  During the year ended March 31,  1997,  the
 Company charged off the remaining unamortized cost of its patents and
trademarks   in   connection   with   the   disposal   of  its   long   distance
telecommunications services business. Amortization expense charged to operations
in 1999, 1998 and 1997 was $-0-, $-0- and $26,370, respectively.


                                      F-10


<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS


TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES
-----------------------------------------------------------------------------

     In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities.  SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishment of liabilities  occurring after December 31, 1996, and
is to be applied prospectively. This statement provides accounting and reporting
standards for transfers and servicing of financial assets and  extinguishment of
liabilities based on consistent application of a  financial-components  approach
that focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Adoption of this statement did
not have a  material  impact on the  Company's  financial  position,  results of
operations or liquidity.

IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
-----------------------------------------------------------------------

     The Company  adopted the  provisions  of SFAS No. 121,  Accounting  for the
Impairment of Long-Lived  Assets and for Long-Lived Assets to Be Disposed Of, on
April 1, 1997.  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 exceed 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. Adoption of this statement did not have a material impact on the Company's
financial position, results of operations or liquidity.

COMPREHENSIVE INCOME
--------------------

     The Company adopted the provisions of SFAS No. 130, Reporting Comprehensive
Income on April 1, 1998.  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 nonowner sources. Adoption of this statement did not have a material
impact on the Company's financial position, results of operations or cash flows,
as the Company did not have any changes in net assets  resulting  from  nonowner
sources during the periods covered by the accompanying financial statements.

SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
-------------------------------------------------

     The  Company  adopted the  provisions  of SFAS No.  131,  Disclosure  about
Segments of an Enterprise and Related Information on April 1, 1998. 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 this statement did not have a material impact
on the Company's financial position, results of operations or cash flows, as any
effects are limited to the form and content of its disclosures.

NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting  for  Derivative  Instruments  and Hedging  Activities.  SFAS No.1-33
requires  that  an  entity   recognize  all  derivatives  as  either  assets  or
liabilities in the statement of financial position and measure those instruments
at fair  value.  Adoption  of this  statement  is not  expected  to  impact  the
Company's  financial  position,  results  of  operations  or  cash  flows.  This
statement is effective for fiscal years beginning after June 15, 1999.

NOTE C - NOTES PAYABLE:

Notes payable consist of the following at March 31, 1999 and 1998:

                                      F-11


<PAGE>


                                               PREFERRED VOICE, INC.

                                           NOTES TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>


                                                                                   1999           1998
                                                                                ----------     ----------
<S>                                                                             <C>            <C>
          Outside interests                                                     $   50,866     $    50,866
          Related parties                                                          690,946         956,746
                                                                                ----------     -----------

                                                                                $  741,812     $ 1,007,612
                                                                                ==========     ===========
     Note payable to outside interests include:

     Note payable,  Brite Voice Systems,  Inc.,  dated January 31, 1997. Note is
     unsecured and payable in monthly installments of $8,112, including interest
     at the rate of prime + 2 (8.5% at March 31, 1999 and 1998) through  January
     1, 1998.                                                                   $   50,866     $    50,866
                                                                                ==========     ===========

     The note to Brite Voice Systems, Inc. is currently in dispute and beginning
     April 1996, the Company has discontinued  the accrual of interest  expense.
     Interest  expense  charged to  operations  related  to the note  payable to
     outside  parties was $-0- for each of the years ended March 31, 1999,  1998
     and 1997, respectively.

     Notes payable to related parties include:                                        1999           1998
                                                                                ----------     ----------

     Note  payable to a director and officer,  dated  September 1, 1994,  due on
     December 31, 1998, and unsecured, interest was payable semi-annually at the
     rate of prime +2 (8.5% at March 31,  1998).  This note was  converted  into
     15,000 shares of common stock on September 30, 1998.                       $        0     $    7,500

     Notes  payable to Pegasus  Settlement  Trust (PST),  a  stockholder  of the
     Company.  The beneficiary and a trustee of PST are officers of the Company.
     The notes are  unsecured  and bear interest at rates ranging from 9% to 10%
     and prime rate (8.5% at March 31,  1999 and 1998)  with the  principal  and
     accrued  interest payable at maturity on various dates through December 31,
     1998.  Subsequent to the balance sheet date,  the notes were converted into
     787,928 shares of common stock on April 6, 1999.                              590,946        590,946

     Notes payable to a stockholder of the Company and several affiliated trusts
     of which the stockholder is the trustee.  The notes were unsecured and bore
     interest at rates ranging from 9% to 10% and prime (8.5% at March 31, 1998)
     with  principal  and  accrued  interest  payable at various  dates  through
     December 31, 1998. These notes were converted into 869,276 shares of common
     stock on September 3, 1998.                                                         0        348,300

     Note payable to an officer dated May 20, 1996, secured by common stock with
     principal and accrued  interest due at maturity on May 20, 1998.  This note
     was converted into 33,975 shares of common stock on
     September 30, 1998.                                                                 0         10,000

     Notes payable to a stockholder of the Company.  The notes are unsecured
     and bear interest at 10% per annum with the principal and interest due
     on various maturity dates through October 16, 1999.                           100,000              0
                                                                                ----------     ----------

          Total related party notes payable                                     $  690,946     $  956,746

          Less current portion                                                     100,000        956,746
                                                                                ----------     ----------

          Long-term portion                                                     $  590,946     $        0
                                                                                ==========     ==========
</TABLE>


                                      F-12


<PAGE>


                                               PREFERRED VOICE, INC.

                                           NOTES TO FINANCIAL STATEMENTS





     Related  party  notes  payable  that  were   converted  into  common  stock
subsequent  to  the  balance  sheet  date  have  been  classified  as  long-term
liabilities in the accompanying 1999 balance sheet.

     Interest  expense charged to operations  related to the related party notes
payable was  $64,199,  $86,172  and $83,257 for the years ended March 31,  1999,
1998 and 1997, respectively.

