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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, 2004



| ̈ | 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:



|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of Each Class |  | Name of Each Exchange on Which Registered
|NONE                |  | N/A                                      



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

(Title of
class)



Check whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days.



Yes x No ̈



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: $1,631,785



The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of June 25, 2004 was approximately $4,164,527. For purposes of
this computation, all executive officers, directors and 10% stockholders were deemed affiliates. Such a determination should not be construed as an admission that such executive officers, directors or 10% stockholders are affiliates.



As of June 25, 2004, there were 29,607,493 shares of the common stock, $0.001 par value, of
the registrant issued and 29,584,993 shares outstanding.



Transitional Small
Business Disclosure Format: Yes ̈No x



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Preferred Voice, Inc.



|                                                                                                                        |  |     
|----------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                        |  | Page
|PART I                                                                                                                  |  |     
|Item 1. Description of Business                                                                                         |  | 1   
|Item 2. Description of Properties                                                                                       |  | 13  
|Item 3. Legal Proceedings                                                                                               |  | 13  
|Item 4. Submission of Matters to a Vote of Security Holders                                                             |  | 13  
|                                                                                                                        | 
|PART II                                                                                                                 |  |     
|Item 5. Market for Common Equity and Related Stockholder Matters                                                        |  | 13  
|Item 6. Managements Discussion and Analysis or Plan of Operations                                                      |  | 16  
|Item 7. Financial Statements                                                                                            |  | 20  
|Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure                            |  | 20  
|                                                                                                                        | 
|PART III                                                                                                                |  |     
|Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act |  | 21  
|Item 10. Executive Compensation                                                                                         |  | 22  
|Item 11. Security Ownership of Certain Beneficial Owners and Management                                                 |  | 24  
|Item 12. Certain Relationships and Related Transactions                                                                 |  | 25  
|Item 13. Exhibits, List and Reports on Form 8-K                                                                         |  | 25  
|Item 14. Controls and Procedures                                                                                        |  | 26  
|                                                                                                                        | 
|SIGNATURES                                                                                                              |  | 27  





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PART I



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



Item 1: Description of Business



Background of
the Company



We integrate and market enhanced services to
phone companies, to complement their overall package of voice services. Our key product, the Voice Integrated Platform (VIP system or the system), successfully integrates both speech recognition and non-speech recognition
applications within the same platform. Our speech recognition applications incorporate Scansofts Speech Pearl Natural Dialog speech recognition technology, with our proprietary software application. The system is designed to utilize standard
industry hardware and a microprocessor-based computing system, with a Windows 2000-series Server operating system that fits into a standard rack that can be placed in the phone companys switch room or can be remotely accessed through a
telephony network. With the VIP system, a subscriber to our services can use natural conversational speech to access a variety of enhanced service applications.



We were incorporated in Delaware in 1992 under the name of Direct Connect, Inc. and began operations in the telecommunications industry under the name
of Preferred Telecom, Inc. in April 1994. We began as a long distance telecommunications carrier with a variety of enhanced services; however, in February 1997 we sold a number of assets, including our end-user customer base to Brite Voice Systems,
Inc. We elected to sell these assets because we believed that the growth prospects of this aspect of the business were limited. We have 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 phone companies.



The Market and Market Strategy



Cell Phone Companies



Cell phone companies had
an estimated 158 million subscribers nationwide at the end of December 2003. We believe that the number of wireless subscribers will increase to approximately 172 million subscribers by the end of 2004. The FCC has licensed spectrum for up to eight
operators per market in each of the 734 FCC designated cellular markets in the United States, Puerto Rico, Virgin Islands, Guam and other Territories and U.S. possessions. Wireless phones are now a mass-market consumer device with an overall
wireless penetration rate of 49% of the U.S. population. We believe cell phone companies need to capitalize on this growth and that they want to differentiate themselves from each other to be competitive. Therefore, many are beginning to offer their
subscribers enhanced services, including voice messaging, e-mail reading, short message services, content delivery and voice activated services.



Local Telephone Companies



Local telephone companies comprise the largest market of telecommunications providers. The Federal Communications Commission (FCC) reported in
May of 2004 in its report on Local Telephone Competition that by the end of 2003 there were at least 1,300 such telephone companies providing over 155 million of the approximately 183 million end-user service lines nationwide (carriers
with under 10,000 lines in a state were not required to report to the FCC). Local telephone companies already have an existing subscriber base, and we believe that many desire to add enhanced service options to increase revenue and deter potential
competition. The FCC reported in its Statistics of Communications Common Carrier report for year ended December 31, 2002 that in 2002 alone, local telephone common carriers spent over $9 billion on upgrading to digital central office
switches. These switches enable carriers to provide their subscribers the latest enhanced services. We believe many local telephone companies have already begun to utilize outboard platforms for certain call processing services, such as



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pre-paid calling cards, as well as voice mail; however, we believe that the convenience of our VIP system will draw many local telephone companies to use our
collocated systems.



Competitive Local Telephone Companies



As of December 2003, there were approximately 350
facilities based competitive local telephone companies nationwide, providing approximately 26.9 million end-user service lines nationwide. We believe that competitive local telephone companies will secure more than 15% of the $l60 billion local
exchange market by 2004. We, therefore, believe that the competitive local telephone market will provide a significant marketing opportunity over the next two years.



Government Regulation



The Telecommunications Act of 1996 requires telecommunications providers to look for new solutions to provide disabled persons equal access to their
systems. Our VIP system may be able to provide a solution for phone companies 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. Our 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.



Many state governments have also proposed legislation regarding the use of cellular phones while driving, The National Conference of State Legislatures has reported that bills similar to the one passed by the New York legislature have been
proposed by state legislators in at least 39 states. At least a dozen municipalities have passed laws requiring use of a hands-free cell phone while driving or banning hand-held cell phone use. Legislation of this sort, if continued to be enacted,
would require cellular telephone companies to provide hands-free enhanced services so that they can keep generating revenue from their subscribers, who make many of their calls while on the road. We believe that our voice activated dialing, along
with the hands-free speaker phones and headsets already available in the market, will provide cell phone companies with a means of complying with the proposed legislation and make those cell telephone companies that choose to make our product and
services available to their customers leaders in the industry.



Our initial marketing efforts are focused on telecommunications providers, primarily cell phone companies. Greater marketing effort will address local telephone companies with subscriber bases of 10,000 and above, and competitive local
exchange carriers, or competitive local telephone companies, in the near future. The cell phone market has grown from approximately 69 million subscribers in 1998 to approximately 158.7 million subscribers as of December 2003, and as prices for
cellular use drop, cellular use is becoming affordable to more economic segments of the population. These companies are already offering some enhanced services to their subscribers, such as voice mail, call forwarding, call waiting and caller
identification systems. In order to remain competitive, however, cell phone companies, local telephone companies, and competitive local telephone companies, need to provide their subscribers more enhanced services. We believe that our VIP system,
with its enhanced speech recognition services, provides a solution to satisfy this need.



Our Market Strategy



We
utilize direct mail and personal sales calls to contact and market our VIP system and services to phone companies in the markets we have targeted. We initially begin our efforts with a direct mail piece that introduces our system and services and
specifically addresses questions we believe the various decision makers within an organization might have from network integration to financial considerations. We then follow up with personal sales calls. We utilize trade shows as a means to present
our product and to network with our potential customerscell phone companies, local telephone companies and competitive local telephone companies.



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



| |  | Target whole subscriber bases. We believe that if the consumer will try our enhanced services, they will like them and utilize them. We utilize an opt
out program to the wireless phone companies who contract with us for our voice dialing application. It allows them to provide voice dialing services to their entire subscriber base at a reduced revenue share arrangement. All subscribers of a
contracting cell phone company that elects our opt out program are provided the service and are billed for such
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | service unless the subscriber opts out after a trial period. See Description of BusinessOpt-Out Contract. This allows the
subscriber to test the services without affirmatively subscribing for the speech services we are offering through their cell phone company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Continue to enhance our phone company customer relationships. We consider our relationships with our phone company customers to be strategic. Our long-term revenue sharing
agreements allow us to plan a joint, strategic deployment of services to a contracting phone companys subscribers. Once a market becomes familiar with basic voice dialing services, we intend to introduce other voice services.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | Technological enhancements. We believe that we provide high quality, reliable speech recognition and non-speech recognition services to consumers through phone companies. We
intend to continue to develop services that we believe will enhance the services we are already providing or for which we believe there is a viable market.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Primary Markets



Cell Phone Companies. Of the approximately 700 cellular telephone markets in the United States, there are approximately 400 rural service areas and
300 metropolitan service areas that have multiple cell phone companies serving the same markets. The local telephone companies and cell phone companies are the two primary markets in which we have focused our marketing efforts, offering these phone
companies a revenue sharing opportunity. We focus on these markets because the phone companies in these markets have an existing subscriber base. We believe that many cell phone companies want to offer the benefits of speech recognition services to
their subscribers in order to maintain their subscriber base, but the cell phone companies often find such services to be cost prohibitive. We will provide and install our VIP system without charge. Our VIP system platform is designed to work in a
cell phone companys central office collocated alongside its central office switch or can be remotely connected through voice over internet protocol (VOIP). Unlike many other enhanced service companies boxes, our VIP system is connected
to the switch via industry standard, high-volume circuits, each of which is capable of carrying twenty-four (24) simultaneous calls.



The ease of installation and the fact that we do not charge for the box or installation make our system a cost effective option for smaller cell phone
companies. However, we have entered into a revenue sharing arrangement with different cell phone companies based upon the revenue generated through sales of the enhanced services to recoup our costs and generate profits. Generally, we contract to
receive seventy percent (70%) of the first $215,000 of revenue generated by sale of our services to end users and decrease the revenue share down to thirty percent (30%) once we have recovered $415,000 from the contract. Most of our contracts
require that the phone companies generate at least $2,000 per month per system for us, based upon varied revenue sharing arrangements, or pay the difference if that amount is not reached otherwise we have the right to terminate the contract.



The cell phone companies who contract with us are responsible
for billing and collecting revenue generated from the VIP systems enhanced services. However, our VIP system can produce subscriber information for marketing or billing use.In addition, we assist each phone company in marketing the
services by providing various co-branded advertising materials we have designed and by training the contracting cell phone companys sales force and customer service staff. As of June 25, 2004, we are providing voice dial and other enhanced
services to nineteen carriers subscribers and generating revenues for the cell phone companies and us.



Local telephone companies. We believe that our revenue sharing market strategy is the most economically viable method for many local telephone
companies to provide speech recognition enhanced services to their subscribers. We will regain focus on marketing to local telephone companies with less than 100,000 access lines again this year. We intend to market to larger telephone companies
after we establish a strong market presence in the medium and smaller telephone company market. As with the cell phone companies, we will again offer local telephone companies the VIP system and installation without charge. We recoup our costs in
the revenue sharing arrangements we have negotiated with them. These arrangements are based on the same percentages used with the cell phone companies with whom we contract. Local telephone companies, like cell phone companies, are responsible for
billing and collecting, and like the cell phone companies they also receive our assistance in



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marketing the VIP systems enhanced services. We have already entered into revenue sharing arrangements with eighteen (18) local telephone companies,
but at this time we are not providing service through any carrier.



Standard Local Telephone Company/Cell Phone Company Contract. We use a substantially similar form of software license agreement and marketing agreement with each of the local telephone companies and cell phone companies who contract
with us. The software license agreement grants each contracting phone company a license to use our software and all subsequent improvements to the software in the local telephone companys or cell phone companys local calling areas. We
retain title to the software and require that those who contract with us keep all information related to the software confidential. The term of our software license agreement coincides with that of our marketing agreement.



Our marketing agreements have provisions to remain in effect for up to ten
years. Most of our agreements are for an initial five year term which automatically renews unless cancelled by either party on 60 days notice prior to the anniversary date of the agreement after the initial term. In our marketing agreement, we
agree to install our VIP system at the switch location and we commence testing following installation. If we are unable to cure any material deficiency of the system within thirty (30) days from the date the testing commenced, then either we or the
contracting phone company may terminate the contract on thirty (30) days written notice. However, if our tests do not reveal any material deficiencies, then we submit the system to the contracting phone company for testing for a period of
thirty (30) days. If the contracting phone company finds any problems in its testing, it must provide us with notice of the problems by the end of the thirty (30) day testing period or an acceptance certificate for the VIP system. If neither notice
of problems nor an acceptance certificate is provided to us by the end of the phone companys thirty (30) day testing period, then the contracting phone company is deemed to have accepted the VIP system.



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



Opt-Out Contract. We have instituted a new contract
arrangement for cell phone companies. We have either signed an addendum to our standard cell phone company contracts that were already in place or we have executed new contracts with new cell phone companies to provide an opt-out
service. In these new or amended contracts, the phone companies have agreed to put their entire subscriber base onto the VIP systems voice activated dialing service. After receiving the service, any of the companys subscribers may elect
not to continue the service, effectively opting out of the voice activated dialing service program. However, for those subscribers that do not opt-out, the contracting cell phone company will typically pay us fifty percent
(50%) of all revenue generated from such subscribers for all services to which the cell phone companys subscriber base has subscribed, but the company must typically pay us the greater of $1.00 per subscriber per month for the Safety Talk
(Safety Dialing) service or fifty percent (50%) of the revenue generated from the Safety Talk service, as part of the revenue share arrangement for the service. The fifty percent (50%) revenue share split differs from the standard agreement in which
the split ranges from seventy percent (70%) to thirty percent (30%) depending on the amount of revenue obtained by the phone company through sale of our voice services to their subscribers. Under both the standard contract and the opt-out contracts,
the cell phone company pays us either a percentage of the revenues received from the phone companys subscribers for the services we offer in that area or a minimum amount for each of its subscribers subscribing to our services.



We have agreed in these addenda to contribute up to $0.50 per subscriber of
our Safety Talk revenue in the first three months of a new carrier launch to the advertising and market awareness budgets of our carrier customer. However, we believe that we could recover our advertising and implementation costs with respect to a
participating cell phone company under the opt-out contract within the first few months of service. Under our standard contract, we must make significant expenditures to market our product to contracting companies service areas so
that we can obtain initial subscribers. We may recover more of the revenue generated per subscriber under our standard contract by virtue of the higher percentages of the revenue split and the requisite fees to be paid by the phone company per
subscriber, but we may have fewer initial subscribers. The nature of the opt-out contract



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provides us initially with one-hundred percent (100%) of the subscriber base. We recognize that some subscribers will elect to opt-out, but we believe that
we are more likely to capture a greater number of subscribers because the service is automatically included until a subscriber opts out, or elects to discontinue the services. As a result we can charge less per subscriber who retains the
service and still realize greater overall revenues.



Secondary Markets



We have also marketed our
services to competitive local telephone companies. Competitive local telephone companies face a distinct challenge because they must rely on local telephone companies to provide the final link in the communications path to subscribers or expend
significant resources to build their own network. We are not currently focusing on competitive local telephone companies because most competitive local telephone companies do not currently have the subscriber base to support our revenue sharing
agreement.



We have signed a collocation agreement with XO
Communications, Inc. to place VIP system platforms in its central office switch locations in the Dallas, Miami, and Chicago areas. Under our agreement with XO, we are granted a license to install, operate and maintain our VIP system in XOs
switching center and in exchange we pay an initial fee and, then, monthly fees for such collocation. We have placed boxes in the Dallas area to service our own direct subscribers and the other two cities to service two of our master distributors.



