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, 2000

[ ] Transition report under  Section 13 or 15 (d) of the Securities Exchange Act
    of 1934 for the transition period from _____________ to ____________

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           Common Stock, $0.001 par value
12(g) of the Exchange Act:                    ------------------------------
                                                     (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. [X]

State issuer's revenues for its most recent fiscal year:  $885,134.00

The  aggregate  market  value  of  the  voting  and  non-voting  stock  held  by
non-affiliates  of  the  registrant  as  of  June  30,  2000  was  approximately
$42,719,109. 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 30, 2000,  there were 13,626,492  shares of the common stock,  $0.001
par value, of the registrant issued and outstanding.

Transitional Small Business Disclosure Format: Yes          No      X
                                                  --------       -------
<PAGE>



<TABLE>
<CAPTION>

                              Preferred Voice, Inc.

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


PART II
     Item 5.   Market for Common Equity and Related Stockholder Matters......................................      8
     Item 6.   Management's Discussion and Analysis or Plan of Operations....................................      9
     Item 7.   Financial Statements..........................................................................      14



PART III
     Item 9.   Directors, Executive Officers, Promoters and Control Persons:  Compliance with Section 16(a)
     of the Exchange Act.....................................................................................      15
     Item 10.  Executive Compensation........................................................................      16
     Item 11.  Security Ownership of Certain Beneficial Owerns and Managements...............................      17
     Item 12.  Certain Relationships and Related Transactions................................................      18
     Item 13.  Exhibits, List and Reports on Form 8-K........................................................      19


SIGNATURES...................................................................................................      21

INDEX TO EXHIBITS............................................................................................      22
</TABLE>

<PAGE>

                                     PART I


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

                         Item 1: Description of Business

         Background of the Company

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

                  The  Company  was  incorporated  in Delaware in 1992 under the
         name  of   Direct   Connect,   Inc.   and  began   operations   in  the
         telecommunications  industry under the name of Preferred Telecom,  Inc.
         in April 1995. The Company began as a long distance  telecommunications
         carrier with a variety of enhanced services,  however, in February 1997
         the Company  sold to Brite Voice  Systems,  Inc.  ("Brite") a number of
         assets,  including the Company's  end-user  customer  base. The Company
         elected  to sell  these  assets  because  it  believed  that the growth
         prospects of this aspect of the business were limited.  The Company has
         since  focused on  enhanced  telephone  services  that  feature  speech
         recognition   technology,   believing  that  there  are  larger  market
         opportunities  in  offering  enhanced  speech  recognition  services to
         telecommunications providers.

         The Market and Market Strategy

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

                  ILECs  comprise  the  largest  market  of   telecommunications
         providers.  Of the approximate 1,700 ILECs in the United States,  1,400
         have less than 50,000  lines  each.  These  ILECs  comprise  fifteen to
         twenty percent of the ILEC market and  approximately  40 million lines.
         ILECs  already  have an  existing  subscriber  base,  and  the  Company
         believes  that most of them desire to add enhanced  service  options to
         increase   revenue  and  deter  potential   competition.   The  Federal
         Communications  Commission  ("FCC")  reported  in a report  released in
         April of 1999  that in 1998  alone, the tier  1 local telephone  common
         carriers spent  over $6  billion on  upgrading  to  digital  electronic
         central office switches, which enable them to provide their subscribers
         the latest enhanced services.  Many ILECs have already begun to utilize
         outboard platforms for certain call processing services,

                                       1

<PAGE>




         as  well  as  voice  mail,  however,  the  Company  believes  that  the
         convenience  of its System  will draw many ILECs to use its  collocated
         Systems.

                  WCCs have an estimated 80 million subscribers nationwide.  The
         FCC has sold  spectrum for up to eight  operators per market in each of
         the 722 FCC designated  wireless markets in the United States. A report
         dated January, 1999 from Cahners  In-Stat Group  estimates  that by the
         year 2002, medium and large businesses will spend over $117  billion on
         wireless equipment and services,  more than double the $54 billion they
         spent in 1998. The WCCs need to capitalize on this growth.  The Company
         believes that WCCs want to differentiate themselves from each other and
         be  competitive  so that many are beginning to offer their  subscribers
         enhanced  services,  including  voice  messaging  and  voice  activated
         services.  In  addition,   WCCs  are  under  pressure  from  regulatory
         authorities to provide  wireless  phone  subscribers a safer method for
         using their phones while driving.

                  As of December,  1999 there were  approximately  212  facility
         based CLECs nationwide.  The general  focus of the  CLECs has  been  to
         raise capital and build networks with the acquisition of customer bases
         lagging behind.  The Strategis  Group,  a  telecommunications  research
         group, in June  of 1998 predicted  that CLECs will  secure more than 17
         percent of the  local exchange market  by 2004. The  Company  therefore
         believes that the  CLEC market  will  provide  a  tremendous  marketing
         opportunity over the next two years.

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

                  There is also government  regulation being proposed  regarding
         the use of wireless  phones  while  driving.  A  representative  of the
         National Conference of State Legislatures stated to a representative of
         the Company  that a  report  soon  to  be  published  by  the  National
         Conference of State  Legislatures will show  that at  least  37  states
         since 1995 have proposed bills  concerning cellular  telephone  use  in
         automobiles. Five municipalities  have passed laws requiring the use of
         hands-free cell  phone while driving  and one municipality  passed such
         legislation which was  declared void in  an appellate court  as  it was
         ruled to be  preempted by portions  of the  state  motor  vehicle  code
         dealing with careless  driving.  Legislation of  this sort, if  enacted
         and upheld, 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.
         The Company believes  that its voice  activated dialing, along with the
         hands-free speaker  phones and headsets  available in the market,  will
         provide WCCs with  a means of  complying with the  proposed regulations
         and make WCCs  using the Company's  product and services leaders in the
         industry.


                                       2

<PAGE>

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

                  The ILECs.  The  Company  believes  that its  revenue  sharing
         market strategy is the most  economically  viable method for many ILECs
         to provide speech  recognition  enhanced services to their subscribers.
         The ILECs and WCCs are the two primary markets in which the Company has
         focused  its  marketing  efforts,   offering  these  telecommunications
         providers a revenue sharing  opportunity.  The Company focuses on these
         markets  because  the  providers  in  these  markets  have an  existing
         customer base.  The Company has focused its marketing  efforts on ILECs
         with access lines of less than 100,000.  The Company  intends to market
         to larger  telephone companies  when it  establishes  a  strong  market
         presence in the medium and smaller telephone company market.

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

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

                  The ILECs are responsible  for billing and collecting  revenue
         generated from the VIP System's  enhanced  services.  However,  the VIP
         System can produce  customer  information for marketing or billing use.
         In addition,  the Company assists each  telecommunications  provider in
         marketing  the services by  providing  various  co-branded  advertising
         materials  the Company has  designed  and by training  the ILEC's sales
         force and customer  service staff. The Company has executed eleven such
         long-term revenue sharing agreements.

                  In addition the Company has a test  agreement  with Sleepy Eye
         Telephone  Company  in  Minnesota  dated May 27,  1999.  The Sleepy Eye
         system  began its test period on June 15, 2000 and will  continue for a
         sixty day period during which time the Company will be responsible  for
         all  testing  and  customer  provisioning  while  Sleepy  Eye  will  be
         responsible  for  providing  collocation  space for the  System and for
         billing and collection services.  At the end of the test period, Sleepy
         Eye may choose to enter into the standard contract as set forth above.

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

         Standard ILEC/WCC Contract.  The Company uses the same standard form of
Software License Agreement and Marketing Agreement for each ILEC and WCC that it
services. The Software License Agreement grants each participating ILEC or WCC a
license to use the Company's  software and all  subsequent  improvements  to the
software in the ILEC's or WCC's local calling areas.  The Company  retains title
to the  software  and  requires  that the ILECs  and WCCs  keep all  information
related to the software confidential. The term of the Software License Agreement
coincides with that of the Marketing Agreement.

         The Marketing  Agreements have provisions to remain in effect for up to
ten years. Most 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.  In the  Marketing  Agreement,  the Company
agrees to install the VIP System at the

                                       3

<PAGE>




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

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

         The  Company has also  marketed  its  services  to CLECs.  CLECs face a
distinct  challenge because they must rely on ILECs to provide the final link in
the communications path to subscribers or expend significant  resources to build
their own network.  The Company is not currently  focusing on CLECs because most
CLECs do not currently  have the customer base to support the Company's  revenue
sharing agreement. The Company,  however, has contracted to sell thirty-nine VIP
System boxes to KMC Telecom Holdings,  Inc. ("KMC") for installation and use. In
exchange for an initial  licensing fee for each market,  the Company's  contract
with KMC grants KMC a license to use the Company's  software and all  subsequent
improvements  of the  software  in  certain  designated  markets.  The number of
markets  covered by the agreement may be expanded up to a defined maximum number
on prior written notice to the Company. As with the ILEC and WCC agreements, the
Company  agrees to install and test the System,  after which time KMC can accept
or reject the  System.  The  Company has agreed not to install VIP Systems or to
license such systems to others in the designated  markets.  The Company also has
agreed to provide KMC  technical  support and  training for KMC  personnel.  Two
years after the Systems are accepted in a licensed market, KMC must begin paying
monthly  fees for use of the  Systems  subject to KMC's right to  terminate  the
entire contract on standard  events of default,  like breach of the agreement by
or insolvency of the Company. Throughout the term of the agreement, KMC may also
be required to pay a support fee for  training  and related  support done by the
Company in the designated  markets.  If the Company desires to provide  services
directly to its own subscribers in the designated markets,  the Company must pay
KMC $1.25 per month per subscriber.  The Company has delivered and installed the
first KMC  system in  Huntsville,  Alabama  and  anticipates  deployment  of the
remaining 38 systems by the end of 2000.