NOTE D - LONG-TERM DEBT:
<TABLE>
<CAPTION>

     Long-term debt consisted of the following at March 31, 1999 and 1998:

                                                                                   1999           1998
                                                                                ----------     ----------

<S>                                                                             <C>            <C>
     8.5% convertible debentures due September 27, 1996, convertible into shares
     of common  stock at a  conversion  price of $1.50 per share,  interest  was
     payable on December 27, 1995, and at maturity. This note was converted into
     27,881 shares of common stock on June 30, 1998.                            $        0     $   35,000

     12% convertible  debentures due December 25, 1997,  convertible into shares
     of common  stock at a  conversion  price of $.87 per share.  Principal  and
     interest were payable on demand at maturity.  Convertible  debentures  were
     secured by a media purchase credit (see Note J). These notes were converted
     into 367,816 shares of common stock on September 30, 1998.                          0        320,000

     Notes payable  dated  various dates from May 20, 1996 through  September 9,
     1996,  secured by common stock with  principal and accrued  interest due at
     maturity on various dates through  September 9, 1998.  216,250  warrants to
     purchase  shares of common  stock at $3.00 per share  expiring  on  various
     dates  through  September  9, 1998 were issued to the note  holders.  These
     notes were converted into 1,555,458 shares of common stock on various dates
     through March 31, 1999.                                                        60,000        805,000

     Notes payable to Bisbro  Investments  Co., Ltd. The notes are unsecured and
     bear  interest  at 10% per annum with the  principal  and  interest  due on
     various maturity dates through January 5, 2000. These notes are convertible
     into  shares  of  common  stock at a  conversion  price of $.50 per  share.
     Subsequent to the balance sheet date, the notes were converted into 120,000
     shares of common stock on June 18, 1999.                                       60,000              0



                                      F-13


<PAGE>


                                               PREFERRED VOICE, INC.

                                           NOTES TO FINANCIAL STATEMENTS



     Notes  payable to Universal  Asset Fund,  Ltd. The notes are  unsecured and
     bear  interest  at 10% per annum with the  principal  and  interest  due on
     various   maturity  dates  through  November  25,  1999.  These  notes  are
     convertible  into shares of common stock at a conversion  price of $.50 per
     share. Subsequent to the balance sheet date, the notes were converted
     into 80,000 shares of common stock on June 18, 1999.                           40,000              0

     Notes payable to Capital Growth Fund, Ltd. The notes are unsecured and bear
     interest at 10% per annum with the  principal  and  interest due on various
     maturity dates through August 14, 1999.  These notes are  convertible  into
     shares of common stock at a conversion price of $.50 per share.  Subsequent
     to the balance sheet date, the notes were converted into 186,000 shares of
     common stock on June 18, 1999.                                                 93,000              0

     Note payable to Equity Communication.  This note is unsecured, non-interest
     bearing, and due upon demand.                                                  10,000              0

     Note payable to an individual. This note is unsecured and bears interest at
     12% per annum with the principal  and interest due on March 30, 2000.  This
     note is convertible  into shares of  common stock at  a conversion price of
     $1.00 per share.                                                               43,000              0
                                                                                ----------     ----------

                                                                                $  306,000     $1,160,000
     Less current portion                                                           53,000      1,160,000
                                                                                ----------     ----------

     Total                                                                      $  253,000     $        0
                                                                                ==========     ==========
</TABLE>

     Current  maturities of long-term debt  obligations that were converted into
common  stock  subsequent  to the  balance  sheet date have been  classified  as
long-term liabilities in the accompanying 1999 balance sheet.

     Interest  expense  charged to operations  related to the long-term debt was
$112,553, $92,625 and $86,530 for the years ended March 31, 1999, 1998 and 1997,
respectively.

     During  the  year  ended  March  31,  1997,  $75,000  of  8.5%  convertible
debentures  were converted  into 50,000 shares of common stock.  During the year
ended March 31, 1998, $30,000 of 8.5% convertible debentures were converted into
20,000 shares of common stock and $160,000 of 12%  convertible  debentures  were
converted into 183,908  shares of common stock.  During the year ended March 31,
1999, $348,300 of 10% notes payable were converted into 869,276 shares of common
stock, $35,000 of 8.5% convertible  debentures were converted into 27,881 shares
of common stock,  $320,000 of 12%  convertible  debentures  were  converted into
367,816 shares of common stock, $745,000 of 7% notes payable were converted into
1,555,458 shares of common stock and $17,500 of notes payable to officers of the
Company were converted into 48,975 shares of common stock.

NOTE E - COMMON STOCK:

STOCK PURCHASE WARRANTS
-----------------------

   At March 31, 1999, the Company had outstanding warrants to purchase 2,605,500
shares of the Company's common stock at prices which ranged from $0.20 per share
to $4.88 per share. The warrants are exercisable at any time and

                                      F-16


<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS


expire on dates  ranging  from August 31, 1999 to March 31,  2004.  At March 31,
1999, 2,605,500 shares of common stock were reserved for that purpose.

COMMON STOCK RESERVED
---------------------

     At March 31, 1999,  shares of common stock were  reserved for the following
purposes:


Exercise of stock warrants                                        2,605,500
Exercise and future grants of stock
   options and stock appreciation rights                            423,000
                                                                  ---------

                                                                  3,028,500
                                                                  =========

NOTE F - 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 carryforwards.
Deferred  income taxes are classified as current or noncurrent  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 noncurrent  depending on the years in
which the temporary differences are expected to reverse.


     The provision for income taxes consists of:




                                             1999         1998         1997
                                         -----------  -----------  -------------

Current income taxes                     $         0  $         0  $           0

Change in deferred income taxes due
     to temporary differences            $         0  $         0  $           0
                                         -----------  -----------  -------------

                                         $         0  $         0  $           0
                                         ===========  ===========  =============




                                      F-15


<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS


     Deferred tax (liabilities) assets consist of the following:


                                                     1999               1998
                                                ---------------    ------------

Accumulated depreciation                        $       (30,000)   $    (22,000)
                                                ---------------    ------------

Gross deferred tax liabilities                  $       (30,000)   $    (22,000)
                                                ---------------    ------------

Accounts receivable                             $             0    $     29,000
Accrued liabilities                                       2,000           2,000
Start-up expenditures                                     7,000          18,000
Net operating loss carryforward                       2,010,000       1,727,000
                                                ---------------    ------------

Gross deferred tax assets                       $     2,019,000    $  1,776,000
Valuation allowance                                  (1,989,000)     (1,754,000)
                                                ---------------    ------------

Net deferred tax assets                         $        30,000    $     22,000
                                                ---------------    ------------

                                                $             0    $          0
                                                ===============    ============

<TABLE>
<CAPTION>

                                                     1999               1998             1997
                                                ---------------    --------------    -------------
<S>                                             <C>                <C>               <C>
The increases in the deferred
     tax valuation allowance are as follows:    $       235,000    $      128,000    $     566,000
                                                ===============    ==============    =============

</TABLE>


     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,  1999,  a net  operating  loss
carryforward  of  approximately  $5,910,000  which can be used to offset  future
taxable income through the year 2019.