In conjunction with the collocation agreement, we have signed
Master Distributor Agreements with several companies to market our services directly to the end user, in five large metropolitan areas. The companies and the markets they cover are the following:



| |  | Talk to Me Communications in Miami, Florida;
| | - | --------------------------------------------



| |  | Amerivoice Telecommunications, Inc. in Milwaukee, Wisconsin and Chicago, Illinois;
| | - | ----------------------------------------------------------------------------------



| |  | In Touch Solutions, L.L.C. in Myrtle Beach, South Carolina; and
| | - | ---------------------------------------------------------------



| |  | Nomis Communications, Inc. in Houston, Texas.
| | - | ---------------------------------------------



The form of master distributor agreement that has been signed by all participating master distributors allows the distributor to market and sell our
system services directly to the end user and through other distributors whom the master distributor is to identify and contact. We provide the master distributor marketing materials and collateral support. We may authorize other distributors in the
master distributors market area, but we agree to direct those distributors to work with the master distributor, who pays a fee to acquire the right to sell our VIP system services in a specific market. We initially provided the master
distributor with commissions for accounts acquired based upon the revenues billed and collected for such accounts. In 2002, we converted these agreements to wholesale agreements whereby the master distributor acquires the end-user, bills and
collects from the end-user and pays Preferred Voice a set fee per end-user.



Our Product and Services



Our proprietary
speech-interactive software, a part of the VIP system, is able to provide the local telephone companies and cell phone companies we target with a host of enhanced services and applications to help them offer services to their subscribers and
increase their revenues.



The Product



We have developed what we believe to be a unique system
that integrates Scansofts Speech Pearl Natural Dialog speech recognition software and our own proprietary software called the VIP system. We believe that the systems hardware and software provide a wide variety of speech enabled enhanced
services and non-speech enabled call processing services being sought by phone companies in a deregulated telecommunications industry. The system is versatile enough to 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 has been deployed in digital, CDMA, TDMA and GSM networks.



The VIP system is an intelligent call processing system that is capable of identifying subscribers. The system has the
capability of archiving call traffic information that may be retrieved and collected for marketing and billing purposes.It is also equipped with technology capable of monitoring, reloading and restarting itself in the event of system
failure.



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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 that 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 a phone companys switch. In many of its applications, the systems speech recognition software recognizes the words of the caller, and our own 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.



Each carrier customer must also have
release link capabilities in their switch. Of the predominant switch manufacturers, only Lucent and Nortel have release link capabilities in certain switches and frequently it is an upgrade that the carrier has not purchased which can run from
$20,000 to $100,000 per switch. In order to address this issue, we have developed a peripheral system access module (SAM) that provides real time switching, release link technology functionality, network access, call management and call control with
upper level intelligence and application control being provided by the VIP.



The VIP systems software currently incorporates several separate enhanced service applications that we have created with our own software. We use speech recognition technology created by Scansoft to process
natural dialogue speech in all applications that require speech recognition. 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. We have been granted a worldwide, non-exclusive perpetual license to use the speech recognition capabilities they have licensed to us in our VIP system.



The Services



We have designed a menu of services that serve as enhancements to our phone company customers basic services. Current enhancements typically offered
by telephone companies include touch-tone, speed dialing, call waiting, caller I.D., and voice mail. The following enhanced services are currently available through the VIP System for delivery to subscribers by participating providers:



Speech Enabled Services



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



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



My One Special Number. Using the locate technology that facilitates the Smart Line, our 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 phone companies or by us 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.



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



*Talk. Star Talk is a
speech recognition service that may be accessed by a residential or business telephone subscriber. 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



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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 system. By lifting the receiver or turning on the speakerphone and waiting three seconds, the telephone switch will automatically activate the system, and the system will prompt the subscriber to speak a name, number or
location to be dialed.



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 system. The subscriber then speaks a name, number or location from the personal directory that he or she previously created. The VIP 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 Direct. This application is designed for subscriber companies with multiple cell 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. Our 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 system will forward the call to the subscribers voice mail.



Business Connect/Electronic Talking Phone Book. This service allows a
phone company to load its entire database of business and residential subscribers into the system. Any person making a call in a participating phone company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 a local
telephone, competitive local telephone or cell phone companys current 411 service and provides local telephone companies, competitive local telephone companies and cell phone companies with a method for reducing their costs for directory
service operators. As with the 411 service, the local telephone, competitive local telephone and cell phone companies may also use the service to increase revenue by charging a nominal fee for the connection of a call. In the Electronic Talking
Phone Book, the local telephone, competitive local telephone and cell phone companies 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 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 subscriber for an additional 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 his or her personal voice directory.



Speech 2 Content. This application service allows a user to receive
internet content in an audio format by speaking different categories such as business, weather, horoscopes, entertainment and sports. For example, a user speaks business-NASDAQ report and he or she will hear the most current market
summary. The subscriber may also retrieve quotes on specific stocks.



Other Services



Push2Connect. This service is
designed to provide subscribers a private network for a group of phones. By pressing * and then the extension of the party, i.e. *1 for John Smith, a customer may ring the called parties phone. The service also has the ability to ring
several phones at once thereby providing a conference type feature.



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



Network Services. We have signed a contract with a web-hosting provider to provide our current services and new
services across their VOIP network. We have placed our VIP system in the providers data center that is connected by routers to their telephone network, allowing us to provide a centralized exchange for both speech recognition services and
non-speech recognition services. Because we are able to use that network, we are able to offer not only our own speech recognition services, but also a speech recognition portal through which voice portal providers, wireless application providers
and other enhanced service providers can develop, manage and deliver



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their services to both wireless and wireline carriers and those carriers subscribers. Our software is compatible in all major telecommunications switch
and network environments, including SS7, ISDN and IS41 protocols.



We believe that our non-speech services will provide us with new sources of revenue and an attractive addition to our current menu of services. We have developed several programs that allow the third party service provider to connect with a
potential subscriber base that allows those providers to take advantage of the networks economies of scale and ease of deployment to both carriers and providers. We believe our centralized network service platform can be a marketable
alternative for third party service providers.



To facilitate
the integration of services offered over the network with a carriers existing infrastructure, we have developed several call management and subscriber maintenance programs. Our call management programs provide for the collection, analysis and
reporting of call data by service offering. This data can be used to provide the carrier and service provider with information regarding empirical user trends, network usage and service functionality, all of which are necessary to the parties
technical and marketing analysis of the network services.



Competition



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



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



Customer Service



We
have developed an automated customer service called Help Me that can assist subscribers with questions regarding any of the applications to which the subscriber has subscribed. The automated Help Me has scripted instructions
that tell the subscriber how to use the different applications. Help Me has been programmed to pull up the particular scripted directions to explain how to use the services which the subscriber has chosen.



We train contracting phone companies customer service employees to be
able to answer standard questions related to the varying services we will provide through the VIP system, from product selection to individual product help such as how to put names in their voice directories, how to change phone numbers in their
directories, and how to dial a number not in a subscribers directory. Therefore, contracting phone companies employees, with the assistance of the Help Me service, should be able to answer the common questions subscribers
will have about their service.



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



Employees



As of June 25, 2004, we had 12 full time employees. None of our employees is represented by a labor organization. We maintain various employee benefit
plans and we believe we have excellent relations with our employees.



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Patents, Trademarks and Copyright



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



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



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



We have received registered trademarks from the United States Patent and Trademark Office for the following: Preferred/telecom, Preferred Voice, Secure
Card, Use Your Voice, BusinessConnect and Safety Talk. We have applied for patents on our Voice Integrated Platform and Method of Operation Thereof, Voice Integrated Platform and Method of Operation Thereof with Release Links, Method and Apparatus
That Provides a Reusable Voice Path in Addition to Release Link Functionality for Use with a Platform Having a Voice Activated Front End and Group Plan Manager. We have applied for trademarks related to our Push2Connect service. We have not yet
received confirmation of issuance of such patents or registration of such trademarks.



Core Technology and System Enhancement



We have spent the last six years developing and enhancing our proprietary software in conjunction with differing hardware platforms and development of switch integration to create the system. We estimate that we have
spent approximately $280,000 during the last two fiscal years in direct core technology enhancement. We continually evaluate and adjust our VIP system. The ever changing telephony and computer industry requires companies like ours to continue
developing new or improved methods to process applications and as new technology emerges new processes are created to better deploy our services. This year we achieved the conversion to our high-density database structure that will allow for a very
efficient and scalable network based service deployment platform. We currently have eight employees in our software/hardware development and deployment department.



Certain Risk Factors



Risks Related to Our Business



Limited revenue history.



Because our commercial offerings of applications through the VIP system are at an early stage, we are yet to derive enough revenue from the services to
meet our ongoing monthly needs. We began actively marketing the VIP system at the end of 1998 but did not commence our current line of service offering until the end of 2000. Accordingly, we have a limited operating history upon which our business
and prospects may be evaluated. One should consider our prospects in light of the risks, expenses and difficulties frequently encountered by companies in an early stage of development, particularly companies in new and rapidly evolving markets, such
as the voice recognition market. Some of the risks, expenses and difficulties we face are the following:



| |  | reliance on the few phone companies with which we have deployed our services;
| | - | -----------------------------------------------------------------------------



| |  | creating recognition and more widespread acceptance of enhanced services, in particular voice recognition services;
| | - | -------------------------------------------------------------------------------------------------------------------



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| |  | significant capital outlays related to installment and deployment of the VIP system and services prior to recognition of any revenue;
| | - | -------------------------------------------------------------------------------------------------------------------------------------



| |  | reliance on significant equity investment to continue operations; and
| | - | ---------------------------------------------------------------------



| |  | need to retain key management and software development personnel in a competitive labor market.
| | - | -----------------------------------------------------------------------------------------------



Our inability to address these risks, expenses and difficulties could harm our business.



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



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



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



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



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



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



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



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



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



In addition, we cannot provide any assurance that we will be able to effectively manage potential conflicts in our strategic relationships, that economic conditions or industry demand will not adversely affect the
phone



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



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



Our success depends to a large extent upon our proprietary technology. We regard our software applications as proprietary and rely primarily on a combination of contract, copyright, trademark and trade secret law to
protect our proprietary rights. We have no patents on our products currently in commercial use, and we have not yet registered any of the marks related to our applications, although we are in the process of applying for patents and registering
trademarks on several of our products and service applications. The source code for our proprietary applications is protected by trade secret and copyright laws. It is our policy to enter into confidentiality agreements with our employees to protect
our software, documentation and other written materials under trade secret and copyright laws.



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



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



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



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



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



After we sign a revenue sharing agreement with a contracting phone company, it may take substantial time and resources to deploy and integrate our
software and hardware into contracting telephone companies existing systems. Our current average time from signing of a contract to deployment is averaging approximately five months. Our agreement specifies acceptance criteria, and we will not
be able to recognize service revenue until each installation is accepted and services are provided and billed to the phone companys subscribers. In the case of carriers who have signed our opt-out contracts, those carriers do not
charge subscribers for the first month of service in order to provide the subscribers with the opportunity to opt out of the Safety Dialing service. Therefore, we will not recognize any revenue from the first month of service we provide under the
opt-out contracts. See BusinessOpt-Out Contract. We also have in the past and may in the future experience other unexpected delays in recognizing revenue. Consequently, the length of our sales and implementation cycles
makes it difficult to



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predict the quarter in which revenue recognition may occur and may cause service revenue and operating results to vary significantly from period to period.
These facts could cause our stock price to be volatile or to decline.



Our Marketing Agreements allow participating local telephone companies and cell phone companies to reject the VIP system after installation and testing is completed and are generally terminable after five years.



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



Risks
Related to Our Industry



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



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



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



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



The telecommunications services market is characterized by rapid technological change, changing consumer needs, frequent new product introductions and evolving industry standards. The introduction of products or
services embodying new technologies and the emergence of new industry standards could render our enhanced service applications obsolete and unmarketable.



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



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



Our phone company customers are subject to a number of government regulations and industry standards. Our products, services and applications must comply with these regulations and standards. Changes to these
standards may require us to make periodic changes to our products and services. In addition, we have based our assumptions as to the probability of acceptance of our services and the potential market for our services on the



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##### Index to Financial Statements

assumption that state and federal legislation related to disabled persons use of speech recognition applications and the regulation by state and
federal authorities of cellular telephone use while driving will drive demand. If such legislative action is not taken by regulatory authorities, it could have an adverse effect on our marketing efforts or even require us to expend significant
amounts of capital on developing modifications of our existing products and services or new products and services.



Item 2: Description of Properties



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



Item 3: Legal Proceedings



None



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



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



PART II



Item 5. Market for Common Equity and Related Stockholder Matters



The Common Stock is listed on the OTC Electronic Bulletin Board. We plan to apply for listing on the NASD BBX board when it becomes available. 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, 2004 and March 31, 2003. 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



|            |  |      |      |     |   |      
|----------- |  | ---- | ---- | --- | - | -----
|            |  | HIGH |      | LOW
|Fiscal 2003 |  |      |      |     |   |      
|1stQuarter  |  | $    | 1.30 |     | $ | 0.35 
|2ndQuarter  |  | $    | 0.44 |     | $ | 0.24 
|3rdQuarter  |  | $    | 0.30 |     | $ | 0.10 
|4thQuarter  |  | $    | 0.24 |     | $ | 0.11 
|            |  |     
|Fiscal 2004 |  |      |      |     |   |      
|1stQuarter  |  | $    | 0.16 |     | $ | 0.06 
|2ndQuarter  |  | $    | 0.16 |     | $ | 0.05 
|3rdQuarter  |  | $    | 0.12 |     | $ | 0.055
|4thQuarter  |  | $    | 0.11 |     | $ | 0.076



On June 25, 2004, the
closing bid price of the Common Stock as reported on the OTC Electronic Bulletin Board was $0.22.



As of June 25, 2004, there were approximately 650 holders of record of the Common Stock. We believe the number of beneficial owners is substantially
greater than the number of record holders because brokers for the benefit of individual investors hold a significant amount of outstanding common stock in street name.



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



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##### Index to Financial Statements

Recent Sales of Unregistered Securities



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



On September 3, 1998, Lawrence E. Steinberg agreed to loan us $100,000. In return, we issued Mr. Steinberg two promissory
notes 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 that were due on September 3, 1999 and October 16, 1999 were repaid on December 30, 1999, and the warrant was
exercised on October 16, 2001.



On September 30, 1998, Bisbro
and Universal agreed to lend us up to $100,000 in exchange for various promissory notes totaling $100,000 bearing interest at a rate of 10% per annum and warrants to purchase up to 100,000 shares. The following transactions were in conjunction with
that agreement:



| |  | On September 30, 1998, at the request of Bisbro, we issued each of JMG Capital Partners and Triton Capital Investments, Ltd. a warrant to purchase 25,000 shares of our common stock
at an exercise price of $1.00 per share on or before September 30, 2001. These warrants were exercised on June 8, 2001.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On December 10, 1999, we issued Steve Chizzik, Howard Isaacs, William Reininger and Elizabeth Valdes warrants to purchase an aggregate of 50,000 shares of
our common stock at an exercise price of $1.60 per share on or before December 10, 2001, for financial public relations services they performed for us. All of these warrants were exercised on December 7, 2001.



On September 8, 2000, we issued a number of warrants. We issued each of Peter
Foster, Tyler Runnels and Mohammed Hadid a warrant to purchase 20,000 shares of our common stock at an exercise price of $2.75 per share to be exercised on or before September 8, 2001, related to their service as advisory council members. We also
issued Robert Ramsdell a warrant to purchase 40,000 shares of our common stock on the same terms and also related to his service as an advisory council member. On September 8, 2001, Mr. Hadids warrant expired. On September 21, 2001, our board
of directors resolved to extend the expiration date of the warrants issued to Mr. Foster, Mr. Runnels and Mr. Ramsdell to September 8, 2003 for their continued service on the advisory council. We extended the expiration date of each of the warrants
so that they may now be exercised on or before September 8, 2003.