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

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

                                       4

<PAGE>




efforts.  The Company has solved its  billing  problems  and expects to roll out
pricing for its  offerings to its master  distributors  by the third  quarter of
2000 so that the distributors may begin their selling efforts.

         The Company  utilizes  direct mail and personal  sales calls to contact
and  market its VIP  Systems to  telecommunications  providers  in the  targeted
markets.

Product and Services

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

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

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

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

         Traditional call processing systems engage at least two ports during an
entire call to process incoming and outgoing  information while the conversation
takes place.  The VIP System  utilizes  release link  technology 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 the  telecommunication
provider's  switch. The VIP System speech  recognition  software  recognizes the
words  of the  caller  and  the  Company's  proprietary  software  looks  up the
telephone number in that subscriber's  directory and then hands the call back to
the switch for dialing  and other call  processing  functions.  With the release
link  technology,  the VIP System  can  process  over 7,000  calls per hour in a
single 48 port system.

         The VIP System's speech recognition  software works in conjunction with
over 13 separate enhanced service  applications the Company has created with its
own  software,  some of which are  discussed  below.  The  Company  uses  speech
recognition  technology  created by Philips Speech Processing to process natural
dialogue  speech for the Company's  operating and software  systems.  The speech
recognition  software,  which is based on  phonetics,  may be  programmed  to be
speaker dependent or speaker  independent.  The software recognizes spoken words
or  sentences  and  completes  the call as  instructed.  The speech  recognition
software allows callers to use continuous  digit speech without  requiring users
to change the  cadence of their  speech or speak  between  beeps to fit a speech
recognition template or prompt.

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

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

         EMMA the  Perfect  Receptionist.  The  Company's  VIP  System  software
provides  telephone   subscribers  with  the  first  remote  accessed  automated
attendant  service.  Emma answers the subscriber's  phone with a custom greeting
and listens as a caller  speaks a name,  department,  or location  listed in the
subscriber's voice dialing directory.  Emma the Perfect Receptionist then routes
the call to the person, department or location requested. On outbound calls,

                                       5

<PAGE>




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 System of a change in his or her
location by giving voice  commands to the System.  A name from the  Subscriber's
voice dialing  directory can be used as the new "locate" phone number.  Incoming
calls for the Subscriber are routed to the pre-programmed "locate" phone number.
That phone number can be either local or long distance,  as required.  The Smart
Line  may also be used to  screen  calls  allowing  the  subscriber  to take the
incoming call or forward it to voice mail.

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

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

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

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

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

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

         Electronic  Talking Phone Book.  This service allows a provider to load
its entire database of business and  residential  customers into the VIP System.
Any person making a call in a participating provider's area is able to press 411
or dial a local  access  number and speak the city and name of the  business  or
person listed. Like the current live directory assistance systems, the automated
system  provides  the  caller  with the  number  and gives them the option to be
connected. This application may be used as a substitute for an ILEC's, CLEC's or
WCC's  current 411 service and provides the ILECs,  CLECs and WCCs with a method
for  reducing  their  costs for  directory  service  operators.  As with the 41l
service,  the ILECs, CLECs and WCCs may also use the service to increase revenue
by  charging  a nominal  fee for the  connection  of a call.  In the  Electronic
Talking  Phone  Book,  the  ILECs,  CLECs and WCCs may also  enter a list of the
businesses  in the Yellow Pages of the phone book. If such a service is offered,
a  subscriber  could  ask for a list of a  certain  type  of  business,  such as
airlines,  and EMMA  would  read  back the  appropriate  names.  As with the 411
service,  the VIP System  could then  complete  the call for the customer for an
extra charge.

                                       6

<PAGE>




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

         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 they  will hear the most  current  market
summary. The user may also retrieve quotes on specific stocks.

         Guest Talk. This service  provides an automatic  answering  service for
hotels using speech recognition.  At check-in the guest's name will be activated
in the Guest Talk  system.  Callers to the hotel  number are routed to the Guest
Talk  System.  They may ask for the guest by name and will be  connected  to the
guest's  appropriate  hotel  extension  (room).  Guest Talk will also handle the
routing of calls for the  hotel's  employees,  concierge,  reservations  and the
front desk. Customized call routing may also be set up.

Competition

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

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

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

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

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

                                       7

<PAGE>




Customer Service

         The Company has developed an automated  customer  service  called "Help
Me" that can assist  subscribers  with their  services.  If a  subscriber  has a
question  regarding  any  of  the  applications  to  which  the  subscriber  has
subscribed,  the  automated  "Help Me" has scripted  instructions  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
that the subscriber has chosen.  This program is currently  being used by Sleepy
Eye Telephone Company during its test period to assist new subscribers.

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

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

Employees

         As of July 10, 2000, the Company had 33 employees, all of whom are full
time.

Patents, Trademarks and Copyright

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

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

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

         The Company has received  registered  trademarks from the United States
Patent and Trademark  Office for the following:  Preferred/telecom,  Secure Card
and Use Your  Voice.  The Company  has  applied  for  various  other  trademarks
regarding its services but has not yet received them.

                                       8

<PAGE>




Research and Development

         The Company has spent the last three years  developing its  proprietary
software in conjunction with testing the Philips Speech  Processing  software to
create the VIP System.  The Company  estimates  that it has spent  approximately
$690,000  during the last two fiscal years in direct  research  and  development
activities and approximately  $2,400,000 in indirect costs,  which costs include
general overhead during the time in which the VIP System was being developed.

                        Item 2: Description of Properties

         The  Company's  executive  offices  are located in Dallas,  Texas.  The
Company leases 6,123 square feet of space in a facility as a tenant. The term of
the lease is through  December 31, 2003 and the rent is presently  $8,357.90 per
month  through  December 31, 2000,  after which point it will be increased  each
year thereafter.

                            Item 3: Legal Proceedings

         As of July 10, 2000, there were no material legal  proceedings  pending
against the Company.

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

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

                                     PART II

        Item 5. Market for Common Equity and Related Stockholder Matters

         The Common Stock is listed on the OTC Electronic  Bulletin  Board.  The
following  table  indicates the quarterly  high and low bid price for the Common
Stock on the OTC Electronic  Bulletin Board for the fiscal year ending March 31,
2000 and  March  31,  1999.  Such  inter-dealer  quotations  do not  necessarily
represent actual transactions and do not reflect retail mark-ups,  mark-downs or
commissions.

                                 OTC ELECTRONIC

                                 BULLETIN BOARD

                                    BID PRICE

Fiscal 1999                                 HIGH                           LOW
1st Quarter                                 $3.25                         $1.865
2nd Quarter                                 $2.875                        $1.00
3rd Quarter                                 $1.25                         $0.75
4th Quarter                                 $2.75                         $0.687

Fiscal 2000
1st Quarter                                 $2.25                         $0.875
2nd Quarter                                 $2.125                        $1.375
3rd Quarter                                 $5.00                         $1.437
4th Quarter                                 $7.625                        $3.375




<PAGE>




         On July 10, 2000, the bid price of  the Common Stock as reported on the
OTC Electronic Bulletin Board was $4.03.

         As of June 30, 2000, there were  approximately 835 holders of record of
the Common Stock.

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

Recent Sales of Unregistered Securities

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

On January 21,  2000,  the Company  issued 500 shares of common stock to Anthony
Clure at a purchase  price of $1.03 per share  pursuant  to the  exercise  of an
employee  stock  option.  On the same day, the Company also issued 750 shares of
common stock to Lori Rubottom at a purchase  price of $.20 per share pursuant to
the exercise of an employee stock option.

On February 23, 2000, the Company issued 100,000 shares of common stock to Jacob
Wizman at a purchase price of $2.00 per share for $200,000.

On March 24,  2000,  the Company  issued 5,000 shares of common stock to Harolyn
Glicker at a purchase price of $3.00 per share for $15,000  pursuant to exercise
of a warrant.

All of the transactions referred to in this section are exempt from registration
under the Securities  Act pursuant to Section 4(2) of the Securities  Act. These
transactions  did not involve an underwriter  and no  underwriting  discounts or
commissions were paid.