NOTE G - STOCK OPTION PLAN:

     On November 1, 1994,  the Company  adopted a stock award and incentive plan
which permits the issuance of options and stock appreciation  rights to selected
employees and independent  contractors of the Company. The plan reserves 450,000
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.


                                      F-16


<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS


     Under the terms of the 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.  During the year
ended March 31,  1997,  options to purchase  27,000  shares were  exercised at a
price of $0.01 per share. At March 31, 1999,  options to purchase 382,750 shares
at  exercise  prices  of $0.20 to $1.25 per  share  had been  granted.  No stock
appreciation rights had been granted at March 31, 1999.

NOTE H - STOCK OPTIONS:

     The per share  weighted-average  fair value of stock options granted during
the year ended March 31, 1999 was $0.98,  on the date of grant,  using the Black
Scholes  Option-Pricing  Model.  All stock options granted during the year ended
March 31,  1997 were  subsequently  forfeited.  The  following  weighted-average
assumptions were used in the pricing model:


                                        1999                    1998
                               ----------------------   ------------------------

Expected dividend yield                0.00%                      0.00%

Risk-free interest rate           5.06% - 5.09%               5.62% - 5.65%

Expected life                  2.5 years to 3.5 years     1.5 years to 2.5 years


     The Company  applies APB  Opinion  No. 25 in  accounting  for its plan 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:


                                    1999              1998              1997
                              --------------    ---------------   --------------

Net loss:
  As reported                 $     (690,598)   $     (381,991)    $ (1,708,672)
                              ==============    ==============     ============

  Proforma                    $     (841,514)   $     (424,637)    $ (1,708,672)
                              ==============    ==============     ============

Loss per common share:
  As reported                 $        (0.10)   $        (0.07)    $      (0.33)
                              ==============    ==============     ============

  Proforma                    $        (0.12)   $        (0.08)    $      (0.33)
                              ==============    ==============     ============



                                      F-19


<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS


NOTE I - COMMITMENTS AND CONTINGENCIES:

LEASE COMMITMENTS
-----------------

     The company has entered into a  non-cancelable  operating  lease for office
facilities under a lease arrangement commencing on February 3, 1998 and expiring
on December 31, 2003.

     Minimum future rentals to be paid on non-cancelable  leases as of March 31,
1999 for each of the next five years and in the aggregate are:


            YEAR ENDING
             MARCH 31,                                   AMOUNT
          ---------------                           ----------------

               2000                                   $       73,766
               2001                                          101,060
               2002                                          103,540
               2003                                          104,856
               2004                                           80,364
                                                      --------------

                                                      $      463,586
                                                      ==============


     Total rent expense charged to operations was $27,416,  $64,463 and $128,475
for the years ended March 31, 1999, 1998 and 1997, respectively.

NOTE J - BARTER TRANSACTION:

     On June 3, 1996, the Company  entered into a media  purchase  agreement for
the  promotion  of its  products  and services  with  Proxhill  Marketing,  Ltd.
(Proxhill).  Under the terms of the agreement, the Company committed to purchase
$1,200,000 of media  advertising  time in exchange for 200,000  shares of common
stock at a value of $4.00 per share,  and $400,000 in cash. The agreement is for
a period of five years. For each purchase of media advertising time, the Company
will receive a barter credit equal to 66.67% of the  transaction  value with the
remaining  balance  payable in cash.  A prepaid  barter  credit in the amount of
$761,018 and $800,000 is included in other  assets in the  accompanying  balance
sheet as of March  31,  1999 and 1998,  respectively.  In  connection  with this
agreement,  the Company  issued to  Proxhill  50,000  warrants  to purchase  the
Company's common stock at a price of $4.00 per share. The options expire June 3,
2001.

NOTE K - SALE - LEASEBACK TRANSACTION:

     The Company entered into a  sale-leaseback  arrangement  during each of the
years ended March 31, 1999 and 1998. Under these arrangements,  the Company sold
telecommunications  equipment  and  leased it back for a period of three  years.
Both leases were  originally  accounted  for as  operating  leases.  The gain of
$66,119 and $70,124 realized in these  transactions had originally been deferred
and  amortized to income in  proportion  to rental  expense over the term of the
lease.  In November  1998,  the Company agreed to issue 579,971 shares of common
stock to the lessor in exchange for the release of the  liability for all future
and past due lease payments.





                                      F-18



<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS


NOTE L - DISCONTINUED OPERATIONS:

     On February 4, 1997, the Company entered into an agreement with Brite Voice
Systems, Inc. (BVS) to sell to BVS its long distance telecommunications services
business.  The assets sold  consisted of property and equipment  and  intangible
assets.  The selling price was $743,000.  Accordingly,  the operating results of
the long distance telecommunications services business have been segregated from
continuing  operations and reported separately in the accompanying  statement of
operations.  The Company has restated its prior financial  statements to present
the operating results of the long distance  telecommunications services business
as a discontinued operation.