On October 1, 2001, Walter Oxley agreed to lend $50,000 to us. In return we issued a $50,000, 10% convertible note to Walter Oxley, due September 30, 2003. The note can be converted into common stock at the rate of $2.00 per share and a
warrant to purchase 7,500 shares at $2.50 on or before November 20, 2003. Nathan Schulhoff & Associates LLC also received a warrant to purchase 25,000 shares at an exercise price of $2.50 per share for certain financial advisory and consulting
services that were provided by it to the company on November 20, 2001.



Also on, November 20, 2001, we issued a number of warrants. We issued each of Peter Foster, Tyler Runnels, Robert Ramsdell and James Samargis a warrant to purchase 20,000 shares of our common stock at an exercise price of $1.50 per share to
be exercised on or before November 20, 2004, related to their service as advisory council members.



Three employees exercised their options to purchase a total of 75,118 shares of common stock. On December 20, 2001, we issued 5,000 shares of our common
stock to Darryll Whitfield at an exercise price of $1.03 per share pursuant to the exercise of an employee stock option. On December 24, 2001, we issued 6,784 shares of our common stock to William D. Sprague in a cashless exercise of his employee
stock option to purchase 30,000 shares of our common stock at an exercise price of $1.50 per share. The shares were issued on a net basis. Also on December 24, 2001, we issued 33,334 shares of our common stock to Bruce Newell at an exercise price of
$0.69 per share pursuant to the exercise of an employee stock option. Again on January 2, 2002, we issued 30,000 shares of our common stock to Mr. Newell at an exercise price of $1.03 per share pursuant to the exercise of an employee stock option.



On January 14, 2002, we issued 17,804 shares of our common
stock to Nat Orme pursuant to his exchange of a $10,000.00 promissory note and accrued interest totaling $17,487.74. The debt was converted at $0.98 per share pursuant to the terms stated in the promissory note.



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##### Index to Financial Statements

On February 1, 2002 we issued Ira Weingarten a warrant to purchase 40,000 shares of common stock of the
Company at an exercise price of $1.50 per share on or before February 2, 2005 for past public relations services he provided us.



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



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



On May 18, 2004, we completed the sale of 220
units consisting of Fifty Thousand (50,000) shares of the common stock of the Company and a warrant to purchase Twenty-Five Thousand shares of common stock at a purchase price of $5,000.00 per unit for an aggregate of $1.1 million. The Warrants are
exercisable for 5 years at an exercise price of $.12 per share of common stock, subject to adjustments to the exercise price and number of shares issued on exercise on standard events, such as recapitalization or reorganization. The investors
accreditation was determined by representations made by the respective investors regarding their accreditation in an investor questionnaire that accompanied each investors subscription agreement for the units purchased in the offering. T.R.
Winston & Company Incorporated acted as placement agent in connection with the sale of the Units and was granted warrants to purchase a number of shares of the Companys $.001 par value common stock equal to five percent (5%) of the total
funds raised in the offering, exercisable for five years thereafter at $.12 per share. The Company has agreed to file a registration statement to register the resale of the Common Stock and the shares issuable upon exercise of the Warrants within 90
days after the closing of the offering.



On November 21, 2001,
we issued 2,420,000 units consisting of one share of our common stock and one warrant to purchase one-half of a share of common stock at a purchase price of $1.25 per unit to thirteen (13) investors. The aggregate proceeds of the offering were
$3,025,000.00. The warrants are exercisable at an exercise price of $1.50 per share and are exercisable for 5 years, subject to adjustments to the exercise price and number of shares issued on exercise on standard events, such as recapitalization or
reorganization. The investors accreditation was determined by representations made by the respective investors regarding their accreditation in an investor questionnaire that accompanied each investors subscription agreement (the
Subscription Agreement) for the units purchased in the offering and we filed a Form D with the SEC in those states where such filing was required. T.R. Winston and Company Incorporated received an aggregate of ten percent (10%) of
$1,725,000 of the proceeds of the offering as a commission payable to them in cash for serving as placement agents on our behalf in this offering. The offer and sale of these securities was exempt from registration pursuant to Regulation D of the
Securities Act. The Subscription Agreement and the warrant agreement used in connection with this offering granted certain registration rights to the purchasers in the offering, as such we filed a registration statement on Form SB-2, as amended,
which has been declared effective by the SEC, registering the resale of the shares of common stock issued on the placement and the shares to be issued on exercise of the warrants issued in the offering.



On April 11, 2001, we issued 1,187,500 units consisting of one share of our
common stock and one warrant to purchase one-half (1/2) of a share of common stock at a purchase price of $2.00 per unit to fourteen (14) investors. The aggregate proceeds of the offering was $2,375,000.00. The warrants are exercisable at an
exercise price of $2.00 per share and are exercisable for 5 years, subject to adjustments to the exercise price and number of shares issued on exercise on standard events, such as recapitalization or reorganization of Preferred. The investors
accreditation was determined by representations made by the respective investors regarding their accreditation in an investor questionnaire that accompanied each investors subscription agreement for the units purchased in the offering and we
filed a Form D with the SEC and in those states where such filing was required. T.R. Winston received an aggregate of six percent (6%) of the proceeds of the offering as a commission payable to them in cash for serving as placement agent on our
behalf in this offering. The offer and sale of these securities was exempt from registration pursuant to Regulation D of the Securities Act.



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##### Index to Financial Statements

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



The following description of Managements Plan of Operation constitutes forward-looking statements for purposes of the Securities Act and
the Exchange Act and as such involves known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or
implied by such forward-looking statements. The words expect, estimate, anticipate, predict, believes, plan, seek, objective and similar expressions are
intended to identify forward-looking statements or elsewhere in this report. Important factors that could cause our actual results, performance or achievement to differ materially from our expectations 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) we are unsuccessful in increasing sales through its anticipated marketing efforts; 3) mistakes
in cost estimates and cost overruns; 4) our inability to obtain financing for general operations including the marketing of our products; 5) non-acceptance of one or more of our products in the marketplace for whatever reason; 6) our 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 adequately protect our intellectual property; 10) if we experience labor and/or employment problems such as the loss of key personnel, inability to hire and/or retain competent personnel, etc.; and 11) if we experience
unanticipated problems and/or force majeure events (including but not limited to accidents, fires, acts of God etc.), and are adversely affected by problems of its suppliers, shippers, customers or others. All written or oral forward-looking
statements attributable to us are expressly qualified in their entirety by such factors. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of unanticipated events. Notwithstanding the foregoing, we are not entitled to rely on the safe harbor for forward looking statements under 27A of the Securities Act or 21E of the
Exchange Act as long as our stock is classified as a penny stock within the meaning of Rule 3a51-1 of the Exchange Act. A penny stock is generally defined to be any equity security that has a market price (as defined in Rule 3a51-1) of less than
$5.00 per share, subject to certain exceptions.



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



Overview



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



In December of 1998, we realized that we would need extensive amounts of working capital to sell and market our services directly to individual consumers.
Therefore, we began researching venues which already had inherent customer or subscriber bases. The first distribution channel that we explored was the use of master distributors in various cities and states around the country. We believe the
distributors will be a source of direct subscriber addition. To date we have begun service deployment in Miami, Florida, and Chicago, Illinois. The second distribution channel is directly with Incumbent Local Exchange Carriers, or local telephone
companies, Wireless Communication Carriers, or cell phone companies, and Competitive Local Exchange Carriers, or competitive local telephone companies. This avenue of distribution is extremely attractive because these companies already have the
subscriber bases and the infrastructure to service large numbers of subscribers. Our third distribution channel is through our network services division which provides third party service application providers access to wireline and wireless
carriers through our voice over internet protocol (VOIP) network hosted by a web hosting provider.



We first attempted to sell our hardware and license our application software but after only one such agreement with KMC Telecom Holdings, Inc.
(KMC) we decided to pursue revenue sharing whereby we in most cases provide all hardware, software applications and support in exchange for a portion of revenue generated from the service provided by our customer to their subscribers.
Our entire sales force focuses on marketing our revenue sharing agreements and, to date, we have signed forty nine (49) local telephone company and cell phone company



16



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##### Index to Financial Statements

multi-year contracts. Nineteen contracts have been fully implemented so that the systems installed pursuant to such contracts are already generating revenues
for us. As of May 31, 2004, these nineteen contracts were generating revenues of approximately $82,000 per month from our primary product voice dial. The revenue sharing agreement is the primary method by which we intend to contract with customers
to generate revenue going forward but with some services will require a licensing fee to initiate the service.



We have spend this past fiscal year converting our systems structure to a robust data base system which will allow for scalability and addition of new
services to the platform in shorter development cycles than were possible under our previous structure. The conversion also included web access to our platform with Push2Connect being the first of our product line to be accessible to end users via
the web.



We have concentrated our efforts in searching for
services that our current carrier customers and potential carrier customers would like to provide their customers. We therefore contracted with a leading content provider to distribute their library of downloadable wireless games, picture messages,
graphics and ring-tones. Our first content project was launched on June 18, 2004 with a full turnkey solution for the carrier that includes secure customer login from the carrier website, viewing of content, download of content, and creation of a
billing record for the carriers billing system. We believe that since we already have a relationship with the carrier and are integrated with most of these carriers customer service department and billing department that we have an opportunity to
introduce new products with minimal integration effort. We will continue to research and either develop or acquire additional services that can be deployed through our platform.



The implementation of our business plan is subject to risks inherent in the establishment and deployment of technology with
which consumers have limited experience. We believe our services are services that any consumer who uses a phone can utilize. For example, any cell phone user who wants to speak a name or use our dial number feature without punching buttons on his
cell phone would be a user, or a company who wants their employees accessed by the caller saying an employee name instead of asking the caller to punch in an extension or spell a name on the key pad. Our services are generic to cell phone users as
well as land line users, children as well as the elderly. As voice recognition becomes more prevalent in everyday life, such as in computer programs, reservation systems and telecommunications information systems, we believe the public will be more
apt to accept and utilize voice-related features. In order for us to succeed, we must:



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



| |  | establish and maintain relationships with phone companies;
| | - | ----------------------------------------------------------



| |  | make sure the VIP system works with the telephone switches of all of the major manufacturers;
| | - | ---------------------------------------------------------------------------------------------



| |  | streamline supply change to ensure timely delivery of hardware;
| | - | ---------------------------------------------------------------



| |  | achieve user acceptance for our services;
| | - | -----------------------------------------



| |  | generate reasonable margins on our services;
| | - | --------------------------------------------



| |  | continue to deploy and install VIP systems on a timely and acceptable schedule;
| | - | -------------------------------------------------------------------------------



| |  | respond to competitive market developments;
| | - | -------------------------------------------



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



| |  | continually update our product offerings to meet the needs of consumers.
| | - | ------------------------------------------------------------------------



Failure to achieve these objectives could adversely affect our business, operating results and financial condition.



Results of Operations



We currently provide our services to phone companies through revenue sharing
agreements that provide revenue splits ranging from seventy percent (70%) to thirty percent (30%) depending on the amount of revenue



17



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##### Index to Financial Statements

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



We recorded a net loss of $326,937, or $.02 per share, for the fiscal year ended March 31, 2004, compared to a net loss of
$1,251,953, or $.07 per share, for the fiscal year ended March 31, 2003, and a net loss of $3,835,115, or $.23 per share, for the year ended March 31, 2002. The decreased loss is a result of our efforts to reduce excess capacity in our network
facilities and general overhead.



Total Revenue



Total revenue for the fiscal year ended March 31, 2004,
was $1,631,785 compared to $2,124,876 and $1,474,465 for the fiscal years ended March 31, 2003 and 2002 respectively. The decrease of revenue reflects loss of subscribers in our opt-out program. Of the revenue booked for the fiscal year ended March
31, 2004, 99% was generated from revenue sharing agreements, and 1% from direct sale service fees for Emma the Perfect Receptionist and Smart Line. Of the revenue booked for the fiscal year ended March 31, 2003, 98% was
generated from revenue sharing agreements, and 2% from direct sale service fees for Emma the Perfect Receptionist and Smart Line. Of the revenue booked for the fiscal year ended March 31, 2002, 71% was generated from revenue
sharing agreements, 28% was generated from sales of our VIP systems network services, and 1% from direct sale service fees for Emma the Perfect Receptionist and Smart Line.



We anticipate that revenues from our revenue sharing agreements will grow
gradually in the fiscal year ending March 31, 2005, as we continue to deploy services with companies which have already signed revenue sharing agreements. We do not anticipate substantial revenue going forward from the sale of master
distributorships or from direct licensing of the VIP systems, such as was done in the KMC licensing agreement.



Cost of Sales



Cost of sales for the fiscal year ended March 31, 2004 was $517,304 compared to $761,185 and $462,311 for the fiscal years ended March 31, 2003 and 2002,
respectively. For the fiscal year ended March 31, 2004, 90% of the costs were for network infrastructure, such as collocations, connectivity, system access, and long-distance and 10% was for voice activated dialing market awareness programs in
carrier customer territories. For the fiscal year ended March 31, 2003, 85% of the costs were for network infrastructure, such as collocations, connectivity, system access, and long-distance and 15% was for voice activated dialing market awareness
programs in carrier customer territories. For the fiscal year ended March 31, 2002, 79% of the costs were for network infrastructure, such as collocations, connectivity, system access, and long-distance and 21% was for voice activated dialing market
awareness programs in carrier customer territories. Costs of sales for network infrastructure will continue to rise as more VIP systems are deployed to phone company customers.



Selling, General and Administrative



Selling, general and administrative expenses for the fiscal year ended March 31, 2004 were $1,597,665 compared to $2,805,827
and $4,854,006 for the fiscal years ended March 31, 2003 and 2002, respectively. The decrease from 2003 to 2004 was from an overall reduction in excess network and lease facilities. The decrease from 2002 to 2003 was primarily from a 33% reduction
of force in May of 2002.



We expect that selling, general and
administrative expenses will increase slightly through the fiscal year ending March 31, 2005, as we do have overhead expansion needs necessary to increase our sales, marketing and development activities.



Core Technology Enhancements Software Applications and Hardware



We have not expensed any research and development costs
for any of the periods stated on our financial statements, but we have accumulated costs of $994,199 for enhancement of our core software and hardware technology as of March 31, 2004 in comparison to $902,350 as of March 31, 2003. The increase in
expenditures is due to the continued enhancement of our core technology.



18



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##### Index to Financial Statements

Extraordinary Items



We have recognized income from the extinguishment of debt of $81,685, $236, and $11,992, respectively, for the fiscal years
ended March 31, 2004, 2003, and 2002. The Company settled a lawsuit on November 18, 2002 that required the company to pay $150,000 to KMC Telecom Holdings, Inc. a former customer. We have recognized $342,579 of previously deferred revenue related to
the customers deposit.



Income Taxes



As of March 31, 2004, we had cumulative federal net operating losses of
approximately $16.9 million, which can be used to offset future income subject to federal income tax through the fiscal year 2024. Net operating loss limitations may be imposed if changes in stock ownership of the company create a change of control
as provided in Section 382 of the Internal Revenue Code of 1986.



Liquidity and Capital Resources



Our cash and
cash equivalents at March 31, 2004 were $64,674, an increase of $8,914 from $55,760 at March 31, 2003. The Company has relied primarily on the issuance of stock and warrants to fund its operations since January of 1997 when we sold our long-distance
resale operation.