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

         The  following   description  of   "Management's   Plan  of  Operation"
constitutes  forward-looking  statements  for purposes of the Securities Act and
the Exchange Act and as such involves known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be  materially  different  from future  results,  performance  or
achievements expressed or implied by such forward-looking  statements. The words
"expect",  "estimate",  "anticipate",  "predict",  "believes",  "plan",  "seek",
"objective"  and similar  expressions  are intended to identify  forward-looking
statements or elsewhere in this report.  Important  factors that could cause the
actual results,  performance or achievement of the Company to differ  materially
from the Company's  expectations  include the  following:  1) one or more of the
assumptions   or  other  factors   discussed  in  connection   with   particular
forward-looking statements or elsewhere in this report prove not to be accurate;
2) the Company is  unsuccessful  in  increasing  sales  through its  anticipated
marketing  efforts;  3) mistakes in cost  estimates  and cost  overruns;  4) the
Company's  inability to obtain  financing for general  operations  including the
marketing of the Company's  products;  5) non-acceptance of one or more products
of  the  Company  in the  marketplace  for  whatever  reason;  6) the  Company's
inability to supply any product to meet market demand; 7) generally  unfavorable
economic  conditions  which  would  adversely  effect  purchasing  decisions  by
distributors,  resellers or consumers;  8)  development  of a similar  competing
product at a similar price point;  9) the  inability to  adequately  protect the
Company's  intellectual  property;  10) if the Company  experiences labor and/or
employment problems such as the loss of key personnel,  inability to hire and/or
retain  competent   personnel,   etc.;  and  11)  if  the  Company   experiences
unanticipated problems and/or force majeure events (including but not limited to
accidents, fires, acts of God etc.), or is adversely affected by problems of its
suppliers,  shippers,  customers or others. All written or oral  forward-looking
statements attributable to the Company are expressly qualified in their entirety
by such factors.  The Company  undertakes no obligation to publicly  release the
result of any revisions to these forward-looking  statements that may be made to
reflect events or circumstances after

                                       10

<PAGE>




the  date  hereof  or  to  reflect  the  occurrence  of  unanticipated   events.
Notwithstanding  the foregoing,  the Company is 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 the  Company's  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
Consolidated Financial Statements, including the notes thereto.

Overview

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

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

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

         In December of 1998, the Company realized that the resources  necessary
to sell and market its services  directly to subscribers would require extensive
amounts of working  capital  and began  researching  venues  which  already  had
inherent  customer  bases.  The  first  distribution  channel  that the  Company
explored was the use of master  distributors in various cities and states around
the country.  The Company  believes  this will be a source of customer  addition
once the  Company is in the  position  to locate  its VIP  Systems in the master
distributor marketing areas. The second is through revenue sharing directly with
ILECs,  WCCs,  and CLECs.  This avenue is  extremely  attractive  to the Company
because these  entities  already have customer bases and the  infrastructure  to
service large numbers of customers. To date, the Company has signed twenty three
ILEC and WCC multi-year contracts.

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

Results of Operations

         The Company  recorded a net loss of $993,066,  or $0.09 per share,  for
the fiscal  year ended  March 31,  2000,  compared  to a net loss of $690,598 or
$0.10 per share,  for the fiscal  year ended March 31,  1999,  and a net loss of
$381,991 or $0.07 per share, for the fiscal year ended March 31, 1998.

                                       11

<PAGE>





         Total Sales

         Total revenue for  the fiscal year  ended March 31, 2000,  was $885,134
compared  to  $180,383  and $6,874 for the years  ended  March 31, 1999 and 1998
respectively. Of the revenue booked in the fiscal year ended March 31, 2000, 65%
was generated from one-time licensing fees to KMC Telecom Holdings, 22% was from
sales of its VIP systems, 9.9% from customer tests, 2.4% from master distributor
fees for specific  marketing rights, and the remaining .7% from service fees for
the Company's "Emma the Perfect  Receptionist"  and "Smart Line". For the fiscal
period  ended March 31,  1999,  revenues of $180,383  were  generated,  94% from
master distributor fees and the remaining 6% from service fees for the Company's
end user  customers.  For the fiscal  period ended March 31,  1998,  revenues of
$6,874  were  generated  100%  from  service  fees  for the  Company's  end user
customers.

         The Company  anticipates  that  revenues  from the sale of its services
will grow  gradually in the second half of calendar year 2000 as it installs VIP
Systems  in the  ILECs  and WCCs  which  have  already  signed  revenue  sharing
agreements  and as VIP Systems  are  purchased  and  installed  at KMC's  switch
locations.  The Company does not anticipate  substantial  revenues going forward
from the sale of master  distributorships,  as it has had in fiscal  year  ended
1999.

         Cost of Sales

         Cost of sales for the year ended  March 31, was  $215,293  compared  to
$15,033 and $2,206 for the years ended March 31, 1999 and 1998, respectively. In
fiscal year 2000,  54% of costs were for VIP system  hardware  purchased by KMC,
13% direct costs associated with the closing of the KMC licensing agreement, and
33% for network infrastructure such as collocations, connectivity, system access
and  long  distance.  For  1999 and  1998  cost of  sales  was 100% for  network
infrastructure  such as  collocations,  connectivity,  system  access  and  long
distance.

         Selling, General and Administrative

         Selling, general and administrative expenses  for the fiscal year ended
March 31, 2000 were $1,675,971  compared to $768,024 and $425,304 for the fiscal
years ended March 31, 1999 and 1998,  respectively.  The increases  from 1998 to
1999 and 1999 to 2000 are due to  increased  staffing and  additional  marketing
efforts of the  Company's  Emma  services to potential  parties to the Company's
revenue  sharing and master  distributor  agreements.  The Company  expects that
selling, general and administrative expenses will continue to increase in fiscal
year 2001,  such  expenses to include  costs related to the number of employees,
office space  requirements and general overhead.  However,  the Company believes
that such expenses will not increase proportionately with revenue from sales.

         Research and Development

         The Company has not expensed any research and development costs for the
years stated on its financial statements,  but has capitalized costs of $705,934
for  development of its software and hardware for the year ended March 31, 1999,
in comparison to $413,109 and $233,093 for the fiscal years ended March 31, 1999
and 1998 respectively.

         Extraordinary Items

         The Company has recognized  income from the  extinguishment  of debt of
$59,976 for the fiscal year ended  March 31, 2000 and $88,828 and  $217,442  for
the fiscal years ended March 31, 1999 and 1998 respectively.

         Income Taxes

         As of March 31, 2000, the Company had cumulative  federal net operating
losses of approximately $6.8 million,  which can be used to offset future income
subject to federal income tax through the fiscal year 2020.

                                       12

<PAGE>




Liquidity and Capital Resources

         Throughout  fiscal 1999 and 2000,  the Company has continued to sustain
operating  losses  that  have  resulted  in the use of its  cash  reserves.  The
Company's cash and cash  equivalents at March 31, 2000 were $1,373,291  compared
to $41,750 and  $82,284 respectively for  the fiscal years  ended March 31, 1999
and 1998.

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

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

         In September of 1998, the Company borrowed $100,000 from a more than 5%
beneficial owner. The note was unsecured and bore interest at 10% per annum with
principal and interest due on various dates through  October 16, 1999. This note
has been paid in full.

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

         From  December  of 1998  through  May of  1999,  the  Company  received
$195,000 from the sale of Master Distributorships to eight different entities.

         On March 31,  1999,  the Company  borrowed  $43,000 from a more than 5%
beneficial owner. The note was unsecured and bore interest at 12% per annum with
the principal and interest due on March 30, 2000. The note was convertible  into
shares of common  stock at a  conversion  price of $1.00 per share.  On June 16,
1999 the note was repaid in full.

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

         On June 3, 1999, the Company entered into a software license  agreement
with KMC Telecom  Holdings,  Inc. (KMC).  Under the terms of the agreement,  KMC
paid the Company an initial  license fee of  $570,000.  The  agreement  is for a
period of 10 years and provides for a total of 39  installations  and grants KMC
the ability to add up to 81 additional  installations.  The agreement also calls
for KMC to pay the Company a monthly  license fee ranging  from $1,000 to $3,500
per month for each  software  and  hardware  installation  beginning in the 25th
month after each  installation.  The Company  anticipates  having the initial 39
installations  completed by December,  2000 which would  obligate KMC to pay the
Company monthly license fees of $131,500,  subject to certain adjustments and to
KMC's right to terminate  the entire  contract on standard  events of default by
the Company, beginning January, 2003 and continuing through July, 2010.

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

                                       13

<PAGE>




         On December 22, 1999,  pursuant to Section 4(2) of the Securities  Act,
the Company  conducted an offering of 1,500,000  shares of the Company's  common
stock at $1.50 per share providing the Company with $2,250,000 working capital.

         On February 23, 2000,  pursuant to Section 4(2) of the Securities  Act,
the Company  conducted  an offering of 100,000  shares of the  Company's  common
stock at $2.00 per share providing the Company with $200,000 working capital.

         In contemplation  of additional  capital needs required to continue the
Company's  current  growth rate,  on February 15, 2000,  the Company  engaged an
investment  banking firm to act as a financial  advisor to assist the Company in
obtaining additional financing to expand its business.

Future Obligations

         During the next twelve months,  the Company  plans,  subject to raising
adequate capital, to increase substantially the marketing of its VIP Systems, to
introduce  new  services,  and to continue  refining  the  services it currently
provides.  Subject to the Company's ability to fund the cost, management expects
the Company to hire or contract with  approximately 30 additional persons during
the next twelve  (12)  months,  primarily  to support  its  expanding  marketing
activities  and system  installations.  At July 10, 2000,  the Company  employed
thirty-three (33) full time employees.