     Operating results  (exclusive of any corporate charges or interest expense)
from discontinued operations are as follows:


                                     1999              1998             1997
                                 -----------       -----------      -----------

Net sales                        $         0       $         0      $   771,937
                                 -----------       -----------      -----------

Costs and expenses:
  Cost of sales                  $         0       $         0      $   899,192
  Sales and marketing expenses             0                 0          661,206
  General and administrative
      expenses                             0                 0          577,086
                                 -----------       -----------      -----------

  Total costs and expenses       $         0       $         0      $ 2,137,484
                                 -----------       -----------      -----------

Loss before income taxes         $         0       $         0      $(1,365,547)

Provision for income taxes                 0                 0                0
                                 -----------       -----------      -----------

Loss from operations             $         0       $         0      $(1,365,547)
                                 ===========       ===========      ===========

NOTE M - EXTINGUISHMENT OF DEBT:

     During  the  years  ended  March  31,  1999,  1998 and  1997,  the  Company
negotiated  settlements of amounts owed to certain of its vendors and employees.
The  negotiated  settlements  resulted in a reduction of the Company's  accounts
payable and accrued  operating  expenses in the amount of $88,828,  $217,442 and
$253,694,  respectively, which has been reported as an extraordinary item in the
accompanying statements of operations.

NOTE N -  GOING CONCERN:

     The Company has  incurred  substantial  operating  losses to date.  In June
1995, the Company  issued 600,000 shares of its common stock to Star  Resources,
Inc.  (Star),  a  public  company,   for  $24,000.  The  Company  then  filed  a
registration statement with the Securities and Exchange Commission to allow Star
to  distribute to its  stockholders  the 600,000  shares of common  stock.  Upon
completion  of the Star  distribution,  the  Company  became a  separate  public
company.  The Company has raised,  and intends to continue to raise,  additional
capital  through  subsequent  offerings of its common stock in  over-the-counter
securities markets.

     On June 3, 1999, the Company entered into a software license agreement with
KMC Telecom Holdings, Inc. (KMC). Under the terms of the agreement, KMC paid the
Company an initial license fee of $570,000.  The agreement is for a period of 10
years and provides for a total of 39 installations and grants KMC the ability to
add up to 81

                                      F-19


<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS


additional installations.  The agreement also calls for KMC to pay the Company a
monthly  license fee ranging  from $1,000 to $3,500 per month for each  software
and hardware  installation  beginning in the 25th month after each installation.
The Company  anticipates  having the initial 39 installations  completed by June
2000  which  would  obligate  KMC to pay the  Company  monthly  license  fees of
$131,500,  subject to certain  adjustments,  beginning  July 2002 and continuing
through July 2009.

     In view of these  matters,  realization of a major portion of the assets in
the  accompanying  balance sheet is dependent upon  continued  operations of the
Company,  which in turn is  dependent  upon the  Company's  ability  to meet its
financing  requirements,  and the success of its future  operations.  Management
believes  that actions  presently  being taken to meet the  Company's  financial
requirements  will  provide the Company the  opportunity  to continue as a going
concern.




                                      F-20


<PAGE>




                                    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 two (2)  persons, G. Ray
Miller and Mary G. Merritt. The following table sets forth information about all
Directors  and  executive  officers of the Company and all persons  nominated or
chosen to become such:


<TABLE>
<CAPTION>

NAME AND BUSINESS ADDRESS                             AGE                    OFFICE                       YEAR FIRST ELECTED
-------------------------                             ---                    ------                            DIRECTOR
                                                                                                              --------
<S>                                                    <C>          <C>                                          <C>
G. Ray Miller                                          60           Director, Chief Executive
                                                                      Officer and President                      1994

Mary G. Merritt                                        42           Director, Vice President-                    1994
                                                                           Finance and
                                                                       Secretary/Treasurer

Richard K. Stone                                       39            Vice President-Sales and                    N/A
                                                                             Marketing

Robert R. Williams                                     50             Vice President-Software                    N/A
                                                                            Development
</TABLE>

         Mr. Miller is a founder of the Company. He has served as an Officer and
Director of the Company  since May,  1994; he has been Chief  Executive  Officer
since June,  1994 and President  since April 1997.  Prior to the founding of the
Company, Mr. Miller founded United Medicorp Inc. ("United Medicorp") 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 time, Mr. Miller served in executive capacities
with  International  Telecharge,  Inc., an operator services company;  Automatic
Radius  Management,  Inc.  ("ARM"),  a security alarm service company;  and U.S.
Telephone,  Inc., a long distance  carrier.  After leaving United Medicorp,  Mr.
Miller managed personal investments until he began work at the Company.

         Ms.  Merritt is a founder of the Company and has been a director  since
May, 1994.  She has served as Vice  President - Finance and  Secretary/Treasurer
since  inception.  She  served  as  President  of Star of Texas,  Inc.,  a trust
management  account  service from 1989 to May 1994.  She 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,  her
last position being senior manager for entrepreneurial services.

         Mr.  Stone  joined the Company in December  1998 as Vice  President  of
Sales and Marketing after serving for two years as a Vice President of Sales and
Marketing for US Metrolines  and Director of National  Accounts at Matrix,  both
Jensen UICI  Companies.  Before that from June 1994 to March 1996,  he served as
Co-Founder/President of Telecable Communications, Inc. and from February 1991 to
June 1994 Director of Sales at Value Added Communications. All of the businesses
in which Mr.  Stone has  worked are  telecommunications  providers  servicing  a
customer base similar to that which the Company currently serves.

         Mr. Williams  joined the  Company in  January 1998 as Vice President of
Software   Development  bringing  25  years  experience  in  system  design  and
development.  During 1990, Mr. Williams worked with Voice Control Systems, Inc.,
a company in the speech recognition field, as a software programmer.  After that
he served as Vice  President of Engineering  for ActionFax,  Inc. for 5 years, a
company that designed multi-dialing and other fax related services. From 1995 to
1998, Mr. Williams owned and operated Business Hotlines,  a software development
company

                                       19


<PAGE>




headquartered  in  Dallas,  Texas.  He  also  worked  in  the  Central  Research
Laboratory  at Texas  Instruments  on the  development  team that  delivered the
world's first commercially available voice-mail system for VMX, Inc.

         The Company is not aware of any "family  relationships"  (as defined in
Item 401(c) of Regulation S-B  promulgated by the Commission)  among  directors,
executive  officers,  or persons  nominated  or chosen by the  Company to become
directors or executive officers.

         Except as set forth  above,  the  Company is not aware of any event (as
listed in Item 401(d) of Regulation  S-B  promulgated  by the  Commission)  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
its Chief  Executive  Officer  during the fiscal year ended March 31,  1999.  No
other executive officer earned in excess of $100,000.