Net cash used for operating activities was
$55,328 for the year ended March 31, 2004 compared to $1,102,284 for the year ended March 31, 2003. Net cash provided by investing activities was $77,742 for the year ended March 31, 2004 compared to cash used for investing activities of $144,710
for the year ended March 31, 2003. Net cash used by financing activities was $13,500 for the year ended March 31, 2004 compared to $0.00 for the year ended March 31, 2003.



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



We have relied on the issuance of stock to fund our operations since January
of 1997 when we sold our long-distance resale operation. We began collecting revenues from our revenue sharing agreements in January of 2001. These revenues are approximately $82,000 per month but we expect these to continue to rise to a level to
meet our monthly cash requirements by January of 2005.



We have
also issued stock or convertible securities to fulfill certain obligations or motivate various people. We have issued warrants to purchase shares of our common stock in connection with services provided by various individuals and entities in their
capacity as members of our Board of Directors, Council of Advisors, various forms of consulting services, capital raising (such as a private offering), and marketing distributors. These warrants are always priced at the fair market value of our
common stock on the date of issuance. We have utilized our common stock as actual compensation in only one instance where 5,000 shares were issued as compensation for consulting services. These services were valued at total fair market value for the
5,000 shares on the date of completion of services.



Future Obligations



We project our working
capital needs to be $720,000 over the next six months for corporate overhead and equipment purchases to continue to deploy our services to carrier customers. Management believes that current cash and cash equivalents and cash that may be generated
from operations will be sufficient to meet these anticipated capital requirements and to finance steady growth for the next six months. Such projections have been based on revenue trends from current customers and customers which are already under
contract utilizing the revenue rates that we have experienced over the past six months with our currently installed customers and projected cash requirements to support installation, sales and marketing, and general overhead. We may be forced to
raise additional capital through the issuance of new shares, the exercise of outstanding warrants, or reduce our current overhead. However, any projections of future cash needs and cash flows are subject to substantial uncertainty.



19



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##### Index to Financial Statements

Item 7.
Financial Statements



PREFERRED VOICE,
INC.

FINANCIAL STATEMENTS

MARCH
31, 2004, 2003 and 2002



|                                            |  |    
|------------------------------------------- |  | ---
|Independent Auditors Report                |  | F-1
|Financial Statements                        |  |    
|Balance Sheets                              |  | F-2
|Statements of Operations                    |  | F-4
|Statement of Stockholders Equity (Deficit) |  | F-5
|Statement of Cash Flows                     |  | F-7
|Notes to Financial Statements               |  | F-9



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



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



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##### Index to Financial Statements

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 four
(4) people. The following table sets forth information about all of our Directors and executive officers and all persons nominated or chosen to become such:



|                          |  |     |  |                                                                                             |  |                            
|------------------------- |  | --- |  | ------------------------------------------------------------------------------------------- |  | ---------------------------
|Name and Business Address |  | Age |  | Office                                                                                      |  | Year First Elected Director
|Latif M. Nathani          |  | 36  |  | Chairman of the Board and Chief Executive Officer                                           |  | 2004                       
|                          |  |     | 
|Mary G. Merritt           |  | 47  |  | Director, Chief Operating Officer, Executive Vice President-Finance and Secretary/Treasurer |  | 1994                       
|                          |  |     | 
|G. Ray Miller             |  | 64  |  | Director                                                                                    |  | 1994                       
|                          |  |     | 
|Scott V. Ogilvie          |  | 49  |  | Director                                                                                    |  | 2000                       
|                          |  |     | 
|Bernard F. Bareis         |  | 43  |  | Vice President and Chief Technology Officer                                                 |  | N/A                        



Mr. Nathanijoined Preferred Voice in May of 2004 as Chairman and Chief Executive Officer bringing more than 10 years of leadership and entrepreneurial experience. Prior to joining Preferred Voice, Mr. Nathani served as Director of Marketing and Business
Development for the Natural Interactive Services Division (NISD) of Microsoft Corporation. Before spearheading NISD efforts to productize speech recognition, natural language and search technologies at Microsoft, Nathani founded the successful
eMemories.com that was later acquired by eCompanies. During his decade at Microsoft, Nathani co-founded the Systems Management Server (SMS) product group and the Speech products business group. He also had the unique experience of being an engineer
on the Windows NT 3.1 team and a marketer in the Microsoft Office 95/97 team. Currently, Nathani serves as chairman for Minecode LLC, based in Bellevue, Washington. He will retain his position as chairman at Minecode LLC.



Ms. Merritt is a founder of Preferred Voice and has been a director
since May, 1994. She has served as Interim Chief Executive Officer since January 2003 and has served as Executive 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 also served as Controller of United Medicorp for several months during 1992. Ms. Merritt is a certified public accountant and was employed by Ernst & Whinney from 1981 to 1989, her last
position being senior manager for entrepreneurial services.



Mr. Miller is a founder of Preferred Voice. He has served as a Director of the company since May 1994; he was Chief Executive Officer from June 1994 until June 10, 2002 and was President from April 1997 to May of 2001. Previously,
Mr. Miller founded United Medicorp Inc. in 1989 and served through February 1992 as Chairman of the Board and Chief Executive Officer. United Medicorp is a publicly-held corporation which manages medical insurance claims. Prior to that time, Mr.
Miller served in executive capacities with International Telecharge, Inc., an operator services company; Automatic Radius Management, Inc., a security alarm service company; and U.S. Telephone, Inc., a long distance carrier. After leaving United
Medicorp, Mr. Miller managed personal investments until he began work at Preferred.



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



Mr. Bareis joined Preferred Voice in March of 2003 and is currently serving as Vice President and Chief Technology Officer bringing over 20 years experience in multidisciplinary expertise in engineering and operations for data and
voice communications technology companies. From June of 1998 to July of 2000 Mr. Bareis was Vice



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##### Index to Financial Statements

President of Engineering and Operations for PremiseNET, Inc., a company that developed IP-based telecommunications switching and routing products and
interactive voice response systems. From there and until February of 2002, he was Vice President and General Manager of Mayan Networks, Inc., a company that developed optical communications switching and multiplexing equipment. From February of 2002
until his joining Preferred Voice, Mr. Bareis owned his own consulting services business which provided a wide variety of services in the telecommunications field.



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



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



Item 10. Executive Compensation



The following tables set forth the compensation paid by the Company to certain executive officers during the fiscal years ended March 31, 2004, 2003, and 2002.



Annual Compensation



|                                            |  |                    |  |        |         |       |   |                          |  |                                                                    |  |        
|------------------------------------------- |  | ------------------ |  | ------ | ------- | ----- | - | ------------------------ |  | ------------------------------------------------------------------ |  | -------
|Name/Principal Position                     |  | YearEndingMarch 31 |  | Salary |         | Bonus |   | Other AnnualCompensation |  | Long Term CompensationSecuritiesUnderlying OptionsWarrants Granted
|Mary G. Merritt                             |  | 2004               |  | $      | 89,250  |       |   |                          |  |                                                                   |  | 150,000
|Interim Chief Executive                     |  | 2003               |  | $      | 105,750 |       |   |                         |  |                                                                   |  | 54,000 
|Officer, Executive Vice President  Finance |  | 2002               |  | $      | 120,000 |       | $ | 250                      |  |                                                                   |  | 80,000 
|Bernard F. Bareis                           |  | 2004               |  | $      | 125,000 |       |   |                         |  |                                                                   |  | 150,000
|Vice President and Chief                    |  | 2003               |  | $      | 5,208   |       |   |                         |  |                                                                   |  |       
|Technical Officer                           |  | 2002               |  |        |        |       |   |                         |  |                                                                   |  |       
|Richard K. Stone1                           |  | 2004               |  | $      | 58,388  |       |   |                         |  |                                                                   |  |       
|                                            |  | 2003               |  | $      | 80,400  |       |   |                         |  |                                                                   |  | 95,000 
|                                            |  | 2002               |  | $      | 100,700 |       | $ | 250                      |  |                                                                   |  | 6,000  



|1 | Mr. Stone was our Executive Vice President of Business Development until January 31, 2004.
|- | ------------------------------------------------------------------------------------------



|2 | No other stock options or convertible securities were granted to the aforementioned executive
officers during the fiscal years ended March 31, 2004, 2003, and 2002.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



Option/SAR Grants in Fiscal Year 2004



|                  |  |                                                      |  |                                                             |   |  |                               |      |                 |           
|----------------- |  | ---------------------------------------------------- |  | ----------------------------------------------------------- | - |  | ----------------------------- | ---- | --------------- | ----------
|Name              |  | Number of Securities Underlying Options/SARs Granted |  | % of Total Options/SARs Granted toEmployees in Fiscal Year1 |   |  | Exercise or Base Price ($/Sh) |      | Expiration Date
|Mary G. Merritt   |  | 150,000                                              |  | 45                                                          | % |  | $                             | 0.12 |                 | 6/12/2008 
|Bernard Bareis    |  | 150,000                                              |  | 45                                                          | % |  | $                             | 0.12 |                 | 04/01/2008
|Richard K. Stone2 |  |                                                     |  |                                                            |   |  |                               |     |                 |          



|1 | Based on a total of 330,000 shares underlying options issued during the fiscal year ended March 31, 2004.
|- | ---------------------------------------------------------------------------------------------------------



|2 | Mr. Stone was our Executive Vice President of Business Development until January 31, 2004.
|- | ------------------------------------------------------------------------------------------



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##### Index to Financial Statements

Aggregated Option Exercises in Fiscal Year

2004 and March 31 2004 Option Values



|                  |  |                           |  |                |  |                                                                       |  |                                                                  |  |               |  |  
|----------------- |  | ------------------------- |  | -------------- |  | --------------------------------------------------------------------- |  | ---------------------------------------------------------------- |  | ------------- |  | -
|                  |  | SharesAcquired OnExercise |  | Value Realized |  | Number of SecuritiesUnderlying UnexercisedOption at March 31, 2004(#) |  | Value of Unexercised In-the-Money Options at March 31, 2004 ($)1
|Name:             |  |                           |  | Exercisable    |  | Unexercisable                                                         |  | Exercisable                                                      |  | Unexercisable
|Mary G. Merritt   |  |                          |  |               |  | 304,000                                                               |  | 0                                                                |  |              |  | 
|Bernard Bareis    |  |                          |  |               |  | 150,000                                                               |  | 0                                                                |  |              |  | 
|Richard K. Stone2 |  |                          |  |               |  |                                                                      |  |                                                                 |  |              |  | 



|1 | Fair market value of the common stock is based upon the average of the closing bid and asked prices as reported by the OTC Bulletin Board for March 31, 2004.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



|2 | Mr. Stone was our Executive Vice President of Business Development until January 31, 2004
|- | -----------------------------------------------------------------------------------------



Equity Compensation Plan



|                                                           |  |                                                                                                 |  |                                                                              |      |                                                                                                                                    |          
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------- | ---- | ---------------------------------------------------------------------------------------------------------------------------------- | ---------
|Plan Category                                              |  | Number of Securities To be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) |  | Weighted-AverageExercise Price ofOutstanding Options,Warrants and
Rights (b) |      | Number of Securities Remaining Available For Future IssuanceUnder Equity CompensationPlans (excluding securitiesin column (a)) (c)
|Equity Compensation Plans Approved by Security Holders     |  | 707,000                                                                                         |  | $                                                                            | 0.50 |                                                                                                                                    | 1,630,132
|Equity Compensation Plans Not Approved by Security Holders |  | 0                                                                                               |  |                                                                              | 0    |                                                                                                                                    | 0        
|Total                                                      |  | 707,000                                                                                         |  | $                                                                            | 0.50 |                                                                                                                                    | 1,630,132



23



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##### Table of Contents

##### Index to Financial Statements

Item 11. Security Ownership of Certain Beneficial Owners and Management



The following table sets forth, as of the close of business on June 25, 2004, 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 June 25, 2004.



Beneficial Ownership(1), (2)



|                                                                  |  |                 |  |            |  
|----------------------------------------------------------------- |  | --------------- |  | ---------- | -
|Name of Beneficial Owner                                          |  | Number ofShares |  | Percentage |  
|G. Ray Miller(3)                                                  |  | 1,925,987       |  | 6.47       | %
|Mary G. Merritt(4)                                                |  | 2,006,213       |  | 6.63       | %
|Latif Nathani(5)                                                  |  | 750,000         |  | 2.47       | %
|Scott Ogilvie(6)                                                  |  | 190,000         |  | *          |  
|Richard K. Stone(7)                                               |  | 10,000          |  | *          |  
|Bernard F. Bareis(8)                                              |  | 304,000         |  | 1.02       | %
|Leslie Melzer(9)                                                  |  | 2,639,000       |  | 8.67       | %
|Paragon Ranch, Inc.(10)                                           |  | 2,012,500       |  | 6.67       | %
|JMG Capital Partners, L.P.(11)                                    |  | 3,676,584       |  | 11.99      | %
|JMG Triton Offshore Fund Ltd.(12)                                 |  | 3,673,584       |  | 11.98      | %
|J. Steven Emerson(13)                                             |  | 5,111,000       |  | 16.36      | %
|G. Tyler Runnels(14)                                              |  | 2,866,695       |  | 9.35       | %
|All Directors and executive officers as a group (six persons)(15) |  | 5,186,191       |  | 16.41      | %



|* | Less than one percent (1%).
|- | ---------------------------



|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/her/its economic interest in the shares. Unless otherwise noted, each person identified possesses sole voting and investment power over the shares listed, subject to community
property laws.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2) | Based on 29,607,493 shares outstanding on June 25, 2004. Shares of common stock subject to options that are exercisable within 60 days of June 25, 2004, are deemed beneficially
owned by the person holding such options for the purposes of calculating the percentage of ownership of such person but are not treated as outstanding for the purpose of computing the percentage of any other person.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|4) | Includes 330,000 shares issuable upon exercise of warrants, 304,000 issuable upon exercise of employee stock options, 30,000 shares held by her minor children, and 24,639 shares
held by Pegasus Settlement Trust.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



|7) | Includes 10,000 shares issuable upon exercise of warrants. Mr. Stone was our Vice President of Business Development until January 31, 2004
|-- | ------------------------------------------------------------------------------------------------------------------------------------------



|8) | Includes 225,000 shares issuable upon exercise of employee stock options and 79,000 shares issuable upon exercise of employee stock options held by his spouse.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



|9) | Includes 230,000 issuable upon exercise of warrants, 1,425,000 shares held by Paragon Ranch, Inc. and 587,500 shares issuable upon exercise of warrants held by Paragon Ranch, Inc.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10) | Includes 587,500 shares issuable upon exercise of warrants. Paragon Ranchs address is 5775 DTC Blvd, Suite 250, Greenwood Village, CO 80111. We have been informed by Paragon
Ranch that Leslie Melzer, Vice President of Paragon Ranch, and Richard L. Gooding, President of Paragon Ranch, share voting power over the shares held by Paragon Ranch.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|11) | Includes 1,050,000 shares issuable upon exercise of warrants. JMG Capital Partners address is 1999 Avenue of the Stars, Suite 2530, Los Angeles, California 90067. We have been
advised by JMG Capital Partners that Jonathan M. Glaser is the member-manager of JMG Capital Management, LLC, which is the general partner of JMG Capital Partners, and he is the natural person who has sole voting power over the shares held by JMG
Capital Partners.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|12) | Includes 1,050,000 shares issuable upon exercise of warrants. JMG Triton Offshore Fund Ltd.s address is Citco Building, Wickhams Cay, Road Town, Tortola, British Virgin
Islands. We have been informed by JMG Triton Offshore Fund Ltd. that Jonathan M. Glaser is the member-manager of Pacific Assets Management, LLC, which is the general partner of JMG Triton Offshore Fund Ltd., and he is the natural person who has sole
voting power over the shares held by JMG Triton Offshore Fund Ltd.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|13) | Includes 3,430,200 shares held in Mr. Emersons retirement accounts and 2,080,000 shares issuable upon exercise of warrants held in Mr. Emersons retirement accounts.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



24



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##### Table of Contents

##### Index to Financial Statements

|14) | Includes 460,000 shares issuable upon exercise of warrants, 1,145,503 shares held by The Runnels Family Trust and 357,000 shares issuable upon exercise of warrants held by The
Runnels Family Trust, and 505,000 shares held by High Tide, LLC and 250,000 shares issuable upone exercise of warrants held by High Tide, LLC for which Mr. Runnels has sole voting power over the shares held by High Tide, LLC.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|15) | Includes the shares described in footnotes 3 through 8.
|--- | -------------------------------------------------------



Item 12. Certain Relationships and Related Transactions



On November 22, 2002, we issued Richard K. Stone a warrant to purchase 55,000 shares of our common stock at an exercise price of $1.50 per share on or before November 22, 2006 related to his position as an officer and
employee of the company.