         The  ability of the  Company  to raise  capital  is, in the  opinion of
management,  the primary  constraint on the implementation of its business plan.
Management  estimates that during the next twelve (12) months,  the Company will
require approximately  $6,000,000 of equity and/or long term debt to finance its
costs of marketing, system deployment, and continued refinement of its services.
In addition,  the Company will be required to obtain  extensions  of its current
debt or raise  additional  funds of  approximately  $811,000 to retire its debt.
There is no assurance that the Company will be able to secure any such financing
or extensions of its current debt.

Year 2000 Compliance

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

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

         An impact  analysis has been  conducted to identify the risk of failure
within the Company's in-house computer systems.  The Company believes that there
will be no adverse impact with the Year 2000 date change.  However, this risk to
the Company's business relates not only to the Company's  computer systems,  but
also to some degree to those of the Company's  suppliers and customers and there
is a risk that existing and  potential  customers may not purchase the Company's
products in the future if the  computer  systems of such  existing or  potential
customers are adversely impacted by the Year 2000 date changes.  The Company has
developed a policy to ensure that all key  customers,  suppliers  and  strategic
partners  operate and provide  Year 2000  compliant  systems and  software.  The
Company has collected certifications from third parties on compliance.

                                       14

<PAGE>




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

                          Item 7. Financial Statements

                              PREFERRED VOICE, INC.

                              FINANCIAL STATEMENTS

                          MARCH 31, 2000, 1999 AND 1998

                                 C O N T E N T S

                                                                      Page

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

Financial Statements:

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

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

    Statement of Stockholders' Equity (Deficit)...................... F-5

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

    Notes to Financial Statements.................................... F-9-F-19

                                       15




<PAGE>







                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
   and Shareholders

Preferred Voice, Inc.

We have audited the accompanying  balance sheets of Preferred Voice,  Inc. as of
March 31, 2000 and 1999, and the related statements of operations, stockholders'
equity  (deficit) and cash flows for each of the three years in the period ended
March  31,  2000.  These  financial  statements  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Preferred Voice, Inc. at March
31, 2000 and 1999, and the results of its operations and its cash flows for each
of the three  years in the period  ended  March 31,  2000,  in  conformity  with
generally accepted accounting principles.

                                                    PHILIP VOGEL & CO. PC




                                                    Certified Public Accountants

Dallas, Texas

May 5, 2000

                                      F-1

<PAGE>


<TABLE>
<CAPTION>


                              PREFERRED VOICE, INC.

                                 BALANCE SHEETS
                             MARCH 31, 2000 AND 1999

                                                                                               2000               1999
                                                                                          --------------     ---------------
<S>                                                                                       <C>                <C>
       Assets

Current assets:

 Cash and cash equivalents                                                                $   1,373,291      $       41,750
 Accounts receivable, net of allowance for doubtful
    accounts of $-0- in 2000 and $-0- in 1999                                                      3,924                 860
 Employee receivables                                                                                  0               2,500
 Inventory                                                                                        84,724                   0
                                                                                          --------------     ---------------

       Total current assets                                                               $    1,461,939     $        45,110
                                                                                          --------------     ---------------




Property and equipment:

 Computer equipment                                                                       $      321,248     $       223,046
 Furniture and fixtures                                                                           38,880              16,934
 Office equipment                                                                                 18,198              12,493
 Computer software                                                                               384,686             190,063
                                                                                          --------------     ---------------

                                                                                          $      763,012     $       442,536
 Less accumulated depreciation                                                                   253,143             161,049
                                                                                          --------------     ---------------

       Net property and equipment                                                         $      509,869     $       281,487
                                                                                          --------------     ---------------




Other assets:

 Prepaid expenses                                                                         $      761,018     $       761,018
 Deposits                                                                                         85,114              81,535
 Trademarks                                                                                        7,472                   0
 Deferred stock issuance costs                                                                    19,803                   0
                                                                                          --------------     ---------------


       Total other assets                                                                 $      873,407     $       842,553
                                                                                          --------------     ---------------

                                                                                          $    2,845,215     $     1,169,150
                                                                                          ==============     ===============


                                                       F-2

<PAGE>







                                                                                               2000               1999
                                                                                          --------------     ---------------

       Liabilities and stockholders' equity (deficit)

Current liabilities:

 Accounts payable                                                                         $      272,818     $       363,834
 Accrued payroll and payroll taxes                                                                 2,265             226,755
 Accrued interest payable                                                                         39,851             248,967
 Accrued operating expenses                                                                       13,128              13,041
 Accrued vacation                                                                                 11,853               6,570
 Customer deposits                                                                               390,992                   0
 Current maturities of long-term debt                                                             30,000              53,000
 Note payable                                                                                     50,866              50,866
 Notes payable - related parties                                                                       0             100,000
                                                                                          --------------     ---------------


       Total current liabilities                                                          $      811,773     $     1,063,033
                                                                                          --------------     ---------------

Long-term liabilities:

 Notes payable - related parties                                                          $            0     $       590,946
 Long-term debt, net of current maturities                                                             0             253,000
                                                                                          --------------     ---------------


       Total long-term liabilities                                                        $            0     $       843,946
                                                                                          --------------     ---------------

Commitments (Note I)

Stockholders' equity (deficit):
 Common stock, $0.001 par value;
   20,000,000 shares authorized; shares

   issued 13,276,796 and 9,695,681, respectively                                          $       13,277     $         9,695
 Additional paid-in capital                                                                    8,952,788           5,192,033
 Accumulated deficit                                                                          (6,930,755)         (5,937,689)
                                                                                          --------------     ---------------


                                                                                          $    2,035,310     $      (735,961)
 Treasury stock - 385,224 and 385,224
    shares, respectively, at cost                                                                  1,868               1,868
                                                                                          --------------     ---------------


       Total stockholders' equity (deficit)                                               $    2,033,442     $      (737,829)
                                                                                          --------------     ---------------


                                                                                          $    2,845,215     $     1,169,150
                                                                                          ==============     ===============
</TABLE>

                                                       F-3



<PAGE>



<TABLE>
<CAPTION>

                              PREFERRED VOICE, INC.

                            STATEMENTS OF OPERATIONS
                FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998

                                                                            2000               1999                 1998
                                                                       --------------     --------------       ---------------
<S>                                                                    <C>                <C>                  <C>

Sales                                                                  $      885,134     $      180,383       $         6,874

Cost of sales                                                                 215,293             15,033                 2,206
                                                                       --------------     --------------       ---------------


       Gross profit                                                    $      669,841     $      165,350       $         4,668
                                                                       --------------     --------------       ---------------

Costs and expenses:

 Selling, general and administrative expenses                          $    1,675,971     $      768,024       $       425,304
 Interest expense                                                              28,556            176,752               178,797
                                                                       --------------     --------------       ---------------


       Total costs and expenses                                        $    1,704,527     $      944,776       $       604,101
                                                                       --------------     --------------       ---------------


Loss from operations                                                   $   (1,034,686)    $     (779,426)      $      (599,433)

Other income (expense):
 Loss from sale of assets                                                     (18,356)                 0                     0
                                                                       --------------     --------------       ---------------

Loss from operations before income taxes

 and extraordinary item                                                $   (1,053,042)    $     (779,426)      $      (599,433)
Provision for income taxes                                                          0                  0                     0
                                                                       --------------     --------------       ---------------


Loss from operations before extraordinary item                         $   (1,053,042)    $     (779,426)      $      (599,433)

Extraordinary item:
 Gain from extinguishment of debt (less applicable
    income taxes of $-0-)(Note L)                                              59,976             88,828               217,442
                                                                       --------------     --------------       ---------------


Net loss                                                               $     (993,066)    $     (690,598)      $      (381,991)
                                                                       ==============     ==============       ===============


Per share amounts:

 Loss from continuing operations                                               $(0.10)            $(0.11)               $(0.11)
                                                                       ==============     ==============       ===============

 Gain from extinguishment of debt                                               $0.01              $0.01                 $0.04
                                                                       ==============     ==============       ===============
                                                                                                                             $
 Net loss                                                                      $(0.09)            $(0.10)                (0.07)
                                                                       ==============     ==============       ===============
</TABLE>
                                                       F-4




<PAGE>


<TABLE>
<CAPTION>


                              PREFERRED VOICE, INC.