                               ANNUAL COMPENSATION



NAME/PRINCIPAL                YEAR ENDING                               WARRANTS
POSITION                        MARCH 31               SALARY           GRANTED
--------                        --------               ------           -------

G. Ray Miller-Chief               1999                 $47,333          250,000
Executive Officer                 1998                  $6,000          200,000
                                  1997                 $30,000

No other stock options were granted to the aforementioned executive officer.

<TABLE>
<CAPTION>

                                        OPTIONS GRANTED IN LAST FISCAL YEAR


                                    NUMBER OF
                                   SECURITIES             % OF TOTAL OPTIONS          EXERCISE OR
                                   UNDERLYING            GRANTED TO EMPLOYEES          BASE PRICE          EXPIRATION
NAME                           OPTIONS GRANTED(#)           IN FISCAL YEAR               ($/SH)               DATE
----                           ------------------        --------------------         -----------             ----
<S>                                <C>                           <C>                     <C>                <C>
G. Ray Miller                      250,000(1)                    33.6%                   $0.84              3/31/2004

<FN>
1  All warrants are currently exercisable.
</FN>
</TABLE>

     ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following  table sets forth, as of the close of business on October
31, 1999,  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-B  promulgated  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-B promulgated 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 October 31, 1999.


                                       20


<PAGE>




                          BENEFICIAL OWNERSHIP (1), (2)


                                                   NUMBER OF
NAME OF BENEFICIAL OWNER                            SHARES            PERCENTAGE
------------------------                            ------            ----------

Pegasus Settlement Trust (3)                      2,715,667              23.74%

G. Ray Miller (4)                                   630,250               5.30%

Mary G. Merritt(5)                                3,480,642              29.52%

Lawrence E. Steinberg(6)                          1,419,276              12.30%

G. Tyler Runnels(7)                                 662,421               5.77%

Capital Growth Fund Ltd(8)                          778,971               6.60%

All Directors, and executive
 officers as a group (four
 persons)(9)                                      4,110,892              34.65%


1)   The  rules of the SEC  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  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  11,440,990  shares  outstanding  on October 31,  1999.  Shares of
     Common  Stock  subject to options  that are  exercisable  within 60 days of
     November 19, 1999, 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)   Pegasus  Settlement  Trust is a Channel  Islands  Trust of which SG Hambros
     Trust Company  (Jersey)  Limited of 7 the Esplanade,  St.  Helier,  Jersey,
     Channel  Islands is Trustee,  and Mary  Merritt is  protector,  with shared
     voting and dispositive  power. G. Ray Miller is the sole beneficiary of the
     Trust.  Pegasus  Settlement  Trust's  address is % SG Hambros Trust Company
     (Jersey) Limited, 7 The Esplanade,  St. Helier, Jersey, Channel Islands JE4
     8RT.

4)   Includes  450,000 shares issuable upon exercise of warrants.  Mr. Miller is
     the  sole  beneficiary  of the  Pegasus  Settlement  Trust  but is not  the
     beneficial  owner of the common stock owned by the Trust because Mr. Miller
     does not exercise voting or investment power over such shares. Mr. Miller's
     address is 6500 Greenville, Suite 570, Dallas, Texas 75206.

5)   Includes  350,000 shares  issuable upon exercise of warrants,  6,000 shares
     held by her minor children, and 2,715,667 shares held by Pegasus Settlement
     Trust. Ms. Merritt's address is 6500 Greenville,  Suite 570, Dallas,  Texas
     75206.

6)   Includes  100,000  shares  issuable  upon  exercise of warrants held by Mr.
     Steinberg and 228,140  shares in trusts of which he is the Trustee,  two of
     which his children are beneficiaries.  Mr. Steinberg's  address is 5420 LBJ
     Freeway, LB 56, Dallas, Texas 75240.

7)   Includes  43,000 shares  issuable upon exercise of warrants.  Mr.  Runnels'
     address is 1999 Avenue of the Stars, Suite 2530, Los Angeles, CA 90067.

8)   Does not  include  120,000  shares and 360,000  warrants  held by Bisbro or
     80,000  shares and 160,000  warrants  held by  Universal  who have the same
     Chief Financial  Officer,  Badar Al-Rezaihan,  who the Company  understands
     exercises  voting  and  investment  power with  respect to such  shares and
     warrants held by Bisbro,  Universal and Capital. The number of shares owned
     by Bisbro includes 20,000 shares issued in the name of Bisbro upon exercise
     of the warrants  held by Mr.  Al-Rezaihan  individually.  Includes  360,000
     shares issuable upon exercise of warrants.

9)   Includes the shares described in footnotes 4 and 5.



                                       21


<PAGE>





             ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On October 2, 1995,  Badar  Al-Rezaihan  was issued a warrant to purchase 20,000
shares  of  common  stock  at an  exercise  price  of $0.20  per  share  with an
expiration date of October 1, 1998. The Company  extended the warrant to October
1, 1999  before  which time Mr.  Al-Rezaihan  exercised  his warrant to purchase
20,000 shares and the shares were issued in the name of Bisbro.  Mr. Al-Rezaihan
received  the  warrant in  consideration  of his  assistance  to the  Company in
creating and  maintaining  international  market contacts to provide the Company
with capital investment.

On April 23, 1998,  the Company  issued two new warrants,  a warrant to purchase
200,000  shares of common stock of the Company at an exercise price of $1.00 per
share on or before November 12, 1999 to Bisbro and a warrant to purchase 100,000
shares of common stock of the Company at an exercise price of $1.00 per share on
or before  November  12, 1999 to Invest.  On October 5, 1999,  Bisbro  exercised
22,000 of the warrant  shares and a new warrant was issued for 178,000 shares of
common stock.  Also on October 5, 1999, both Bisbro's and Invest's warrants were
extended to November  12, 2000 and  repriced  from $1.00 to $1.25.  The previous
warrants  were granted in  connection  with a Regulation S offering  made by the
Company in 1995.

On May 1, 1998, the Company entered a sale lease back agreement with Capital,  a
beneficial  owner of 5% or more of the  Company's  stock,  whereby it sold a VIP
System to Capital for $100,000 and then leased it back for 36 months.