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



All of the
transactions referred to in this section involving the issuance of shares of our common stock or warrants are exempt from registration under the Securities Act pursuant to Section 4(2) of the Securities Act. Each transaction was a privately
negotiated transaction without general solicitation or advertising with persons or entities that we believed were sophisticated investors within the meaning of the Securities Act and had access to all information concerning our company
that each such person or entity deemed necessary to make an informed investment decision with respect to the transaction. Such transactions did not involve an underwriter and no underwriting discounts or commissions were paid.



I tem 13. Exhibits, List and Reports on Form 8-K

|(a) | Exhibits
|--- | --------



|               |  |                                                                                                                                                                                
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                         
|3.1(1)         |  | Certificate of Incorporation of the registrant, Inc. filed on August 3, 1992 with the Secretary of State of Delaware (Exhibit 3.1)                                             
|               | 
|3.2(1)         |  | Certificate of Amendment, filed on May 2, 1994 with the Secretary of State of Delaware (Exhibit 3.2)                                                                           
|               | 
|3.3(1)         |  | Certificate of Amendment, filed on March 21, 1995 with the Secretary of State of Delaware (Exhibit 3.3)                                                                        
|               | 
|3.4(2)         |  | Certificate of Amendment, filed on July 27, 1995 with the Secretary of State of Delaware (Exhibit 3.5)                                                                         
|               | 
|3.5(3)         |  | Certificate of Amendment, filed on March 7, 1997 with the Secretary of State of Delaware (Exhibit 3.5)                                                                         
|               | 
|3.6(1)         |  | Bylaws of the registrant (Exhibit 3.4)                                                                                                                                         
|               | 
|10.1(4)        |  | Form of Warrant Certificate and Schedule of Warrant Certificates (Exhibit 10.1)                                                                                                
|               | 
|10.2(5)        |  | Volume License Agreement between Philips Speech Processing North America, a division of Philips Electronics North America Corporation and Preferred Voice, Inc. (Exhibit
10.31)
|               | 
|10.3(6)        |  | Form of Subscription Agreement between Preferred Voice, Inc. and certain purchasers of Preferred Voice, Inc. common stock (Exhibit 10.1)                                       
|               | 
|10.4(6)        |  | Form of Warrant Certificate (Exhibit 10.2)                                                                                                                                     
|               | 
|10.5(6)        |  | Warrant No. 122 issued to Stifel, Nicolaus & Company, Inc. (Exhibit 10.3)                                                                                                      
|               | 
|10.6(5)        |  | Second Amendment to Lease between Dallas Office Portfolio, L.P., as successor in interest to Greenville Avenue Properties, Ltd. and Preferred Voice, Inc. (Exhibit 10.3)       
|               | 
|10.7(1)        |  | Preferred/telecom, Inc. 1994 Stock Plan for Incentive and Non-Qualified Stock Options (Exhibit 10.5)                                                                           
|               | 
|10.8(7)        |  | 2000 Stock Plan for Incentive Stock Options and Other Equity Participation (Exhibit 10.1)                                                                                      



25



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##### Index to Financial Statements

|          |  |                                                                                                                                                
|--------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|10.9  (8) |  | Form of Subscription Agreement by and between Preferred Voice, Inc. and certain signatories thereto (Exhibit 10.1)                             
|          | 
|10.10(8)  |  | Form of Warrant Certificate, issued by Preferred Voice, Inc. pursuant to the Subscription Agreement filed as Exhibit 10.9 hereto (Exhibit 10.2)
|          | 
|10.11(9)  |  | Patent License Agreement by and between Preferred Voice, Inc. and KoninKlijkePhilips Electronics N.V.*(Exhibit 10.2)                           
|          | 
|10.12(10) |  | Form of Subscription Agreement, by and between Preferred Voice, Inc. and certain signatories thereto (Exhibit 10.1)                            
|          | 
|10.13(11) |  | Form of Subscription Agreement, by and between Preferred Voice, Inc. and certain signatories thereto (Exhibit 10.1)                            
|          | 
|23^       |  | Consent of Philip Vogel & Co. PC                                                                                                               
|          | 
|31.1^     |  | Section 302 Certification                                                                                                                      
|          | 
|31.2^     |  | Section 302 Certification                                                                                                                      
|          | 
|32.1^     |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                         
|          | 
|32.2^     |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                         

---

|^ | Filed herewith.
|- | ---------------



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



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



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



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



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



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



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



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



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



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



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



|(b) | Reports on Form 8-K
|--- | -------------------



None



Item 14. Controls and Procedures



| | 1. | Evaluation of disclosure controls and procedures. Our principal executive officer and our principal financial officer, after evaluating the effectiveness of our disclosure
controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d- 14(c) as of a date (the Evaluation Date) within 90 days before the filing date of this quarterly report, have concluded that as of the
Evaluation Date our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Changes in internal controls. There were no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect our disclosure
controls and procedures subsequent to the Evaluation Date.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



26



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##### Index to Financial Statements

SIGNATURES



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



|                    |  |  |  |                                    |  |                         |  |                           
|------------------- |  |  |  | ---------------------------------- |  | ----------------------- |  | --------------------------
|                    |  |  |  | Preferred Voice, Inc. (Registrant)
|                    |  |  | 
|Date: July 14, 2004 |  |  |  | By:                                |  | /s/    LATIF M. NATHANI
|                    |  |  |  |                                    |  |                         |  | Latif M. Nathani, Chairman



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



|                                        |  |                                                                                                                                                 |  |              
|--------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------
|SIGNATURE                               |  | TITLE                                                                                                                                           |  | DATE         
|                                        |  |                                                                                                                                                
|/s/    LATIF M.
NATHANILatif M.
Nathani |  | Chairman and Chief Executive Officer (Principal
Executive Officer)                                                                              |  | July 14, 2004
|                                        |  |                                                                                                                                                
|/s/    G. RAY
MILLERG. Ray
Miller       |  | Director                                                                                                                                        |  | July 14, 2004
|                                        |  |                                                                                                                                                
|/s/    MARY G.
MERRITTMary G.
Merritt   |  | Secretary, Treasurer and Chief Operating Officer, Executive Vice President of Finance and Director (Principal Financial and Accounting Officer) |  | July 14, 2004
|                                        |  |                                                                                                                                                
|/s/    SCOTT
OGILVIEScott
Ogilvie       |  | Director                                                                                                                                        |  | July 14, 2004



27



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##### Index to Financial Statements

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, 2004 and 2003, and the related statements of operations, stockholders equity (deficit) and cash flows for the years ended March 31, 2004, 2003 and 2002. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



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



In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Preferred Voice, Inc. as of March 31, 2004 and 2003, and the results of its operations and its cash flows for the years ended March 31, 2004, 2003 and 2002, in conformity with accounting principles
generally accepted in the United States of America.



PHILIP VOGEL & CO. PCCertified Public Accountants




Dallas, Texas



May 25, 2004



F-1



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##### Table of Contents

##### Index to Financial Statements

PREFERRED VOICE, INC.

BALANCE SHEETS

MARCH 31, 2004 AND 2003



|                                                                                                               |  |      |           |      |   |          
|-------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                                                                                               |  | 2004 |           | 2003
|Assets                                                                                                         |  |      |           |      |   |          
|Current assets:                                                                                                |  |      |           |      |   |          
|Cash and cash equivalents                                                                                      |  | $    | 64,674    |      | $ | 55,760   
|Accounts receivable, net of allowance for doubtful accounts of $6,325 and $0, respectively                     |  |      | 133,542   |      |   | 220,706  
|Employee advances                                                                                              |  |      |          |      |   | 675      
|Prepaid expense                                                                                                |  |      | 2,851     |      |   | 4,730    
|                                                                                                               |  |      |           |      |   |          
|Total current assets                                                                                           |  | $    | 201,067   |      | $ | 281,871  
|                                                                                                               |  |      |           |      |   |          
|Property and equipment:                                                                                        |  |      |           |      |   |          
|Computer equipment                                                                                             |  | $    | 1,575,228 |      | $ | 1,726,289
|Furniture and fixtures                                                                                         |  |      | 32,046    |      |   | 42,691   
|Office equipment                                                                                               |  |      | 61,044    |      |   | 62,997   
|                                                                                                               |  |      |           |      |   |          
|                                                                                                               |  | $    | 1,668,318 |      | $ | 1,831,977
|Less accumulated depreciation                                                                                  |  |      | 847,415   |      |   | 690,430  
|                                                                                                               |  |      |           |      |   |          
|Net property and equipment                                                                                     |  | $    | 820,903   |      | $ | 1,141,547
|                                                                                                               |  |      |           |      |   |          
|Other assets:                                                                                                  |  |      |           |      |   |          
|Capitalized software development costs, net of accumulated amortization of $872,672 and $751,545, respectively |  | $    | 121,528   |      | $ | 225,032  
|Deposits                                                                                                       |  |      | 4,485     |      |   | 23,019   
|Trademarks and patents, net of accumulated amortization of $5,580 and $1,819, respectively                     |  |      | 78,532    |      |   | 74,539   
|                                                                                                               |  |      |           |      |   |          
|Total other assets                                                                                             |  | $    | 204,545   |      | $ | 322,590  
|                                                                                                               |  |      |           |      |   |          
|Total assets                                                                                                   |  | $    | 1,226,515 |      | $ | 1,746,008
|                                                                                                               |  |      |           |      |   |          



The accompanying
notes are an integral part of these statements.



F-2



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##### Table of Contents

##### Index to Financial Statements

|                                                                                                                   |  |      |             |   |      |   |             |  
|------------------------------------------------------------------------------------------------------------------ |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                                                   |  | 2004 |             |   | 2003 |  
|Liabilities and stockholders equity                                                                               |  |      |             |   |      |   |             |  
|Current liabilities:                                                                                               |  |      |             |   |      |   |             |  
|Accounts payable                                                                                                   |  | $    | 202,079     |   |      | $ | 299,369     |  
|Accrued operating expenses                                                                                         |  |      | 239         |   |      |   | 69,418      |  
|Accrued vacation                                                                                                   |  |      | 8,565       |   |      |   | 6,690       |  
|Accrued payroll and payroll taxes                                                                                  |  |      | 30,241      |   |      |   | 11,847      |  
|Accrued interest payable                                                                                           |  |      |            |   |      |   | 33,319      |  
|Accrued lawsuit settlement                                                                                         |  |      | 132,293     |   |      |   | 150,000     |  
|Current portion- notes payable                                                                                     |  |      | 49,041      |   |      |   | 100,866     |  
|                                                                                                                   |  |      |             |   |      |   |             |  
|Total current liabilities                                                                                          |  | $    | 422,458     |   |      | $ | 671,509     |  
|                                                                                                                   |  |      |             |   |      |   |             |  
|Long-term liabilities:                                                                                             |  |      |             |   |      |   |             |  
|Notes payable                                                                                                      |  | $    | 27,459      |   |      | $ |            |  
|                                                                                                                   |  |      |             |   |      |   |             |  
|Commitments and contingencies (Note I and M)                                                                       |  |      |             |   |      |   |             |  
|Stockholders equity:                                                                                              |  |      |             |   |      |   |             |  
|Common stock, $.001 par value; 50,000,000 shares authorized; 18,607,493 and 18,407,493 shares issued, respectively |  | $    | 18,607      |   |      | $ | 18,407      |  
|Additional paid-in capital                                                                                         |  |      | 17,846,301  |   |      |   | 17,817,465  |  
|Accumulated deficit                                                                                                |  |      | (17,086,804 | ) |      |   | (16,759,867 | )
|Treasury stock- 22,500 shares at cost                                                                              |  |      | (1,506      | ) |      |   | (1,506      | )
|                                                                                                                   |  |      |             |   |      |   |             |  
|Total stockholders equity                                                                                         |  | $    | 776,598     |   |      | $ | 1,074,499   |  
|                                                                                                                   |  |      |             |   |      |   |             |  
|Total liabilities and stockholders equity                                                                         |  | $    | 1,226,515   |   |      | $ | 1,746,008   |  
|                                                                                                                   |  |      |             |   |      |   |             |  



F-3



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##### Table of Contents

##### Index to Financial Statements

PREFERRED VOICE, INC.

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED MARCH 31, 2004, 2003 AND 2002



|                                         |  |      |           |   |      |   |            |      |  |   |            |  
|---------------------------------------- |  | ---- | --------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                         |  | 2004 |           |   | 2003 |   |            | 2002 | 
|Net sales                                |  | $    | 1,631,785 |   |      | $ | 2,124,876  |      |  | $ | 1,474,465  |  
|Cost of sales                            |  |      | 517,304   |   |      |   | 761,185    |      |  |   | 462,311    |  
|                                         |  |      |           |   |      |   |            |      |  |   |            |  
|Gross profit                             |  | $    | 1,114,481 |   |      | $ | 1,363,691  |      |  | $ | 1,012,154  |  
|                                         |  |      |           |   |      |   |            |      |  |   |            |  
|General and administrative expenses      |  | $    | 1,597,665 |   |      | $ | 2,805,827  |      |  | $ | 4,854,006  |  
|                                         |  |      |           |   |      |   |            |      |  |   |            |  
|Loss from operations                     |  | $    | (483,184  | ) |      | $ | (1,442,136 | )    |  | $ | (3,841,852 | )
|                                         |  |      |           |   |      |   |            |      |  |   |            |  
|Other income (expense):                  |  |      |           |   |      |   |            |      |  |   |            |  
|Interest income                          |  | $    | 247       |   |      | $ | 5,419      |      |  | $ |           |  
|Interest expense                         |  |      | (15,603   | ) |      |   | (5,016     | )    |  |   | (5,255     | )
|Gain (loss) on sale of assets            |  |      | 84,048    |   |      |   | (1,021     | )    |  |   |           |  
|Extinguishment of debt                   |  |      | 81,685    |   |      |   | 230        |      |  |   | 11,992     |  
|Negotiated settlements                   |  |      | 8,413     |   |      |   | 342,579    |      |  |   |           |  
|Lawsuit settlement                       |  |      |          |   |      |   | (150,000   | )    |  |   |           |  
|Other expense                            |  |      | (2,543    | ) |      |   | (2,008     | )    |  |   |           |  
|                                         |  |      |           |   |      |   |            |      |  |   |            |  
|Total other income (expense)             |  | $    | 156,247   |   |      | $ | 190,183    |      |  | $ | 6,737      |  
|                                         |  |      |           |   |      |   |            |      |  |   |            |  
|Loss from operations before income taxes |  | $    | (326,937  | ) |      | $ | (1,251,953 | )    |  | $ | (3,835,115 | )
|Provision for income taxes               |  |      |          |   |      |   |           |      |  |   |           |  
|                                         |  |      |           |   |      |   |            |      |  |   |            |  
|Net loss                                 |  | $    | (326,937  | ) |      | $ | (1,251,953 | )    |  | $ | (3,835,115 | )
|                                         |  |      |           |   |      |   |            |      |  |   |            |  
|Per share amounts:                       |  |      |           |   |      |   |            |      |  |   |            |  
|Net loss per share                       |  | $    | (0.02     | ) |      | $ | (0.07      | )    |  | $ | (0.23      | )
|                                         |  |      |           |   |      |   |            |      |  |   |            |  



The accompanying
notes are an integral part of these statements.