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998

                                                                                     Shares of common stock
                                                                    ---------------------------------------------------------
                                                                     Authorized       Issued       Outstanding    In treasury
                                                                    -------------  -------------  --------------  -----------
<S>                                                                 <C>            <C>            <C>             <C>
Balance - March 31, 1997                                               20,000,000      5,430,422       5,267,922      162,500

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

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

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

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

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

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

 Conversion of prime plus 2% debentures - April 6, 1999                         0        121,261         121,261            0
 Conversion of 8% debentures - April 6, 1999                                    0        200,000         200,000            0
 Conversion of 9% debentures - April 6, 1999                                    0        466,667         466,667            0
 Exercise of stock warrants - April 6, 1999                                     0          5,000           5,000            0
 Conversion of 10% debentures - June 18, 1999                                   0        386,000         386,000            0
 Exercise of stock warrants - June 28, 1999                                     0        200,000         200,000            0
 Conversion of 12% debentures - June 29, 1999                                   0         26,381          26,381            0
 Issuance of common stock - July 1, 1999                                        0        320,000         320,000            0
 Exercise of stock warrants - September 29, 1999                                0         20,000          20,000            0
 Exercise of stock warrants - October 4, 1999                                   0         22,297          22,297            0
 Exercise of stock warrants - December 16, 1999                                 0        160,000         160,000            0
 Conversion of 7% debenture - December 17, 1999                                 0         47,254          47,254            0
 Issuance of common stock - December 29, 1999                                   0      1,500,005       1,500,005            0
 Exercise of employee stock option - January 20, 2000                           0            500             500            0
 Issuance of common stock - February 16, 2000                                   0        100,000         100,000            0
 Exercise of employee stock option - February 22, 2000                          0            750             750            0
 Exercise of stock warrants - March 27, 2000                                    0          5,000           5,000            0

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

Balance - March 31, 2000                                               20,000,000     13,276,796      12,891,572      385,224
                                                                    =============  =============  ==============  ===========
</TABLE>
                                                       F-5
<PAGE>

<TABLE>
<CAPTION>

                                        Amounts

---------------------------------------------------------------------------------------
    Common                         Additional                               Total
 stock $0.001      Treasury          paid-in        Accumulated         stockholders'
  par value          stock           capital          deficit          equity (deficit)
--------------   -------------    -------------    --------------      ----------------
<S>              <C>              <C>              <C>                 <C>

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

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

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

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

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


             0               0                0          (690,598)             (690,598)
--------------   -------------    -------------    --------------      ----------------

$        9,695   $      (1,868)   $   5,192,033    $   (5,937,689)     $       (737,829)

           121               0           90,826                 0                90,947
           200               0          149,800                 0               150,000
           467               0          349,533                 0               350,000
             5               0                0                 0                     5
           386               0          192,614                 0               193,000
           200               0           99,800                 0               100,000
            27               0           26,354                 0                26,381
           320               0          359,680                 0               360,000
            20               0            3,980                 0                 4,000
            22               0           22,275                 0                22,297
           160               0          159,840                 0               160,000
            47               0           42,009                 0                42,056
         1,500               0        2,048,500                 0             2,050,000
             1               0              500                 0                   501
           100               0          199,900                 0               200,000
             1               0              149                 0                   150
             5               0           14,995                 0                15,000

             0               0                0          (993,066)             (993,066)
--------------   -------------    -------------    --------------      ----------------

$       13,277   $      (1,868)   $   8,952,788    $   (6,930,755)     $      2,033,442
==============   =============    =============    ==============      ================

</TABLE>
                                       F-6


<PAGE>


<TABLE>
<CAPTION>


                              PREFERRED VOICE, INC.

                            STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998

                                                                                2000              1999               1998
                                                                           ---------------   --------------    ----------------
<S>                                                                        <C>               <C>               <C>
Cash flows from operating activities:


 Cash received from customers                                              $     1,273,062   $      179,510    $         23,576
 Cash paid to suppliers and employees                                           (2,093,749)        (500,572)           (189,734)
 Interest received                                                                       0                0               2,376
 Interest paid                                                                    (224,235)               0                  (4)
                                                                           ---------------   --------------    ----------------


       Net cash used by operating activities                               $    (1,044,922)  $     (321,062)   $       (163,786)
                                                                           ---------------   --------------    ----------------


Cash flows from investing activities:


 Capital expenditures                                                      $      (389,436)  $     (151,772)   $       (138,621)
 Proceeds from sale of assets                                                        1,750            1,300               5,683
                                                                           ---------------   --------------    ----------------


       Net cash used by investing activities                               $      (387,686)  $     (150,472)   $       (132,938)
                                                                           ---------------   --------------    ----------------


Cash flows from financing activities:


 Proceeds from issuance of stock                                           $     2,811,952   $            0    $              0
 Proceeds from notes payable                                                       200,000          351,000             314,850
 Note principal payments                                                          (228,000)         (20,000)               (700)
 Proceeds from sale - leaseback transaction                                              0          100,000                   0
 Deferred stock issuance costs                                                     (19,803)               0                   0
                                                                           ---------------   --------------    ----------------


       Net cash provided by financing activities                           $     2,764,149   $      431,000    $        314,150
                                                                           ---------------   --------------    ----------------


Net increase (decrease) in cash and cash equivalents                       $     1,331,541   $      (40,534)   $         17,426

Cash and cash equivalents:
 Beginning of year                                                                  41,750           82,284              64,858
                                                                           ---------------   --------------    ----------------


 End of year                                                               $     1,373,291   $       41,750    $         82,284
                                                                           ===============   ==============    ================



                                                       F-7


<PAGE>







                                                                                2000              1999               1998
                                                                          ----------------   --------------    ----------------

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


 Net loss                                                                  $      (993,066)  $     (690,598)   $       (381,991)
                                                                          ----------------   --------------    ----------------

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


    Depreciation                                                           $       140,948   $       80,113    $         45,945
    Amortization                                                                         0            2,869               1,900
    (Gain) loss on sale of assets                                                   18,356             (186)              4,937
    Provision for losses on accounts receivable                                          0                0                 446

    Changes in assets and liabilities:
       (Increase) decrease in accounts receivable                                   (3,064)            (860)             18,207
       (Increase) decrease in employee receivables                                   2,500           (2,500)              1,500
       Increase in inventory                                                       (84,724)               0                   0
       Increase in other receivables                                                     0                0             (25,854)
       Decrease in certificate of deposit                                                0                0              52,376
       (Increase) decrease in deposits                                              (3,579)           2,875               7,359
       Decrease in prepaid expenses                                                      0           38,982               1,676
       Decrease in deferred contract costs                                               0                0              50,000
       Increase in patents and trademarks                                           (7,472)               0                   0
       Increase (decrease) in accounts payable                                     (91,016)          58,635             (46,129)
       Increase (decrease) in accrued expenses                                    (414,797)         189,608              35,718
       Increase in customer deposits                                               390,992                0                   0
       Increase in deferred gain on sale - leaseback                                     0                0              70,124
                                                                          ----------------   --------------    ----------------

                                                                                         $                $                   $
       Total adjustments                                                           (51,856)         369,536             218,205
                                                                          ----------------   --------------    ----------------


Net cash used by operating activities                                      $    (1,044,922)  $     (321,062)   $       (163,786)


Schedule of non-cash investment and financing activities:


   Issuance of common stock in exchange for debt                           $       952,383   $    1,879,809    $        304,122
                                                                          ================   ==============    ================

</TABLE>

                                                       F-8

<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS

Note A - General organization:

   Preferred Voice, Inc. (the "Company") is a Delaware corporation  incorporated
in 1992. On February 25, 1997, the Company's  stockholders approved changing the
name of the Company to better reflect the nature of the Company's business.  The
Company  commenced  business on May 13, 1994, and was in the  development  stage
until  August 1,  1995.  The  Company  provides  products  and  services  to the
telecommunications  industry  throughout  the United  States and  maintains  its
principal offices in Dallas,  Texas. The preparation of financial  statements in
conformity with generally accepted accounting  principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements  and  accompanying  notes.  Actual  results  could  differ from these
estimates.  Certain  prior year amounts have been  reclassified  for  comparison
purposes.

Note B - Summary of significant accounting policies:

   Cash and cash equivalents
   -------------------------

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

   Accounts receivable
   -------------------

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

   Inventory
   ---------

       Inventories consist of finished goods and are stated at the lower of cost
(specific identification) or market.

   Depreciation
   ------------

       The cost of property and  equipment  is  depreciated  over the  estimated
   useful  lives  of  the  related  assets.  Depreciation  is  computed  on  the
   straight-line   method  for  financial  reporting  purposes  and  the  double
   declining method for income tax purposes.

       Maintenance   and  repairs  are  charged  to  operations  when  incurred.
Betterments and renewals are capitalized.

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

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

   Income taxes
   ------------

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

                                      F-9

<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS

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

   Fair value of financial instruments
   -----------------------------------

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

   Revenue recognition
   -------------------

       The Company is engaged as a provider of  telecommunication  products  and
   services.  Generally, the Company recognizes revenue under the accrual method
   when its services and products are provided.  During the year ended March 31,
   2000, the majority of the Company's  revenue  consisted of licensing fees and
   systems  sales.  Licensing  fees are paid in order to  obtain  the  rights to
   utilize the Company's software  applications in certain  geographical  areas.
   Licensing fee income is recognized  when the contract is executed.  Licensing
   fee income for the years ended March 31,  2000,  1999 and 1998 was  $570,000,
   $-0- and $-0-,  respectively.  System sales revenues are recognized  when the
   customer  accepts  the system,  which  usually  occurs  within five days from
   delivery and  installation.  System sale income for the years ended March 31,
   2000, 1999 and 1998 was $195,496, $-0- and $-0-, respectively.

   Advertising expense
   -------------------

       The Company expenses  advertising  costs when the  advertisement  occurs.
   Total advertising expense amounted to $39,613, $42,269 and $-0- for the years
   ended March 31, 2000, 1999 and 1998, respectively.

   Loss per share
   --------------

       The Company  adopted the provisions of Statement of Financial  Accounting
   Standards (SFAS) No. 128, Earnings per Share, during the year ended March 31,
   1998. SFAS No. 128 reporting  requirements  replace primary and fully-diluted
   earnings per share (EPS) with basic and diluted EPS.  Basic EPS is calculated
   by dividing  net income 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.