On August 3, 1998, Capital agreed to lend $83,000 to the Company. In return, the
Company  issued  Capital its  promissory  note in the amount of $83,000  bearing
interest at a rate of 10% per annum due on August 3, 1999.  On August 14,  1998,
Capital  agreed to lend $10,000 to the Company.  In return,  the Company  issued
Capital its promissory note in the amount of $10,000 bearing  interest at a rate
of 10% per annum due on August 14, 1999. Both of those notes were converted into
shares of common stock at a  conversion  price of $0.50 per share for a total of
186,000 shares on June 18, 1999.

On September 3, 1998, the Company  issued  Lawrence E.  Steinberg,  a beneficial
owner of 5% or more of the Company's  stock,  751,136  shares of common stock at
$0.39  per  share  for  $302,100  that the  Company  owed to him on  outstanding
promissory notes.

On September 3, 1998, the Company  issued the Lawrence E.  Steinberg  Charitable
Remainder  Trust,  a Texas trust of which  Lawrence E.  Steinberg  is a trustee,
75,180  shares of common stock at a $0.39 per share for $29,400 that the Company
owed to the trust on outstanding promissory notes.

On September 3, 1998, the Company issued the Ilana S. Steinberg Trust A, a Texas
trust for the benefit of one of Lawrence  E.  Steinberg's  children of which Mr.
Steinberg  is a trustee,  21,480  shares of common  stock at $0.39 per share for
$8,400 that the Company owed to the trust on outstanding promissory notes.

On September 3, 1998, the Company issued the Adam J. Steinberg  Trust A, a Texas
trust for the benefit of one of Lawrence  E.  Steinberg's  children of which Mr.
Steinberg  is a trustee,  21,480  shares of common  stock at $0.39 per share for
$8,400 that the Company owed to the trust on outstanding promissory notes.

On  September  3, 1998,  Lawrence E.  Steinberg  agreed to loan  $100,000 to the
Company.  In return, the Company issued Mr. Steinberg its promissory note in the
amount of $50,000  bearing  interest at a rate of 10% per annum due on September
3, 1999, and its promissory note in the amount of $50,000 bearing  interest at a
rate of 10% per annum due on October 16, 1999 and a warrant to purchase  100,000
shares of common  stock at a price of $1.00 per share on or before  October  16,
2001.  The notes due on  September  3, 1999 and October  16, 1999 are  currently
delinquent.

On October 1, 1998, Bisbro agreed to loan $20,000 to the Company. In return, the
Company  issued to Bisbro its promissory  note in the amount of $20,000  bearing
interest  at a rate of 10% per  annum  due on  October  1,  1999.  This note was
converted  into shares of common stock at a conversion  price of $0.50 per share
for 40,000 shares on June 18, 1999.


                                       22


<PAGE>




On October 1, 1998,  Universal agreed to loan $20,000 to the Company.  In return
the Company  issued to Universal  its  promissory  note in the amount of $20,000
bearing  interest  at a rate of 10% per annum due on October 1, 1999.  This note
was  converted  into shares of common stock at a  conversion  price of $0.50 per
share for 40,000 shares on June 18, 1999.

On November 10, 1998,  Bisbro  agreed to loan $30,000 to the Company.  In return
the  Company  issued to Bisbro  its  promissory  note in the  amount of  $30,000
bearing  interest at a rate of 10% per annum due on November 10, 1999. This note
was  converted  into shares of common stock at a  conversion  price of $0.50 per
share for 60,000 shares on June 18, 1999.

On  November 5, 1998  Capital  converted  the amounts  owed to it by the Company
under  the  Company's   outstanding  lease  obligations  under  Equipment  Lease
Agreements  dated  March 18,  1998 and May 1, 1998  into  579,971  shares of the
Company's common stock.

On November 25, 1998, Universal agreed to loan $20,000 to the Company. In return
the Company  issued to Universal  its  promissory  note in the amount of $20,000
bearing  interest at a rate of 10% per annum due on November 25, 1999. This note
was  converted  into shares of common stock at a  conversion  price of $0.50 per
share for 40,000 shares on June 18, 1999.

On January 5, 1999, Bisbro agreed to loan $10,000 to the Company.  In return the
Company  issued to Bisbro its promissory  note in the amount of $10,000  bearing
interest  at a rate of 10% per  annum  due on  January  5,  2000.  This note was
converted  into shares of common stock at a conversion  price of $0.50 per share
for 20,000 shares on June 18, 1999.

On March 30, 1999,  G. Tyler  Runnels,  a beneficial  owner of 5% or more of the
Company's stock,  agreed to lend $43,000 to the Company.  In return, the Company
issued to Mr.  Runnels  its  promissory  note in the amount of  $43,000  bearing
interest at a rate of 12% per annum due on March 30,  2000.  The note was repaid
with  interest on June 16,  1999.  On March 31,  1999,  the  Company  issued Mr.
Runnels a warrant to purchase 43,000 shares of common stock of the Company at an
exercise price of $0.50 per share on or before March 31, 2004.

On March 31, 1999, the Company issued G. Ray Miller, the Chief Executive Officer
and a director of the Company,  a warrant to purchase  250,000  shares of common
stock of the Company at $0.84 per share on or before March 31, 2004. The warrant
was issued for Mr. Miller's past work for the Company.

On March 31,  1999,  the Company  issued Mary  Merritt,  the Vice  President  of
Finance and a director of the Company,  a warrant to purchase  250,000 shares of
common stock of the Company at an exercise price of $0.84 per share on or before
March 31,  2004.  The  warrant  was issued for Ms.  Merritt's  past work for the
Company.