F-4



---

##### Table of Contents

##### Index to Financial Statements

PREFERRED VOICE, INC.

STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE YEARS ENDED MARCH 31, 2004, 2003 AND 2002



|                                                                 |  |                        |  |            |   |  |             |  |             |  
|---------------------------------------------------------------- |  | ---------------------- |  | ---------- | - |  | ----------- |  | ----------- | -
|                                                                 |  | Shares of common stock | 
|                                                                 |  | Authorized             |  | Issued     |   |  | Outstanding |  | In treasury |  
|Balance - March 31, 2001                                         |  | 20,000,000             |  | 15,672,586 |   |  | 15,287,362  |  | 385,224     |  
|Conversion of note payable to common stock                       |  |                       |  | 17,804     |   |  | 17,804      |  |            |  
|Exercise warrants                                                |  |                       |  | 275,118    |   |  | 275,118     |  |            |  
|Warrants issued to non-employees                                 |  |                       |  |           |   |  |            |  |            |  
|Issuance of common stock net of stock issuance costs of $232,986 |  |                       |  | 2,804,709  |   |  | 2,804,709   |  |            |  
|Increase in authorized shares                                    |  | 30,000,000             |  |           |   |  |            |  |            |  
|Cancellation of treasury stock                                   |  |                       |  | (362,724   | ) |  |            |  | (362,724    | )
|Net loss for the year ended March 31, 2002                       |  |                       |  |           |   |  |            |  |            |  
|                                                                 |  |                        |  |            |   |  |             |  |             |  
|Balance - March 31, 2002                                         |  | 50,000,000             |  | 18,407,493 |   |  | 18,384,993  |  | 22,500      |  
|Net loss for the year ended March 31, 2003                       |  |                       |  |           |   |  |            |  |            |  
|                                                                 |  |                        |  |            |   |  |             |  |             |  
|Balance - March 31, 2003                                         |  | 50,000,000             |  | 18,407,493 |   |  | 18,384,993  |  | 22,500      |  
|Conversion of accounts payable to common stock                   |  |                       |  | 200,000    |   |  | 200,000     |  |            |  
|Warrants issued to non-employees                                 |  |                       |  |           |   |  |            |  |            |  
|Net loss for the year ended March 31, 2004                       |  |                       |  |           |   |  |            |  |            |  
|                                                                 |  |                        |  |            |   |  |             |  |             |  
|Balance - March 31, 2004                                         |  | 50,000,000             |  | 18,607,493 |   |  | 18,584,993  |  | 22,500      |  
|                                                                 |  |                        |  |            |   |  |             |  |             |  



The accompanying
notes are an integral part of these statements.



F-5



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##### Table of Contents

##### Index to Financial Statements

| |  |                             |  |               |        |   |                          |   |                     |  |   |                          |   |  |   |            |  
| |  | --------------------------- |  | ------------- | ------ | - | ------------------------ | - | ------------------- |  | - | ------------------------ | - |  | - | ---------- | -
| |  | Amounts                     |  |               |        |  
| |  | Commonstock $0.001par value |  | Treasurystock |        |   | Additionalpaid-incapital |   | Accummulateddeficit |  |   | Totalstockholdersequity |  
| |  | $15,674                     |  | $             | (1,868 | ) |                          | $ | 13,856,051          |  | $ | (11,672,799              | ) |  | $ | 2,197,058  |  
| |  | 18                          |  |               |       |   |                          |   | 17,470              |  |   |                         |   |  |   | 17,488     |  
| |  | 275                         |  |               |       |   |                          |   | 300,051             |  |   |                         |   |  |   | 300,326    |  
| |  |                            |  |               |       |   |                          |   | 91,187              |  |   |                         |   |  |   | 91,187     |  
| |  | 2,803                       |  |               |       |   |                          |   | 3,552,706           |  |   |                         |   |  |   | 3,555,509  |  
| |  |                            |  |               |       |   |                          |   |                    |  |   |                         |   |  |   |           |  
| |  | (363)                       |  |               | 362    |   |                          |   |                    |  |   |                         |   |  |   | (1         | )
| |  |                            |  |               |       |   |                          |   |                    |  |   | (3,835,115               | ) |  |   | (3,835,115 | )
| |  |                             |  |               |        |   |                          |   |                     |  |   |                          |   |  |   |            |  
| |  | $18,407                     |  | $             | (1,506 | ) |                          | $ | 17,817,465          |  | $ | (15,507,914              | ) |  | $ | 2,326,452  |  
| |  |                            |  |               |       |   |                          |   |                    |  |   | (1,251,953               | ) |  |   | (1,251,953 | )
| |  |                             |  |               |        |   |                          |   |                     |  |   |                          |   |  |   |            |  
| |  | $18,407                     |  | $             | (1,506 | ) |                          | $ | 17,817,465          |  | $ | (16,759,867              | ) |  | $ | 1,074,499  |  
| |  | 200                         |  |               |       |   |                          |   | 20,691              |  |   |                         |   |  |   | 20,891     |  
| |  |                            |  |               |       |   |                          |   | 8,145               |  |   |                          |   |  |   | 8,145      |  
| |  |                            |  |               |       |   |                          |   |                    |  |   | (326,937                 | ) |  |   | (326,937   | )
| |  |                             |  |               |        |   |                          |   |                     |  |   |                          |   |  |   |            |  
| |  | $18,607                     |  | $             | (1,506 | ) |                          | $ | 17,846,301          |  | $ | (17,086,804              | ) |  | $ | 776,598    |  
| |  |                             |  |               |        |   |                          |   |                     |  |   |                          |   |  |   |            |  



F-6



---

##### Table of Contents

##### Index to Financial Statements

PREFERRED VOICE, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED MARCH 31, 2004, 2003 AND 2002



|                                                     |  |      |            |   |      |   |            |      |  |   |            |  
|---------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                     |  | 2004 |            |   | 2003 |   |            | 2002 | 
|Cash flows from operating activities:                |  |      |            |   |      |   |            |      |  |   |            |  
|Cash received from customers                         |  | $    | 1,718,949  |   |      | $ | 2,065,305  |      |  | $ | 1,365,158  |  
|Cash paid to suppliers and employees                 |  |      | (1,756,421 | ) |      |   | (3,167,992 | )    |  |   | (4,438,374 | )
|Interest received                                    |  |      | 247        |   |      |   | 5,419      |      |  |   |           |  
|Interest paid                                        |  |      | (18,103    | ) |      |   | (5,016     | )    |  |   |           |  
|                                                     |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash used by operating activities                |  | $    | (55,328    | ) |      | $ | (1,102,284 | )    |  | $ | (3,073,216 | )
|                                                     |  |      |            |   |      |   |            |      |  |   |            |  
|Cash flows from investing activities:                |  |      |            |   |      |   |            |      |  |   |            |  
|Capital expenditures                                 |  | $    | (48,757    | ) |      | $ | (148,413   | )    |  | $ | (1,247,115 | )
|Proceeds from sale of assets                         |  |      | 125,824    |   |      |   | 1,740      |      |  |   |           |  
|Employee (advances) repayments                       |  |      | 675        |   |      |   | 1,963      |      |  |   | (1,716     | )
|                                                     |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash provided (used) by investing activities     |  | $    | 77,742     |   |      | $ | (144,710   | )    |  | $ | (1,248,831 | )
|                                                     |  |      |            |   |      |   |            |      |  |   |            |  
|Cash flows from financing activities:                |  |      |            |   |      |   |            |      |  |   |            |  
|Proceeds from issuance of stock                      |  | $    |           |   |      | $ |           |      |  | $ | 4,072,035  |  
|Stock issuance costs                                 |  |      |           |   |      |   |           |      |  |   | (232,986   | )
|Repayment of note payable                            |  |      | (13,500    | ) |      |   |           |      |  |   | 50,000     |  
|                                                     |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash provided (used) by financing activities     |  | $    | (13,500    | ) |      | $ |           |      |  | $ | 3,889,049  |  
|                                                     |  |      |            |   |      |   |            |      |  |   |            |  
|Net increase (decrease) in cash and cash equivalents |  | $    | 8,914      |   |      | $ | (1,246,994 | )    |  | $ | (432,998   | )
|Cash and cash equivalents:                           |  |      |            |   |      |   |            |      |  |   |            |  
|Beginning of period                                  |  |      | 55,760     |   |      |   | 1,302,754  |      |  |   | 1,735,752  |  
|                                                     |  |      |            |   |      |   |            |      |  |   |            |  
|End of period                                        |  | $    | 64,674     |   |      | $ | 55,760     |      |  | $ | 1,302,754  |  
|                                                     |  |      |            |   |      |   |            |      |  |   |            |  



The accompanying
notes are an integral part of these statements.



F-7



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##### Table of Contents

##### Index to Financial Statements

|                                                                            |  |      |          |   |      |   |            |      |  |   |            |  
|--------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                            |  | 2004 |          |   | 2003 |   |            | 2002 | 
|Reconciliation of net loss to net cash used by operating activities:        |  |      |          |   |      |   |            |      |  |   |            |  
|Net loss                                                                    |  | $    | (326,937 | ) |      | $ | (1,251,953 | )    |  | $ | (3,835,115 | )
|Adjustments to reconcile net loss to net cash used by operating activities: |  |      |          |   |      |   |            |      |  |   |            |  
|Depreciation and amortization                                               |  | $    | 424,593  |   |      | $ | 448,286    |      |  | $ | 729,790    |  
|Gain on sale of assets                                                      |  |      | (84,048  | ) |      |   | 1,021      |      |  |   |           |  
|Extinguishment of debt                                                      |  |      | (81,685  | ) |      |   |           |      |  |   | (11,992    | )
|Impairment of intangibles                                                   |  |      | 2,543    |   |      |   | 2,014      |      |  |   |           |  
|Fair value of stock warrants issued in exchange for services                |  |      | 8,145    |   |      |   |           |      |  |   | 91,186     |  
|Changes in operating assets and liabilities:                                |  |      |          |   |      |   |            |      |  |   |            |  
|(Increase) decrease in accounts receivable                                  |  |      | 87,164   |   |      |   | (57,766    | )    |  |   | (123,799   | )
|Decrease in inventory                                                       |  |      |         |   |      |   |           |      |  |   | 49,085     |  
|(Increase) decrease in prepaid expenses                                     |  |      | 1,879    |   |      |   | 23,681     |      |  |   | (27,918    | )
|(Increase) decrease in deposits                                             |  |      | 7,832    |   |      |   |           |      |  |   | (8,926     | )
|Decrease in accounts payable                                                |  |      | (25,697  | ) |      |   | (34,267    | )    |  |   | (4,634     | )
|Increase (decrease) in accrued expenses                                     |  |      | (69,117  | ) |      |   | 111,319    |      |  |   | 66,607     |  
|Increase (decrease) in customer deposits                                    |  |      |         |   |      |   | (344,619   | )    |  |   | 2,500      |  
|                                                                            |  |      |          |   |      |   |            |      |  |   |            |  
|Total adjustments                                                           |  | $    | 271,609  |   |      | $ | 149,669    |      |  | $ | 761,899    |  
|                                                                            |  |      |          |   |      |   |            |      |  |   |            |  
|Net cash used by operating activities                                       |  | $    | (55,328  | ) |      | $ | (1,102,284 | )    |  | $ | (3,073,216 | )
|                                                                            |  |      |          |   |      |   |            |      |  |   |            |  
|Supplemental schedule of non-cash investing and and financing activities:   |  |      |          |   |      |   |            |      |  |   |            |  
|Conversion of accounts payable to common stock                              |  | $    | 71,593   |   |      | $ |           |      |  | $ | 34,247     |  
|                                                                            |  |      |          |   |      |   |            |      |  |   |            |  
|Extinguishment of accrued interest                                          |  | $    | 30,819   |   |      | $ |           |      |  | $ |           |  
|                                                                            |  |      |          |   |      |   |            |      |  |   |            |  
|Extinguishment of notes payable                                             |  | $    | 50,866   |   |      | $ |           |      |  | $ |           |  
|                                                                            |  |      |          |   |      |   |            |      |  |   |            |  



F-8



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##### Table of Contents

##### Index to Financial Statements

PREFERRED VOICE

NOTES TO FINANCIAL STATEMENTS



Note A - General organization:



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



Note B - Summary of significant accounting policies:



Use of estimates



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



Reclassification



Certain amounts were reclassified in the prior years. The purpose of the reclassification is to give a more accurate representation of the
Companys operations. The reclassification did not affect the representation of the Companys overall performance or net income or losses.



Cash and cash equivalents



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



Receivables and credit policies



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



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



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



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



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



Depreciation expense for the years ended March 31, 2004, 2003 and 2002 was $299,705, $283,737 and $465,723, respectively.



F-9



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##### Table of Contents

##### Index to Financial Statements

PREFERRED VOICE

NOTES TO FINANCIAL STATEMENTS



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



Capitalized software development



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



During the years ended March 31, 2004, 2003 and 2002, software development costs capitalized were $17,623, $71,288 and $181,728,
respectively. The amortization of capitalized software development costs for the years ended March 31, 2004, 2003 and 2002 was $121,127, $162,730 and $264,067, respectively.



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



|                      |  |        |        
|--------------------- |  | ------ | -------
|Year ending March 31, |  | Amount
|2005                  |  | $      | 55,895 
|2006                  |  |        | 28,412 
|2007                  |  |        | 25,564 
|2008                  |  |        | 11,657 
|2009                  |  |        |       
|                      |  |        |        
|Total                 |  | $      | 121,528
|                      |  |        |        



Trademarks and
patents



Certain costs incurred for
the registration of trademarks and patents are capitalized and amortized. The amortization is calculated using the straight-line method, beginning when it is approved and continuing over its estimated useful or legal life, generally ten years.



The amortization of trademarks and patents
for the years ended March 31, 2004 and 2003 was $3,761 and $1,819, respectively. At March 31, 2002, approval of certain patents and trademarks was still pending; therefore, no amortization expense for trademarks and patents was recorded for the year
ended March 31, 2002.



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



F-10



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##### Table of Contents

##### Index to Financial Statements

PREFERRED VOICE

NOTES TO FINANCIAL STATEMENTS



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



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



|                      |  |        |       
|--------------------- |  | ------ | ------
|Year ending March 31, |  | Amount
|2005                  |  | $      | 4,129 
|2006                  |  |        | 4,129 
|2007                  |  |        | 4,129 
|2008                  |  |        | 4,129 
|2009                  |  |        | 4,129 
|                      |  |        |       
|Total                 |  | $      | 20,645
|                      |  |        |       



Advertising
expense



The Company expenses
advertising costs when the advertisement occurs. Total advertising expense amounted to $-0-, $18,110 and $17,350 for the years ended March 31, 2004, 2003 and 2002, respectively.