       Loss per  share  is  based  on the  weighted  average  number  of  shares
   outstanding of 11,283,538,  7,205,065 and 5,219,890 for the years ended March
   31, 2000, 1999 and 1998, respectively.

   Amortization
   ------------

       Fees and other  expenses  associated  with the  issuance of  subordinated
   convertible  debentures are being amortized on the straight-line  method over
   the term of the debentures beginning in April, 1995. Amortization expense was
   $-0-,  $2,869 and $1,900 for the years ended March 31,  2000,  1999 and 1998,
   respectively.

       The cost of trademarks are being  amortized on the  straight-line  method
over a period of 15 years.

                                      F-10

<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS

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

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

       The Company has adopted the  provisions of SFAS No. 121,  Accounting  for
   the Impairment of Long-Lived  Assets and for Long-Lived Assets to Be Disposed
   Of. This statement  requires that  long-lived  assets and certain  identified
   intangibles  be  reviewed  for  impairment  whenever  events  or  changes  in
   circumstances  indicate  that the  carrying  amount  of an  asset  may not be
   recoverable.  Recoverability  of assets to be held and used is  measured by a
   comparison  on the  carrying  amount  of an asset to  future  net cash  flows
   expected to be generated by the asset.  If such assets are  considered  to be
   impaired,  the impairment to be recognized is measured by the amount by which
   the carrying amount of the assets exceed the fair value of the assets. Assets
   to be disposed of are  reported at the lower of the  carrying  amount or fair
   value less costs to sell.

   Comprehensive income
   --------------------

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

   Segments of an enterprise and related information
   -------------------------------------------------

       The Company  adopted the  provisions  of SFAS No. 131,  Disclosure  about
   Segments of an Enterprise and Related  Information on April 1, 1998. SFAS No.
   131 establishes  annual and interim  reporting  standards for an enterprise's
   operating  segments and related  disclosures  about its  products,  services,
   geographic areas and major customers. Adoption of this statement did not have
   a material impact on the Company's financial position,  results of operations
   or cash  flows,  as any  effects  are  limited to the form and content of its
   disclosures.

   New accounting pronouncements
   -----------------------------

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

Note C - Notes payable:

<TABLE>
<CAPTION>

   Notes payable consist of the following at March 31, 2000 and 1999:

                                                                                          2000             1999
                                                                                       ----------       -----------
                                                                                       <S>              <C>
Outside interests                                                                      $  50,866        $   50,866
Related parties                                                                                0           690,946
                                                                                       ----------       -----------
                                                                                       $  50,866        $  741,812
                                                                                       ==========       ===========

                                      F-11
<PAGE>

                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS

Note C - Notes payable (continued):

   Note payable to outside interests include:

                                                                                          2000             1999
                                                                                       ----------       ------------

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


The note to Brite  Voice  Systems,  Inc.  (Brite) is  currently  in dispute  and
     effective April 1997, the Company  discontinued the accrual of interest
     expense.  Interest  expense  charged to operations  related to the Brite note
     was $-0- for each of the years ended March 31, 2000, 1999 and 1998,
     respectively.

   Notes payable to related parties include:

                                                                                          2000             1999
                                                                                       ----------       ------------


          Notes payable to Pegasus  Settlement Trust (PST), a stockholder of the
          Company.  The  beneficiary  and a trustee of PST are  officers  of the
          Company.  The notes were  unsecured and bore interest at rates ranging
          from 9% to 10% and  prime  rate  (8.5% at  March  31,  1999)  with the
          principal  and accrued  interest  payable at maturity on various dates
          through  December  31,  1998.  The notes were  converted  into 787,928
          shares of common stock on April 6, 1999.                                     $        0       $  590,946

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

         Total related party notes payable                                             $        0       $  690,946

         Less current portion                                                                   0          100,000
                                                                                       -----------      -------------
         Long-term portion                                                             $        0       $  590,946
                                                                                       ===========      =============
    The PST notes payable that were  converted  into common stock  subsequent to
March  31,  1999,  have  been   classified  as  long-term   liabilities  in  the
accompanying 1999 balance sheet.

   Interest  expense  charged to  operations  related to the related party notes
payable was $8,485, $64,199 and $86,172 for the years ended March 31, 2000, 1999
and 1998, respectively.

                                                       F-12

<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS

Note D - Long-term debt:

 Long-term debt consisted of the following at March 31, 2000 and 1999:

                                                                                          2000             1999
                                                                                       ----------       ------------

          Notes payable dated various dates from May 20, 1996 through  September
          9, 1996 secured by common stock with  principal  and accrued  interest
          due at maturity on various  dates through  September 9, 1998.  216,250
          warrants  to  purchase  shares  of  common  stock at $3.00  per  share
          expiring on various dates through September 9, 1998 were issued to the
          note holders.  These notes were  converted  into  1,602,712  shares of
          common stock on various dates through March 31, 2000.                        $  20,000        $   60,000

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

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

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

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

          Note  payable  to an  individual.  This  note was  unsecured  and bore
          interest at 12%  per annum with  the  principal and  interest  due  on
          March 30, 2000.                                                                      0            43,000
                                                                                       ----------       -------------

         Total related party notes payable                                             $  30,000        $  306,000

         Less current portion                                                             30,000            53,000
                                                                                       ----------       -------------

         Long-term portion                                                             $       0        $  253,000
                                                                                       ==========       =============

</TABLE>


                                      F-13
<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS

Note D - Long-term debt (continued):

   Current  maturities of long-term  debt  obligations  that were converted into
common stock  subsequent  to March 31, 1999,  have been  classified as long-term
liabilities in the accompanying 1999 balance sheet.

   Interest  expense  charged to operations  related to the  long-term  debt was
$20,072, $112,553 and $92,625 for the years ended March 31, 2000, 1999 and 1998,
respectively.

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

   During the year ended March 31, 2000,  $590,947 of notes payable with various
interest rates were  converted into 787,928 shares of common stock,  $193,000 of
10%  convertible  debentures were converted into 386,000 shares of common stock,
$125,000 of 12%  convertible  debentures  were  converted into 226,381 shares of
common stock and $30,000 of 7% convertible debentures were converted into 47,254
shares of common stock.

Note E - Common stock:

   Stock purchase warrants
   -----------------------

       At March 31,  2000,  the  Company  had  outstanding  warrants to purchase
   2,303,203  shares of the  Company's  common stock at prices which ranged from
   $0.50 per share to $4.00 per share.  The warrants are exercisable at any time
   and expire on dates  ranging from June 12, 2000 to December 1, 2004. At March
   31, 2000, 2,303,203 shares of common stock were reserved for that purpose.

   Common stock reserved
   ---------------------

       At March 31, 2000, shares of common stock were reserved for the following
purposes:

Exercise of stock warrants                                        2,303,203
Exercise and future grants of stock
   options and stock appreciation rights                            421,750
                                                              -------------

                                                                  2,724,953
                                                              =============

                                      F-14


<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS

Note F - Income taxes:

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

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

   The provision for income taxes consists of:
<TABLE>
<CAPTION>

                                                      2000              1999             1998
                                                 --------------    ---------------   -------------
<S>                                              <C>               <C>               <C>

Current income taxes                             $            0    $             0   $           0

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

                                                 $            0    $             0   $           0
                                                 ==============    ===============   =============
</TABLE>

   Deferred tax (liabilities) assets consist of the following:

                                                   2000              1999
                                              --------------    ---------------


Accumulated depreciation                      $     (38,000)    $      (30,000)
                                              --------------    ---------------


Gross deferred tax liabilities                $     (38,000)    $      (30,000)
                                              --------------    ---------------


Accounts receivable                           $            0    $             0
Accrued liabilities                                    4,000              2,000
Start-up expenditures                                  2,000              7,000
Net operating loss carryforward                    2,324,000          2,010,000
                                              --------------    ---------------


Gross deferred tax assets                     $    2,330,000    $     2,019,000
Valuation allowance                               (2,292,000)        (1,989,000)
                                              --------------    ---------------
                                              $       38,000    $        30,000

Net deferred tax assets                       $            0    $             0
The increases in the deferred tax valuation
   allowance are as follows:                  $      303,000    $       235,000
                                              ==============    ===============

                                      F-15

<PAGE>

                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS

Note F - Income taxes (continued):

   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,  2000,  a  net  operating   loss
carryforward  of  approximately  $6,835,000  which can be used to offset  future
taxable income through the year 2020.

Note G - Stock option plan:

   On November 1, 1994,  the Company  adopted a stock award and  incentive  plan
which permits the issuance of options and stock appreciation  rights to selected
employees and independent  contractors of the Company. The plan reserves 450,000
shares of common  stock for grant and  provides  that the term of each  award be
determined by the committee of the Board of Directors  (Committee)  charged with
administering the plan.

   Under the terms of the plan,  options  granted may be either  nonqualified or
incentive stock options,  and the exercise  price,  determined by the Committee,
may not be less  than the  fair  market  value of a share on the date of  grant.
Stock appreciation  rights granted in tandem with an option shall be exercisable
only to the extent the  underlying  option is  exercisable  and the grant  price
shall be equal to the  exercise  price of the  underlying  option.  At March 31,
2000,  options to purchase  406,500 shares at exercise  prices of $0.20 to $1.50
per share were  outstanding.  No stock  appreciation  rights had been granted at
March 31, 2000.