                                       23


<PAGE>




                 ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

(a) Exhibits


Exhibit
Number       Description of Exhibit
-------      ----------------------

3.1  Certificate of Incorporation of Preferred/telecom,  Inc. filed on August 3,
     1992 with the Secretary of State of Delaware  (Incorporated by reference to
     Exhibit  3.1  to  the  Company's   Registration   Statement  on  Form  S-1,
     registration no. 33-92894)

3.2  Certificate of Amendment,  filed on May 2, 1994 with the Secretary of State
     of Delaware  (Incorporated  by  reference  to Exhibit 3.2 to the  Company's
     Registration Statement on Form S-1, registration no. 33-92894)

3.3  Certificate  of  Amendment,  filed on March 21, 1995 with the  Secretary of
     State  of  Delaware  (Incorporated  by  reference  to  Exhibit  3.3  to the
     Company's Registration Statement on Form S-1, registration no. 33-92894)

3.4  Certificate  of  Amendment,  filed on July 27, 1995 with the  Secretary  of
     State of Delaware  (Incorporated  by  reference to Exhibit 3.5 to Amendment
     No. 1 to the Company's Registration Statement on Form S-1, registration no.
     33-92894)

3.5* Certificate  of  Amendment,  filed on March 7, 1997 with the  Secretary  of
     State of Delaware

3.6  Bylaws of Preferred/telecom, Inc. (Incorporated by reference to Exhibit 3.4
     to the  Company's  Registration  Statement  on Form S-1,  registration  no.
     33-92894)

4.1  Specimen  Certificate  evidencing Common Stock of  Preferred/telecom,  Inc.
     (Incorporated  by  reference to Exhibit 4.1 to the  Company's  Registration
     Statement on Form S-1, registration no. 33-92894)

10.1*Form of Warrant Certificate and Schedule of Warrant Certificates

10.2*Office  Building  Lease  between  Greenville  Avenue  Properties,  Ltd. And
     Preferred Voice, Inc.

10.3*Collocation  License  Agreement  between NEXTLINK Texas, Inc. and Preferred
     Voice, Inc.

10.4*Promissory Note to Capital Growth Fund Ltd., in original  principal  amount
     of $83,000.00, dated as of August 3, 1998

10.5*Promissory Note to Capital Growth Fund Ltd., in original  principal  amount
     of $10,000.00, dated as of August 14, 1998

10.6*Promissory Note to Lawrence E. Steinberg,  in original  principal amount of
     $50,000.00, dated as of September 3, 1998

10.7*Promissory  Note to Bisbro  Investments  Co.,  Ltd., in original  principal
     amount of $20,000.00, dated as of October 1, 1998

10.8*Promissory Note to Universal Asset Fund Ltd., in original  principal amount
     of $20,000.00, dated as of October 1, 1998

10.9*Promissory Note to Lawrence E. Steinberg,  in original  principal amount of
     $50,000.00 dated as of October 16, 1998

10.10*Promissory Note to Bisbro  Investments  Co.,  Ltd., in original  principal
      amount of $30,000.00, dated as of November 10, 1998

10.11*Promissory Note to Universal Asset Fund Ltd., in original principal amount
      of $20,000.00, dated as of November 25, 1998

10.12*Promissory Note to Bisbro  Investments  Co.  Ltd.,  in original  principal
      amount of $10,000.00, dated as of January 5, 1999

10.13*Software License  Agreement   between  KMC  Telecom  Holdings,   Inc.  and
      Preferred Voice, Inc.+

10.14*Promissory Note to G.  Tyler  Runnels,  in  original  principal  amount of
      $43,000.00, dated as of March 30, 1999

10.15*Equipment Lease between  Capital  Growth Fund,  Ltd. and Preferred  Voice,
      Inc. and Amendment No. 1 to Lease Agreement+

10.16*Equipment Lease between  Capital  Growth Fund,  Ltd. and Preferred  Voice,
      Inc. and Amendment No. 1 to Lease Agreement+

10.17*First Amendment  to  Lease  between  Dallas  Office  Portfolio,   L.P.  as
      successor in interest to Greenville Avenue Properties,  Ltd. and Preferred
      Voice, Inc.

10.18*Master Distributor  Agreement  between  In  Touch  Solutions,  L.L.C.  and
      Preferred Voice, Inc.



                                       24


<PAGE>






10.19*Master Distributor Agreement between Answering Service, Inc. and Preferred
      Voice, Inc.

10.20*Master Distributor Agreement between Amerivoice  Telecommunications,  Inc.
      and Preferred Voice, Inc.

10.21*Master  Distributor   Agreement  between  Voicenet  New  Media,  Inc.  and
      Preferred Voice, Inc.

10.22*Master Distributor Agreement between Best Voice, Inc. and Preferred Voice,
      Inc.

10.23*Master Distributor  Agreement  between  Nomis  Communications,   Inc.  and
      Preferred Voice, Inc.

10.24*Master Distributor Agreement between Florida Wireless and Preferred Voice,
      Inc.

10.25*Master Distributor  Agreement between Voice Retrieval,  Inc. and Preferred
      Voice, Inc.

10.26*Software  License  Agreement   between  Rural  Cellular   Corporation  and
      Preferred Voice, Inc.

10.27*Marketing Agreement  between  Rural  Cellular  Corporation  and  Preferred
      Voice, Inc.+

10.28*Software License Agreement  between  Southwest Texas Telephone Company and
      Preferred Voice, Inc.

10.29*Marketing  Agreement   between   Southwest  Texas  Telephone  Company  and
      Preferred Voice, Inc.+

10.30*Software License Agreement  between Kaplan Telephone Company and Preferred
      Voice, Inc.

10.31*Marketing Agreement  between Kaplan Telephone Company and Preferred Voice,
      Inc.+

10.32*Software License Agreement between Midwest Wireless Communications, L.L.C.
      and Preferred Voice, Inc.

10.33*Marketing Agreement  between Midwest Wireless  Communications,  L.L.C. and
      Preferred Voice, Inc.+

27*   Financial Data Schedule

*Filed herewith

+Confidential materials  deleted and  filed separately  with the  Securities and
 Exchange Commission

(b)      Reports on Form 8-K

          None.
                                       25


<PAGE>




                                   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: November 29, 1999                            By:  /s/ G. Ray Miller
                                                        ------------------------
                                                        G. Ray Miller, President


         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.