Fair value of financial instruments



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



Concentration of business, market and credit risks



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



During the years ended March 31, 2004, 2003 and 2002, approximately $225,000 (12.3%), $271,243 (12.8%) and $410,000 (27.8%), respectively,
of the Companys total sales were derived from one customer. At March 31, 2004, 2003 and 2002, no single customer accounted for a material portion of accounts receivable.



Revenue recognition



For recognizing revenue, the Company applies the provisions of SEC Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in
Financial Statements. In most cases, the services being performed do not require significant production, modification or customization of the Companys software or services; therefore, revenues are recognized when evidence of a completed
transaction exists, generally when services have been rendered. In situations where the Company receives an initial payment for future services, the Company defers recognition of revenue, and recognizes the revenue over the life of the respective
contract.



During the year ended March 31,
2004, the majority of the Companys revenue consisted of revenue sharing receipts. Revenue sharing income is recognized when the voice dialing services are provided, generally monthly. Revenue sharing income for the years ended March 31, 2004,
2003 and 2002 was $1,572,008, $2,025,359 and $1,044,380, respectively.



F-11



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##### Table of Contents

##### Index to Financial Statements

PREFERRED VOICE

NOTES TO FINANCIAL STATEMENTS



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



Income taxes



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



Stock based compensation



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



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



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 or loss (available to common stockholders) by the
weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Since the Company
incurred a loss from operations for the years ended March 31, 2004, 2003 and 2002, no computation of diluted EPS has been performed.



Loss per share is based on the weighted average number of shares outstanding of 18,407,493, 18,407,493 and 16,581,164 for the years ended
March 31, 2004, 2003 and 2002, respectively.



Reporting
comprehensive income and operating segments



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



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



The Company previously adopted the
provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement requires that long-lived assets and certain identified intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an



F-12



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##### Table of Contents

##### Index to Financial Statements

PREFERRED VOICE

NOTES TO FINANCIAL STATEMENTS



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



asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison on the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less costs to sell. An impairment loss in the amount of $2,543, $2,014, and $-0- was recognized during the years ended March 31, 2004, 2003, and 2002, respectively.



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



Gain from extinguishment of debt



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



Note C - Notes payable:



Notes payable consist of the following:



|                                                                                                                                                                                                                                            |  |      |        |      |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | -------
|                                                                                                                                                                                                                                            |  | 2004 |        | 2003
|Note payable, dated January 31, 1997, interest rate 2% above the prime rate as listed in the Wall Street Journal on the first day of each
month. Principal and interest was payable on January 1, 1998. Note was unsecured.                 |  | $    |       |      | $ | 50,866 
|Note payable, 10% interest rate. Principal and interest was payable on September 30, 2003. Convertible into shares of the Companys
common stock at a conversion rate of $2.00 of indebtedness per share of common stock. Note is unsecured |  |      | 36,500 |      |   | 50,000 
|Note payable, 6% interest rate. Principal and interest is payable on March 1, 2007. Note is unsecured                                                                                                                                       |  |      | 40,000 |      |   |       
|                                                                                                                                                                                                                                            |  |      |        |      |   |        
|                                                                                                                                                                                                                                            |  | $    | 76,500 |      | $ | 100,866
|Less current portion                                                                                                                                                                                                                        |  |      | 49,041 |      |   | 100,866
|                                                                                                                                                                                                                                            |  |      |        |      |   |        
|Total                                                                                                                                                                                                                                       |  | $    | 27,459 |      | $ |       
|                                                                                                                                                                                                                                            |  |      |        |      |   |        



F-13



---

##### Table of Contents

##### Index to Financial Statements

PREFERRED VOICE

NOTES TO FINANCIAL STATEMENTS



Note
C - Notes payable (continued):



Maturities under note payable agreements are as follows:



|                      |  |        |       
|--------------------- |  | ------ | ------
|Year ending March 31, |  | Amount
|2005                  |  | $      | 49,041
|2006                  |  |        | 13,315
|2007                  |  |        | 14,144
|                      |  |        |       
|Total                 |  | $      | 76,500
|                      |  |        |       



Interest expense charged to operations related to the notes payable was $4,788, $5,016 and $5,255 for the years ended March 31, 2004, 2003 and 2002, respectively.



Note D - Common stock:



Stock purchase warrants



At March 31, 2004 the Company had outstanding warrants to purchase 3,080,500 shares of the Companys common stock at prices that
ranged from $0.10 per share to $3.53 per share. The warrants are exercisable at any time and expire through November 20, 2006. At March 31, 2004, 3,080,500 shares of common stock were reserved for that purpose.



Common stock reserved



At March 31, 2004, shares of common stock were reserved for
the following purposes:



|                                                                                                          |  |          
|--------------------------------------------------------------------------------------------------------- |  | ---------
|Exercise of future grants of stock options and stock appreciation rights under the 1994 stock option plan |  | 337,132  
|Exercise of future grants of stock options and stock appreciation rights under the 2000 stock option plan |  | 2,000,000
|Exercise of stock warrants                                                                                |  | 3,080,500
|                                                                                                          |  |          
|                                                                                                          |  | 5,417,632
|                                                                                                          |  |          



Note E  Employee stock option
plans:



1994 Plan



On November 1, 1994, the Company adopted a stock award and
incentive plan (1994 Plan) which permits the issuance of options and stock appreciation rights to selected employees and independent contractors of the Company. The 1994 Plan 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.



Under the terms of the 1994 Plan, options granted may be either nonqualified or incentive stock options, and the exercise price,
determined by the Committee, may not be less than the fair market value of a share on the date of grant. Stock appreciation rights granted in tandem with an option shall be exercisable only to the extent the underlying option is exercisable and the
grant price shall be equal to the exercise price of the underlying option. At March 31, 2004, options to purchase 5,000 shares at an exercise price of $0.50 per share were outstanding. No stock appreciation rights had been granted at March 31, 2004.



F-14



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##### Table of Contents

##### Index to Financial Statements

PREFERRED VOICE

NOTES TO FINANCIAL STATEMENTS



Note E  Employee stock option plans (continued):



As of March 31, 2004, 112,868 of these options have been
exercised, 533,882 have been forfeited, 5,000 remain outstanding, and 5,000 were vested and exercisable. At March 31, 2004, the remaining weighted average contractual life was 6.0 years.



2000 Plan



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



Under the terms of the 2000 Plan, options granted may be either nonqualified or incentive stock options, and the exercise price, determined by the Committee, may not be less than the fair market value of a share on
the date of the grant. Stock appreciation rights granted in tandem with an option shall be exercisable only to the extent the underlying option is exercisable and the grant price shall be equal to the exercise price of the underlying option. At
March 31, 2004, options to purchase 702,000 shares at an exercise price of $0.50 per share were outstanding. No stock appreciation rights had been granted at March 31, 2004.



As of March 31, 2004, none of these options have been exercised, 909,825 have been forfeited, 294,750
expired, 702,000 remain outstanding, and 543,563 were vested and exercisable. At March 31, 2004, the remaining weighted average contractual life was 4.1 years.



Employee warrants



As of March 31, 2004, none of the employee warrants have been exercised or forfeited, 925,000 expired, 215,000 remain outstanding, and
215,000 were vested and exercisable. At March 31, 2004, the remaining weighted average contractual life was approximately 1.2 years.



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



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



|                        |  |                |  |                |  |               
|----------------------- |  | -------------- |  | -------------- |  | --------------
|                        |  | 2004           |  | 2003           |  | 2002          
|Expected dividend yield |  | 0.00%          |  | 0.00%          |  | 0.00%         
|Risk-free interest rate |  | 1.00%          |  | 2.28% -4.39%   |  | 2.28% -5.06%  
|Expected life           |  | 1.0 -2.5 years |  | 1.5 -2.5 years |  | 2.5 -3.5 years
|Expected volatility     |  | 133% -145%     |  | 69% - 191%     |  | 165% -189%    



F-15



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##### Table of Contents

##### Index to Financial Statements

PREFERRED VOICE

NOTES TO FINANCIAL STATEMENTS



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



The Company applies APB Opinion No. 25 in accounting for its
plan (as described in Note G) 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:



|                       |  |      |          |   |      |   |            |      |  |   |            |  
|---------------------- |  | ---- | -------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                       |  | 2004 |          |   | 2003 |   |            | 2002 | 
|Net loss:              |  |      |          |   |      |   |            |      |  |   |            |  
|As reported            |  | $    | (326,937 | ) |      | $ | (1,251,953 | )    |  | $ | (3,835,115 | )
|                       |  |      |          |   |      |   |            |      |  |   |            |  
|Proforma               |  | $    | (378,386 | ) |      | $ | (1,434,703 | )    |  | $ | (4,409,704 | )
|                       |  |      |          |   |      |   |            |      |  |   |            |  
|Loss per common share: |  |      |          |   |      |   |            |      |  |   |            |  
|As reported            |  | $    | (0.02    | ) |      | $ | (0.07      | )    |  | $ | (0.23      | )
|                       |  |      |          |   |      |   |            |      |  |   |            |  
|Proforma               |  | $    | (0.02    | ) |      | $ | (0.08      | )    |  | $ | (0.26      | )
|                       |  |      |          |   |      |   |            |      |  |   |            |  



Proforma loss reflects only options granted during the years ended March 31, 2004, 2003 and 2002. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the proforma net loss
amounts presented above because compensation cost is reflected over the options vesting period.



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



|                                                               |  |                                                 |   |      |                                 |      |                  |         |   |                                 |   |                  |  |         |                              |  |   |     
|-------------------------------------------------------------- |  | ----------------------------------------------- | - | ---- | ------------------------------- | ---- | ---------------- | ------- | - | ------------------------------- | - | ---------------- |  | ------- | ---------------------------- |  | - | ----
|                                                               |  | 1994 stock award and incentive plan (1994 Plan)
|                                                               |  | 2004                                            |   | 2003 |                                 | 2002
|                                                               |  | Number of shares                                |   |      | Weighted average exercise price |      | Number of shares |         |   | Weighted average exercise price |   | Number of shares |  |         | Weightedaverageexerciseprice
|Outstanding at beginning of year                               |  | 252,000                                         |   |      | $                               | 0.98 |                  | 297,000 |   |                                 | $ | 1.02             |  | 412,000 |                              |  | $ | 0.96
|Granted                                                        |  |                                                |   |      |                                 |     |                  |        |   |                                 |   |                 |  |        |                              |  |   |    
|Exercised                                                      |  |                                                |   |      |                                 |     |                  |        |   |                                 |   |                 |  | (75,118 | )                            |  |   | 0.94
|Forfeited                                                      |  | (247,000                                        | ) |      |                                 | 0.50 |                  | (45,000 | ) |                                 |   | 1.25             |  | (39,882 | )                            |  |   | 1.16
|Expired                                                        |  |                                                |   |      |                                 |     |                  |        |   |                                 |   |                 |  |        |                              |  |   |    
|                                                               |  |                                                 |   |      |                                 |      |                  |         |   |                                 |   |                  |  |         |                              |  |   |     
|Outstanding at end of year                                     |  | 5,000                                           |   |      | $                               | 0.50 |                  | 252,000 |   |                                 | $ | 0.98             |  | 297,000 |                              |  | $ | 1.02
|                                                               |  |                                                 |   |      |                                 |      |                  |         |   |                                 |   |                  |  |         |                              |  |   |     
|Options exercisable at end of year                             |  | 5,000                                           |   |      | $                               | 0.50 |                  | 247,000 |   |                                 | $ | 0.95             |  | 272,000 |                              |  | $ | 0.95
|Weighted average fair value of options granted during the year |  |                                                |   |      | $                               |     |                  |        |   |                                 | $ |                 |  |        |                              |  | $ |    



F-16



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##### Table of Contents

##### Index to Financial Statements

PREFERRED VOICE

NOTES TO FINANCIAL STATEMENTS



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



|                                                               |  |                                                 |   |      |                              |      |                 |           |   |                              |   |                 |  |           |                              |  |   |     
|-------------------------------------------------------------- |  | ----------------------------------------------- | - | ---- | ---------------------------- | ---- | --------------- | --------- | - | ---------------------------- | - | --------------- |  | --------- | ---------------------------- |  | - | ----
|                                                               |  | 2000 stock award and incentive plan (2000 Plan)
|                                                               |  | 2004                                            |   | 2003 |                              | 2002
|                                                               |  | Number ofshares                                 |   |      | Weightedaverageexerciseprice |      | Number ofshares |           |   | Weightedaverageexerciseprice |   | Number ofshares |  |           | Weightedaverageexerciseprice
|Outstanding at beginning of year                               |  | 1,163,875                                       |   |      | $                            | 1.29 |                 | 1,051,825 |   |                              | $ | 1.63            |  | 576,000   |                              |  | $ | 1.45
|Granted                                                        |  | 330,000                                         |   |      |                              | 0.50 |                 | 792,750   |   |                              |   | 1.25            |  | 607,825   |                              |  |   | 1.81
|Exercised                                                      |  |                                                |   |      |                              |     |                 |          |   |                              |   |                |  |          |                              |  |   |    
|Forfeited                                                      |  | (497,125                                        | ) |      |                              | 0.73 |                 | (280,700  | ) |                              |   | 1.62            |  | (132,000  | )                            |  |   | 1.61
|Cancelled                                                      |  |                                                |   |      |                              | 0.00 |                 | (400,000  | ) |                              |   | 1.88            |  |          |                              |  |   |    
|Expired                                                        |  | (294,750                                        | ) |      |                              | 1.20 |                 |          |   |                              |   |                |  |          |                              |  |   |    
|                                                               |  |                                                 |   |      |                              |      |                 |           |   |                              |   |                 |  |           |                              |  |   |     
|Outstanding at end of year                                     |  | 702,000                                         |   |      | $                            | 0.50 |                 | 1,163,875 |   |                              | $ | 1.29            |  | 1,051,825 |                              |  | $ | 1.63
|                                                               |  |                                                 |   |      |                              |      |                 |           |   |                              |   |                 |  |           |                              |  |   |     
|Options exercisable at end of year                             |  | 543,563                                         |   |      | $                            | 0.50 |                 | 334,563   |   |                              | $ | 1.39            |  | 222,000   |                              |  | $ | 1.40
|Weighted average fair value of options granted during the year |  | 330,000                                         |   |      | $                            | 0.03 |                 | 792,750   |   |                              | $ | 0.21            |  | 607,825   |                              |  | $ | 1.07



Following is a
summary of warrants issued to employees:



|                                                               |  |                   |   |      |                              |      |                 |          |   |                              |   |                 |  |                              |  |   |     
|-------------------------------------------------------------- |  | ----------------- | - | ---- | ---------------------------- | ---- | --------------- | -------- | - | ---------------------------- | - | --------------- |  | ---------------------------- |  | - | ----
|                                                               |  | Employee warrants
|                                                               |  | 2004              |   | 2003 |                              | 2002
|                                                               |  | Numberof shares   |   |      | Weightedaverageexerciseprice |      | Numberof shares |          |   | Weightedaverageexerciseprice |   | Numberof shares |  | Weightedaverageexerciseprice
|Outstanding at beginning of year                               |  | 795,000           |   |      | $                            | 1.09 |                 | 985,000  |   |                              | $ | 1.04            |  | 825,000                      |  | $ | 1.10
|Granted                                                        |  |                  |   |      |                              |     |                 | 110,000  |   |                              |   | 1.25            |  | 160,000                      |  |   | 1.50
|Exercised                                                      |  |                  |   |      |                              |     |                 |         |   |                              |   |                |  |                             |  |   |    
|Forfeited                                                      |  |                  |   |      |                              |     |                 |         |   |                              |   |                |  |                             |  |   |    
|Expired                                                        |  | (580,000          | ) |      |                              | 0.95 |                 | (300,000 | ) |                              |   | 1.00            |  |                             |  |   |    
|                                                               |  |                   |   |      |                              |      |                 |          |   |                              |   |                 |  |                              |  |   |     
|Outstanding at end of year                                     |  | 215,000           |   |      | $                            | 1.44 |                 | 795,000  |   |                              | $ | 1.09            |  | 985,000                      |  | $ | 1.04
|                                                               |  |                   |   |      |                              |      |                 |          |   |                              |   |                 |  |                              |  |   |     
|Options exercisable at end of year                             |  | 215,000           |   |      | $                            | 1.44 |                 | 795,000  |   |                              | $ | 1.09            |  | 985,000                      |  | $ | 1.04
|Weighted average fair value of options granted during the year |  |                  |   |      | $                            |     |                 | 110,000  |   |                              | $ | 0.04            |  | 160,000                      |  | $ | 1.36



F-17



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##### Table of Contents

##### Index to Financial Statements

PREFERRED VOICE

NOTES TO FINANCIAL STATEMENTS



Note G - Stock warrants:



During the years ended March 31, 2004, 2003 and 2002, the Company issued 250,000, -0- and 180,000 warrants to certain
service providers and business partners at exercise prices ranging from $0.10 to $3.53. The warrants can be exercised at any time and expire at various dates through November 22, 2006.