Note H - Stock options:

   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:

<TABLE>
<CAPTION>

                                      2000                   1999                  1998
                                -----------------    --------------------    -----------------
<S>                             <C>                  <C>                     <C>
Expected dividend yield               0.00%                 0.00%                  0.00%

Risk-free interest rate           6.31% - 6.35%         5.06% - 5.09%          5.62% - 5.65%

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

Expected volatility                   177%                   189%                  207%

</TABLE>


                                      F-16

<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS

Note H - Stock options (continued):

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

                                                      2000              1999              1998
                                                 --------------    ---------------   --------------
<S>                                              <C>               <C>               <C>
Net loss:

  As reported                                    $    (993,066)    $     (690,598)   $    (381,991)

  Proforma                                       $  (1,111,018)    $     (841,514)   $    (424,637)

Loss per common share:

  As reported                                    $      (0.09)     $       (0.10)    $      (0.07)


   Proforma                                      $      (0.10)     $       (0.12)    $      (0.08)

</TABLE>

   Following is a summary of the stock award and incentive plan during the years
ended March 31, 2000, 1999 and 1998:

<TABLE>
<CAPTION>

                                              2000                          1999                            1998
                                                     Weighted                       Weighted                      Weighted
                                       Number         Average       Number          Average         Number         Average
                                         Of          Exercise         Of            Exercise          Of          Exercise
                                       Shares          Price        shares           Price          shares          Price
                                      -------        --------     --------          --------       -------        ---------
<S>                                  <C>            <C>          <C>               <C>            <C>            <C>

Outstanding at beginning of year      382,750       $    0.92      297,000         $    1.00             0       $     0.00

Granted                                30,000            1.50      245,750              0.86       297,000             1.00
Exercised                              (1,250)           0.53            0              0.00             0             0.00
Forfeited                              (5,000)           1.03     (160,000)             1.00             0             0.00
                                      -------        --------     --------          --------       -------        ---------

Outstanding at end of year            406,500       $    0.96      382,750         $    0.96       297,000       $     1.00
                                      =======        ========     ========          ========       =======        =========

Options exercisable at end of year    304,583       $    0.94      173,250         $    0.93       304,583       $     1.00

Weighted average fair value of
  options granted at end of year       30,000       $    1.28      245,750         $    0.75       297,000       $     0.93

</TABLE>

                                      F-17


<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS

Note I - Commitments:

   The Company leases its office  facilities and various office  equipment under
operating  leases  expiring  through  December 2003.  Following is a schedule of
future minimum lease payments  required under the above  operating  leases as of
March 31, 2000:

  Year ending

   March 31,                                         Amount
---------------                                   ------------


     2001                                         $    112,919
     2002                                              116,067
     2003                                              114,377
     2004                                               81,033
                                                  ------------
                                                  $    424,396

       Total rent expense charged to operations was $76,317, $27,416 and $64,463
   for the years ended March 31, 2000, 1999 and 1998, respectively.

Note J - Barter transaction:

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

Note K - Sale - leaseback transactions:

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

Note L - Extinguishment of debt:

   During the years ended March 31, 2000, 1999 and 1998, the Company  negotiated
settlements  of amounts  owed to  certain  of its  vendors  and  employees.  The
negotiated settlements resulted in a reduction of the Company's accounts payable
and accrued operating  expenses in the amount of $59,976,  $88,828 and $217,442,
respectively,   which  has  been  reported  as  an  extraordinary  item  in  the
accompanying statements of operations.

                                      F-18

<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS

Note M -  Going concern:

   The Company has incurred  substantial  operating  losses to date. The Company
has  raised,  and  intends to  continue  to raise,  additional  capital  through
subsequent offerings of its common stock in over-the-counter securities markets.

   On June 3, 1999, the Company entered into a software  license  agreement with
KMC Telecom Holdings, Inc. (KMC). Under the terms of the agreement, KMC paid the
Company an initial license fee of $570,000.  The agreement is for a period of 10
years and provides for a total of 39 installations and grants KMC the ability to
add up to 81 additional  installations.  The agreement also calls for KMC to pay
the Company a monthly  license  fee ranging  from $1,000 to $3,500 per month for
each software and hardware  installation  beginning in the 25th month after each
installation.  The  Company  anticipates  having the  initial  39  installations
completed by December 2000 which would  obligate KMC to pay the Company  monthly
license fees of $131,500, subject to certain adjustments, beginning January 2003
and continuing through January 2010.

   As of May 5, 2000,  the Company  has entered  into  fifteen  revenue  sharing
agreements  with various  telecommunication  service  providers  throughout  the
United States.  Generally, the agreements provide for the Company to receive 30%
to 70% of the revenue from the sale of the Company's services depending upon the
level of revenue generated.  The Company  anticipates to begin receiving revenue
from the agreements in September 2000.

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

Note N - Concentrations:

   Concentrations of credit risk
   -----------------------------

       At March 31, 2000,  the Company had cash balances of $1,536,804  with one
   banking  institution,  which is in excess of the federally  insured amount of
   $100,000 per institution.  These balances are before considering  outstanding
   items.

   Concentrations of business - major customers
   --------------------------------------------

       During the years ended March 31, 2000 and 1999, a substantial  portion of
   its revenue was derived  from one and six  customers,  respectively.  Revenue
   from these customers was approximately $852,921 and $170,000, respectively.

                                      F-19

<PAGE>




                                    PART III

      Item 9. Directors, Executive Officers, Promoters and Control Persons;
                Compliance with Section 16(a) of the Exchange Act

Directors, Executive Officers, Promoters and Control Persons

         The Board of  Directors  currently  consists of three (3)  people.  The
following  table  sets  forth  information  about all  Directors  and  executive
officers of the Company and all persons nominated or chosen to become such:

<TABLE>
<CAPTION>

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

Mary G. Merritt                                        43              Director, Vice President-                 1994
                                                                              Finance and
                                                                          Secretary/Treasurer

Scott V. Ogilvie                                       46                      Director                          2000

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

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

William D. Sprague                                     51              Vice President-Corporate                  N/A
                                                                              Operations
</TABLE>


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

     Ms.  Merritt is a founder of the Company and has been a director since May,
1994. She has served as Vice President - Finance and  Secretary/Treasurer  since
inception.  She served as President of Star of Texas,  Inc., a trust  management
account  service  from 1989 to May 1994.  She  served  as  Controller  of United
Medicorp for several  months  during  1992.  Ms.  Merritt is a certified  public
accountant  and was  employed  by Ernst & Whinney  from  1981 to 1989,  her last
position being senior manager for entrepreneurial services.

     Mr.  Ogilvie was elected as a director of the Company on February 20, 2000.
Mr. Ogilvie has been 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.  Stone joined the Company in December  1998 as Vice  President of Sales
and  Marketing  after  serving  for two years as a Vice  President  of Sales and
Marketing for US Metrolines  and Director of National  Accounts at Matrix,  both
Jensen UICI  Companies.  Before that from June 1994 to March 1996,  he served as
Co-Founder/President of Telecable Communications, Inc. and from February 1991 to
June 1994 Director of Sales at Value Added

                                       16



<PAGE>




Communications.  All of the  businesses  in  which  Mr.  Stone  has  worked  are
telecommunications providers servicing a customer base similar to that which the
Company currently serves.

         Mr.  Williams  joined the Company in January 1998 as Vice  President of
Software   Development  bringing  25  years  experience  in  system  design  and
development.  During 1990, Mr. Williams worked with Voice Control Systems, Inc.,
a company in the speech recognition field, as a software programmer.  After that
he served as Vice  President of Engineering  for ActionFax,  Inc. for 5 years, a
company that designed multi-dialing and other fax related services. From 1995 to
1998, Mr. Williams owned and operated Business Hotlines,  a software development
company  headquartered in Dallas,  Texas. He also worked in the Central Research
Laboratory  at Texas  Instruments  on the  development  team that  delivered the
world's first commercially available voice-mail system for VMX, Inc.

         Mr.  Sprague  joined  the  Company  in July 1999 as Vice  President  of
Corporate   Operations   responsible   for  product   development,   production,
deployment, technical support, customer service and day-to-day operations of the
company.  Mr. Sprague  brings to Preferred  Voice over 29 years of experience in
operations  in the  telecommunications  industry.  From 1990 until  joining  the
Company,  he held  executive  positions  in network  engineering,  planning  and
technical operations, both in the field and headquarters,  with GTE. He also, at
one time, held the position of Chief Engineer at Citizens  Utilities  Company of
California.  He  has  spoken  at  industry  forums  regarding  telephony  access
technologies and issues.

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

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

                         Item 10. Executive Compensation

         The following tables set forth the compensation  paid by the Company to
certain executive officers during the fiscal year ended March 31, 2000, 1999 and
1998.

<TABLE>
<CAPTION>

                               Annual Compensation
                                                                                          Securities Underlying
Name/Principal                   Year Ending                                                 Options/Warrants
Position                           March 31               Salary              Bonus              Granted
--------------                   -----------             --------            -------      ---------------------
<S>                              <C>                     <C>                 <C>          <C>
G. Ray Miller-Chief                  2000                $ 70,083            $10,000                   ---
Executive Officer                    1999                $ 47,333                ---               250,000
                                     1998                $  6,000                ---               200,000

Richard K. Stone                     2000                $ 92,769            $10,500                   ---
Vice President-Sales                 1999                  11,538                ---               120,000
  and Marketing                      1998                     ---                ---                   ---

</TABLE>

No  other  stock  options  or  convertible   securities   were  granted  to  the
aforementioned executive officers.