<TABLE>
<CAPTION>

                  SIGNATURE                                       OFFICE                                 DATE
                  ---------                                       ------                                 ----
<S>                                            <C>                                              <C>
/s/ G. Ray Miller
---------------------------                    President, Chief Executive Officer and           November 29, 1999
G. Ray Miller                                  Chairman of the Board of Directors
                                               (Principal Executive Officer)

/s/ Mary G. Merritt                            Secretary, Treasurer and Vice President          November 29, 1999
---------------------------                    of Finance
Mary G. Merritt


</TABLE>



                                          26


<PAGE>


                               INDEX TO EXHIBITS


Exhibit
Number       Description of Exhibit
-------      ----------------------

3.1  Certificate of Incorporation of Preferred/telecom,  Inc. filed on August 3,
     1992 with the Secretary of State of Delaware  (Incorporated by reference to
     Exhibit  3.1  to  the  Company's   Registration   Statement  on  Form  S-1,
     registration no. 33-92894)

3.2  Certificate of Amendment,  filed on May 2, 1994 with the Secretary of State
     of Delaware  (Incorporated  by  reference  to Exhibit 3.2 to the  Company's
     Registration Statement on Form S-1, registration no. 33-92894)

3.3  Certificate  of  Amendment,  filed on March 21, 1995 with the  Secretary of
     State  of  Delaware  (Incorporated  by  reference  to  Exhibit  3.3  to the
     Company's Registration Statement on Form S-1, registration no. 33-92894)

3.4  Certificate  of  Amendment,  filed on July 27, 1995 with the  Secretary  of
     State of Delaware  (Incorporated  by  reference to Exhibit 3.5 to Amendment
     No. 1 to the Company's Registration Statement on Form S-1, registration no.
     33-92894)

3.5* Certificate  of  Amendment,  filed on March 7, 1997 with the  Secretary  of
     State of Delaware

3.6  Bylaws of Preferred/telecom, Inc. (Incorporated by reference to Exhibit 3.4
     to the  Company's  Registration  Statement  on Form S-1,  registration  no.
     33-92894)

4.1  Specimen  Certificate  evidencing Common Stock of  Preferred/telecom,  Inc.
     (Incorporated  by  reference to Exhibit 4.1 to the  Company's  Registration
     Statement on Form S-1, registration no. 33-92894)

10.1*Form of Warrant Certificate and Schedule of Warrant Certificates

10.2*Office  Building  Lease  between  Greenville  Avenue  Properties,  Ltd. And
     Preferred Voice, Inc.

10.3*Collocation  License  Agreement  between NEXTLINK Texas, Inc. and Preferred
     Voice, Inc.

10.4*Promissory Note to Capital Growth Fund Ltd., in original  principal  amount
     of $83,000.00, dated as of August 3, 1998

10.5*Promissory Note to Capital Growth Fund Ltd., in original  principal  amount
     of $10,000.00, dated as of August 14, 1998

10.6*Promissory Note to Lawrence E. Steinberg,  in original  principal amount of
     $50,000.00, dated as of September 3, 1998

10.7*Promissory  Note to Bisbro  Investments  Co.,  Ltd., in original  principal
     amount of $20,000.00, dated as of October 1, 1998

10.8*Promissory Note to Universal Asset Fund Ltd., in original  principal amount
     of $20,000.00, dated as of October 1, 1998

10.9*Promissory Note to Lawrence E. Steinberg,  in original  principal amount of
     $50,000.00 dated as of October 16, 1998

10.10*Promissory Note to Bisbro  Investments  Co.,  Ltd., in original  principal
      amount of $30,000.00, dated as of November 10, 1998

10.11*Promissory Note to Universal Asset Fund Ltd., in original principal amount
      of $20,000.00, dated as of November 25, 1998

10.12*Promissory Note to Bisbro  Investments  Co.  Ltd.,  in original  principal
      amount of $10,000.00, dated as of January 5, 1999

10.13*Software License  Agreement   between  KMC  Telecom  Holdings,   Inc.  and
      Preferred Voice, Inc.+

10.14*Promissory Note to G.  Tyler  Runnels,  in  original  principal  amount of
      $43,000.00, dated as of March 30, 1999

10.15*Equipment Lease between  Capital  Growth Fund,  Ltd. and Preferred  Voice,
      Inc. and Amendment No. 1 to Lease Agreement+

10.16*Equipment Lease between  Capital  Growth Fund,  Ltd. and Preferred  Voice,
      Inc. and Amendment No. 1 to Lease Agreement+

10.17*First Amendment  to  Lease  between  Dallas  Office  Portfolio,   L.P.  as
      successor in interest to Greenville Avenue  Properties, Ltd. and Preferred
      Voice, Inc.

10.18*Master Distributor  Agreement  between  In  Touch  Solutions,  L.L.C.  and
      Preferred Voice, Inc.



                                       27


<PAGE>






10.19*Master Distributor Agreement between Answering Service, Inc. and Preferred
      Voice, Inc.

10.20*Master Distributor Agreement between Amerivoice  Telecommunications,  Inc.
      and Preferred Voice, Inc.

10.21*Master  Distributor   Agreement  between  Voicenet  New  Media,  Inc.  and
      Preferred Voice, Inc.

10.22*Master Distributor Agreement between Best Voice, Inc. and Preferred Voice,
      Inc.

10.23*Master Distributor  Agreement  between  Nomis  Communications,   Inc.  and
      Preferred Voice, Inc.

10.24*Master Distributor Agreement between Florida Wireless and Preferred Voice,
      Inc.

10.25*Master Distributor  Agreement between Voice Retrieval,  Inc. and Preferred
      Voice, Inc.

10.26*Software  License  Agreement   between  Rural  Cellular   Corporation  and
      Preferred Voice, Inc.

10.27*Marketing Agreement  between  Rural  Cellular  Corporation  and  Preferred
      Voice, Inc.+

10.28*Software License Agreement  between  Southwest Texas Telephone Company and
      Preferred Voice, Inc.

10.29*Marketing  Agreement   between   Southwest  Texas  Telephone  Company  and
      Preferred Voice, Inc.+

10.30*Software License Agreement  between Kaplan Telephone Company and Preferred
      Voice, Inc.

10.31*Marketing Agreement  between Kaplan Telephone Company and Preferred Voice,
      Inc.+

10.32*Software License Agreement between Midwest Wireless Communications, L.L.C.
      and Preferred Voice, Inc.

10.33*Marketing Agreement  between Midwest Wireless  Communications,  L.L.C. and
      Preferred Voice, Inc.+

27*   Financial Data Schedule

*Filed herewith

+Confidential materials  deleted and  filed separately  with the  Securities and
 Exchange Commission





                                       28