In accordance with SFAS No. 123, the Company accounts for warrants issued to non-employees at fair value of the warrants at
the grant date. For the years ended March 31, 2004, 2003 and 2002, the Company recognized $8,145, $-0- and $91,186, respectively, as compensation expense and $-0- as stock issuance cost during the years ended March 31, 2004, 2003 and 2002 related to
warrants issued to non-employees.



For the years ended March
31, 2004, 2003 and 2002, the Company issued -0-, -0- and 1,575,000 warrants, respectively, in connection with stock offerings. These warrants were not issued in exchange for goods and services; therefore, no compensation expense was recognized by
the Company during the years ended March 31, 2004, 2003 and 2002.



As of March 31, 2004, 1,022,493 of these warrants have been exercised; none have been forfeited; and 3,080,500 remain outstanding, of which 3,080,500 were vested and exercisable. At March 31, 2004, the remaining weighted average contractual
life was approximately 1.5 years.



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



|                        |  |            |  |      |  |          
|----------------------- |  | ---------- |  | ---- |  | ---------
|                        |  | 2004       |  | 2003 |  | 2002     
|Expected dividend yield |  | 0.00%      |  | N/A  |  | 0.00%    
|Risk-free interest rate |  | 1.48%      |  | N/A  |  | 4.39%    
|Expected life           |  | 1.75 years |  | N/A  |  | 1.5 years
|Expected volatility     |  | 76%        |  | N/A  |  | 86% -131%



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



|                                                               |  |                 |   |      |                              |      |                 |         |   |                              |   |                 |  |                              |  |   |     
|-------------------------------------------------------------- |  | --------------- | - | ---- | ---------------------------- | ---- | --------------- | ------- | - | ---------------------------- | - | --------------- |  | ---------------------------- |  | - | ----
|                                                               |  | 2004            |   | 2003 |                              | 2002
|                                                               |  | Numberof shares |   |      | Weightedaverageexerciseprice |      | Numberof shares |         |   | Weightedaverageexerciseprice |   | Numberof shares |  | Weightedaverageexerciseprice
|Outstanding at beginning Of year                               |  | 756,035         |   |      | $                            | 1.76 |                 | 801,035 |   |                              | $ | 1.76            |  | 621,035                      |  | $ | 1.76
|Granted                                                        |  | 250,000         |   |      |                              | 0.10 |                 |        |   |                              |   |                |  | 180,000                      |  |   | 1.94
|Exercised                                                      |  |                |   |      |                              |     |                 |        |   |                              |   |                |  |                             |  |   |    
|Forfeited                                                      |  |                |   |      |                              |     |                 |        |   |                              |   |                |  |                             |  |   |    
|Expired                                                        |  | (388,000        | ) |      |                              | 1.91 |                 | (45,000 | ) |                              |   | 1.12            |  |                             |  |   |    
|                                                               |  |                 |   |      |                              |      |                 |         |   |                              |   |                 |  |                              |  |   |     
|Outstanding at end of year                                     |  | 618,035         |   |      | $                            | 1.17 |                 | 756,035 |   |                              | $ | 1.76            |  | 801,035                      |  | $ | 1.76
|                                                               |  |                 |   |      |                              |      |                 |         |   |                              |   |                 |  |                              |  |   |     
|Options exercisable at end of year                             |  | 618,035         |   |      | $                            | 1.17 |                 | 756,035 |   |                              | $ | 1.76            |  | 801,035                      |  | $ | 1.76
|Weighted average fair value of options granted during the year |  | 250,000         |   |      | $                            | 0.03 |                 |        |   |                              | $ |                |  | 180,000                      |  | $ | 1.97



F-18



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##### Table of Contents

##### Index to Financial Statements

PREFERRED VOICE

NOTES TO FINANCIAL STATEMENTS



Note G - Stock warrants (continued):



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



|                                                               |  |                  |   |      |                              |      |                  |           |                              |   |                  |  |           |                              |  |   |     
|-------------------------------------------------------------- |  | ---------------- | - | ---- | ---------------------------- | ---- | ---------------- | --------- | ---------------------------- | - | ---------------- |  | --------- | ---------------------------- |  | - | ----
|                                                               |  | 2004             |   | 2003 |                              | 2002
|                                                               |  | Number of shares |   |      | Weightedaverageexerciseprice |      | Number of shares |           | Weightedaverageexerciseprice |   | Number of shares |  |           | Weightedaverageexerciseprice
|Outstanding at beginning of year                               |  | 2,532,668        |   |      | $                            | 1.64 |                  | 2,532,668 |                              | $ | 1.64             |  | 1,252,668 |                              |  | $ | 1.75
|Granted                                                        |  |                 |   |      |                              |     |                  |          |                              |   |                 |  | 1,575,000 |                              |  |   | 1.95
|Exercised                                                      |  |                 |   |      |                              |     |                  |          |                              |   |                 |  | (200,000  | )                            |  |   | 1.15
|Forfeited                                                      |  |                 |   |      |                              |     |                  |          |                              |   |                 |  |          |                              |  |   |    
|Expired                                                        |  | (285,203         | ) |      |                              | 1.82 |                  |          |                              |   |                 |  | (95,000   | )                            |  |   | 3.04
|                                                               |  |                  |   |      |                              |      |                  |           |                              |   |                  |  |           |                              |  |   |     
|Outstanding at end of year                                     |  | 2,247,465        |   |      | $                            | 1.75 |                  | 2,532,668 |                              | $ | 1.64             |  | 2,532,668 |                              |  | $ | 1.64
|                                                               |  |                  |   |      |                              |      |                  |           |                              |   |                  |  |           |                              |  |   |     
|Options exercisable at end of year                             |  | 2,247,465        |   |      | $                            | 1.75 |                  | 2,532,668 |                              | $ | 1.64             |  | 2,532,668 |                              |  | $ | 1.64
|Weighted average fair value of options granted during the year |  |                 |   |      | $                            |     |                  |          |                              | $ |                 |  | 1,575,000 |                              |  | $ | 1.95



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



|                                                               |  |                  |  |                              |      |                  |           |   |                              |   |                  |  |           |                              |  |   |     
|-------------------------------------------------------------- |  | ---------------- |  | ---------------------------- | ---- | ---------------- | --------- | - | ---------------------------- | - | ---------------- |  | --------- | ---------------------------- |  | - | ----
|                                                               |  | 2004             |  | 2003                         |      | 2002            
|                                                               |  | Number of shares |  | Weightedaverageexerciseprice |      | Number of shares |           |   | Weightedaverageexerciseprice |   | Number of shares |  |           | Weightedaverageexerciseprice
|Outstanding at beginning of year                               |  | 4,083,703        |  | $                            | 1.67 |                  | 4,318,703 |   |                              | $ | 1.62             |  | 2,698,703 |                              |  | $ | 1.75
|Granted                                                        |  | 250,000          |  |                              | 0.10 |                  | 110,000   |   |                              |   | 1.25             |  | 1,915,000 |                              |  |   | 1.59
|Exercised                                                      |  |                 |  |                              |     |                  |          |   |                              |   |                 |  | (200,000  | )                            |  |   | 1.15
|Forfeited                                                      |  |                 |  |                              |     |                  |          |   |                              |   |                 |  |          |                              |  |   |    
|Expired                                                        |  | 1,253,203        |  |                              | 1.44 |                  | (345,000  | ) |                              |   | 1.01             |  | (95,000   | )                            |  |   | 3.04
|                                                               |  |                  |  |                              |      |                  |           |   |                              |   |                  |  |           |                              |  |   |     
|Outstanding at end of year                                     |  | 3,080,500        |  | $                            | 1.61 |                  | 4,083,703 |   |                              | $ | 1.67             |  | 4,318,703 |                              |  | $ | 1.62
|                                                               |  |                  |  |                              |      |                  |           |   |                              |   |                  |  |           |                              |  |   |     
|Options exercisable at end of year                             |  | 3,080,500        |  | $                            | 1.61 |                  | 4,083,703 |   |                              | $ | 1.67             |  | 4,318,703 |                              |  | $ | 1.62
|Weighted average fair value of options granted during the year |  | 250,000          |  | $                            | 0.03 |                  | 110,000   |   |                              | $ | 0.04             |  | 1,915,000 |                              |  | $ | 1.62



F-19



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##### Table of Contents

##### Index to Financial Statements

PREFERRED VOICE

NOTES TO FINANCIAL STATEMENTS



Note H - Income taxes:



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



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



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



|                                                             |  |      |   |      |   |      |  |   |  
|------------------------------------------------------------ |  | ---- | - | ---- | - | ---- |  | - | -
|                                                             |  | 2004 |   | 2003 |   | 2002
|Current income taxes                                         |  | $    |  |      | $ |     |  | $ | 
|Change in deferred income taxes due to temporary differences |  |      |  |      |   |     |  |   | 
|                                                             |  |      |   |      |   |      |  |   |  
|                                                             |  | $    |  |      | $ |     |  | $ | 
|                                                             |  |      |   |      |   |      |  |   |  



The provision for
income taxes for the years ended March 31, 2004, 2003 and 2002, differs from the expected tax benefit (computed using the 34% U.S. federal corporate rate to income before income taxes) as follows:



|                                 |  |      |          |   |      |   |          |      |  |   |            |  
|-------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | ---------- | -
|                                 |  | 2004 |          |   | 2003 |   |          | 2002 | 
|Computed expected tax benefit  |  | $    | (111,000 | ) |      | $ | (426,000 | )    |  | $ | (1,304,000 | )
|Nondeductible items              |  |      | 3,000    |   |      |   | 4,000    |      |  |   | 45,000     |  
|Temporary differences            |  |      | (6,000   | ) |      |   | (58,000  | )    |  |   | 44,000     |  
|Net operating loss carry-forward |  |      | 114,000  |   |      |   | 480,000  |      |  | $ | 1,215,000  |  
|                                 |  |      |          |   |      |   |          |      |  |   |            |  
|Provision for income taxes       |  | $    |         |   |      | $ |         |      |  | $ |           |  
|                                 |  |      |          |   |      |   |          |      |  |   |            |  



F-20



---

##### Table of Contents

##### Index to Financial Statements

PREFERRED VOICE

NOTES TO FINANCIAL STATEMENTS



Note H - Income taxes (continued):



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



|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|----------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                  |  | 2004 |            |   | 2003 |   |            | 2002 | 
|Accumulated depreciation                                          |  | $    | (57,000    | ) |      | $ | (52,000    | )    |  | $ | (3,500     | )
|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Gross deferred tax liabilities                                    |  | $    | (57,000    | ) |      | $ | (52,000    | )    |  | $ | (3,500     | )
|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Stock warrant compensation                                        |  | $    | 3,000      |   |      | $ |           |      |  | $ | 31,000     |  
|Accounts receivable                                               |  |      | 2,000      |   |      |   |           |      |  |   |           |  
|Accrued liabilities                                               |  |      | 3,000      |   |      |   | 2,000      |      |  |   | 8,000      |  
|Net operating loss carry-forward                                  |  |      | 5,724,000  |   |      |   | 5,610,000  |      |  |   | 5,121,000  |  
|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Gross deferred tax assets                                         |  | $    | 5,732,000  |   |      | $ | 5,612,000  |      |  | $ | 5,160,000  |  
|Valuation allowance                                               |  |      | (5,675,000 | ) |      |   | (5,560,000 | )    |  |   | (5,156,500 | )
|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|                                                                  |  | $    | 57,000     |   |      | $ | 52,000     |      |  | $ | 3,500      |  
|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Net deferred tax assets                                           |  | $    |           |   |      | $ |           |      |  | $ |           |  
|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|The change in the deferred tax valuation allowance is as follows: |  | $    | 115,000    |   |      | $ | 403,500    |      |  | $ | 1,256,500  |  
|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  



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



The Company has available at March 31, 2004, a net operating loss carry-forward of approximately $16,944,000, which can be used to offset future taxable income through the year 2024. Utilization of net operating loss
carry-forwards in the future may be limited if changes in the Companys stock ownership create a change of control as provided in Section 382 of the Internal Revenue Code.



Note I - Commitments:



The Company leases its office facilities and various office equipment under operating leases expiring through December 2008. Following is a schedule of
future minimum lease payments required under the above operating leases as of March 31, 2004:



|                      |  |        |        
|--------------------- |  | ------ | -------
|Year ending March 31, |  | Amount
|2005                  |  | $      | 62,096 
|2006                  |  |        | 53,820 
|2007                  |  |        | 53,820 
|2008                  |  |        | 53,820 
|2009                  |  |        | 40,365 
|                      |  |        |        
|                      |  | $      | 263,921
|                      |  |        |        



F-21



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##### Table of Contents

##### Index to Financial Statements

PREFERRED VOICE

NOTES TO FINANCIAL STATEMENTS



Total rent expense charged to operations was $201,949, $292,940 and $238,859 for the years ended
March 31, 2004, 2003 and 2002, respectively.



Note J  Extinguishment
of debt:



During the years ended March 31, 2004 and 2002,
the Company negotiated settlements of amounts owed to a certain holders of notes payable by the Company. The negotiated settlements resulted in a reduction of the Companys notes and accrued interest payable in the amount of $81,685 and $11,992
for the years ended March 31, 2004 and 2002, respectively.



Note K 
Negotiated settlement and lawsuit settlement:



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



The lawsuit proceeded to trial and the jury returned its verdict; but prior to any judgment being signed by the court, the parties announced that all
matters in dispute between them had been resolved by an agreement. The court accepted the agreement. The agreement called for the Company to pay $150,000 to the customer, of which $132,293 remains unpaid as of March 31, 2004. For the year ended
March 31, 2003, The Company recognized $342,579 of previously deferred revenue related to the customers deposits.



Note L- Subsequent events



On May 18, 2004, the Company completed the sale of ten million shares of common stock and warrants to purchase five million shares of common stock of the
Company. The warrants are exercisable for 5 years at an exercise price of $0.12 per share of common stock. The sale was a private equity offering that raised $1 million in gross proceeds from existing institutional and individual investors.



Note M  Managements intent:



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



F-22