                                       17



<PAGE>

     Item 11. Security Ownership of Certain Beneficial Owners and Management


         The following table sets forth, as of the close of business on June 30,
2000, 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 30, 2000.

<TABLE>
<CAPTION>

                          Beneficial Ownership (1), (2)

                                                                   Number of
Name of Beneficial Owner                                             Shares            Percentage
------------------------                                           ----------          ----------
<S>     <C>    <C>    <C>    <C>    <C>    <C>
Pegasus Settlement Trust (3)                                        2,715,667              19.93%

G. Ray Miller (4)                                                     550,250               3.91%

Mary G. Merritt(5)                                                  3,517,542              25.17%

Scott V. Ogilvie(6)                                                    40,000                  *

Lawrence E. Steinberg(7)                                            1,407,584              10.25%

Richard K. Stone(8)                                                   120,000                  *

All Directors, and executive officers as a group (five              4,393,792              29.85%
persons)(9)

<FN>

* Less than one percent (1%).

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

2)   Based on  13,626,492  shares of common stock  outstanding  o June 30, 2000.
     Shares of common stock  subject to options that are  exercisable  within 60
     days of June 30, 2000, are deemed  beneficially owned by the person holding
     such options for the purposes of calculating the percentage of ownership of
     such person but are not treated as outstanding for the purpose of computing
     the percentage of any other person.

3)   Pegasus  Settlement  Trust is a Channel  Islands  Trust of which SG Hambros
     Trust Company  (Jersey)  Limited of 7 the Esplanade,  St.  Helier,  Jersey,
     Channel  Islands is Trustee,  and Mary  Merritt is  protector,  with shared
     voting and dispositive  power. G. Ray Miller is the sole beneficiary of the
     Trust.  Pegasus  Settlement  Trust's  address is % SG Hambros Trust Company
     (Jersey) Limited, 7 The Esplanade,  St. Helier, Jersey, Channel Islands JE4
     8RT.

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

5)   Includes  350,000 shares issuable upon exercise of warrants,  36,000 shares
     held by her minor children, and 2,715,667 shares held by Pegasus Settlement
     Trust. Ms. Merritt's address is 6500 Greenville Avenue,  Suite 570, Dallas,
     Texas 75206.

                                       18



<PAGE>




6)   Consists  of  40,000  shares  issuable  upon  exercise  of a  warrant.  Mr.
     Ogilvie's  address is 6500  Greenville  Avenue,  Suite 570,  Dallas,  Texas
     75206.

7)   Includes  100,000  shares  issuable  upon  exercise of warrants held by Mr.
     Steinberg and 216,448  shares in trusts of which he is the Trustee,  two of
     which his children are beneficiaries.  Mr. Steinberg's  address is 5420 LBJ
     Freeway, Suite 1280, Dallas, Texas 75240.

8)   Consists of 120,000 shares  issuable upon exercise of options.  Mr. Stone's
     address is 6500 Greenville Avenue, Suite 570, Dallas, Texas 75206.

9)   Includes the shares described in footnotes 4, 5, 6 and 8.

</FN>
</TABLE>


                                       19



<PAGE>





             Item 12. Certain Relationships and Related Transactions

On  January 5, 1998,  the  Company  issued G. Ray  Miller,  the Chief  Executive
Officer and a director of the Company,  a warrant to purchase  200,000 shares of
common stock of the Company at an exercise price of $1.00 per share on or before
January 5, 2001.  The  warrant  was  issued for Mr.  Miller's  past work for the
Company.

On January 5, 1998,  the Company  issued Mary  Merritt,  the Vice  President  of
Finance and a director of the Company,  a warrant to purchase  100,000 shares of
common stock of the Company at an exercise price of $1.00 per share on or before
January 5, 2001.  The  warrant  was issued for Ms.  Merritt's  past work for the
Company.

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

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

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

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

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

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

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

                                       20



<PAGE>




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

<TABLE>
<CAPTION>

(a) Exhibits

Exhibit
Number               Description of Exhibit
-------              ----------------------
<S>                  <C>
3.1                  Certificate of Incorporation of Preferred/telecom, Inc. filed on August 3, 1992 with the Secretary
                     of State of Delaware (Incorporated by reference to Exhibit 3.1 to the Company's Registration
                     Statement on Form S-1, registration no. 33-92894)
3.2                  Certificate of Amendment, filed on May 2, 1994 with the Secretary of State of Delaware
                     (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1,
                     registration no. 33-92894)
3.3                  Certificate of Amendment, filed on March 21, 1995 with the Secretary of State of Delaware
                     (Incorporated by reference to Exhibit 3.3 to the Company's Registration Statement on Form S-1,
                     registration no. 33-92894)
3.4                  Certificate of Amendment, filed on July 27, 1995 with the Secretary of State of Delaware
                     (Incorporated by reference to Exhibit 3.5 to Amendment No. 1 to the Company's Registration
                     Statement on Form S-1, registration no. 33-92894)
3.5                  Certificate of Amendment, filed on March 7, 1997 with the Secretary of State of Delaware
3.6                  Bylaws of Preferred/telecom, Inc. (Incorporated by reference to Exhibit 3.4 to the Company's
                     Registration   Statement  on  Form  S-1,  registration  no. 33-92894)
4.1                  Specimen Certificate evidencing Common Stock of Preferred/telecom, Inc. (Incorporated by
                     reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1, registration no.
                     33-92894)
10.1*                Form of Warrant Certificate and Schedule of Warrant Certificates
10.2**               Office Building Lease between Greenville Avenue Properties, Ltd. and Preferred Voice, Inc.
10.3**               Collocation License Agreement between NEXTLINK Texas, Inc. and Preferred Voice, Inc.
10.4**               Promissory Note to Capital Growth Fund Ltd., in original principal amount of $83,000.00, dated
                     as of August 3, 1998
10.5**               Promissory Note to Capital Growth Fund Ltd., in original principal amount of $10,000.00, dated
                     as of August 14, 1998
10.6**               Promissory Note to Lawrence E. Steinberg, in original principal amount of $50,000.00, dated as
                     of September 3, 1998
10.7**               Promissory Note to  Bisbro Investments Co., Ltd., in original principal amount of $20,000.00,
                     dated as of October 1, 1998
10.8**               Promissory Note to Universal Asset Fund Ltd., in original principal amount of $20,000.00, dated
                     as of October 1, 1998
10.9**               Promissory Note to Lawrence E. Steinberg, in original principal amount of $50,000.00 dated as
                     of October 16, 1998
10.10**              Promissory Note to Bisbro Investments Co., Ltd., in original principal amount of $30,000.00, dated
                     as of November 10, 1998
10.11**              Promissory Note to Universal Asset Fund Ltd., in original principal amount of $20,000.00, dated
                     as of November 25, 1998
10.12**              Promissory Note to Bisbro Investments Co. Ltd., in original principal amount of $10,000.00, dated
                     as of January 5, 1999
10.13**              Software License Agreement between KMC Telecom Holdings, Inc. and Preferred Voice, Inc.
10.14**              Promissory Note to G. Tyler Runnels, in original principal amount of $43,000.00, dated as of
                     March 30, 1999
10.15**              Equipment Lease between Capital Growth Fund, Ltd. and Preferred Voice, Inc.
10.16**              Equipment Lease between Capital Growth Fund, Ltd. and Preferred Voice, Inc.
10.17**              First Amendment to Lease between Dallas Office Portfolio, L.P. as successor in interest to
                     Greenville Avenue Properties, Ltd. and Preferred Voice, Inc.
10.18**              Master Distributor Agreement between In Touch Solutions, L.L.C. and Preferred Voice, Inc.



                                       21



<PAGE>





10.19**              Master Distributor Agreement between Answering Service, Inc. and Preferred Voice, Inc.
10.20**              Master Distributor Agreement between Amerivoice Telecommunications, Inc. and Preferred Voice,
                     Inc.
10.21**              Master Distributor Agreement between Voicenet New Media, Inc. and Preferred Voice, Inc.
10.22**              Master Distributor Agreement between Best Voice, Inc. and Preferred Voice, Inc.
10.23**              Master Distributor Agreement between Nomis Communications, Inc. and Preferred Voice, Inc.
10.24**              Master Distributor Agreement between  Florida Wireless and Preferred Voice, Inc.
10.25**              Master Distributor Agreement between Voice Retrieval, Inc. and Preferred Voice, Inc.
10.26***             Form of Promissory Note and Schedule (10.7)
10.27****            Subscription Agreement and Letter of Investment Intent of Trition Capital Investments, Ltd., dated
                     July 1, 1999 (10.1)
10.28****            Subscription Agreement and Letter of Investment Intent of JMG Capital Partners, L.P., dated July
                     1, 1999 (10.2)
10.29****            Second Amendment to Lease between Dallas Office Portfolio, L.P. as successor in interest to
                     Greenville Avenue Properties, Ltd. and Preferred Voice, Inc. (10.3)
10.30*****           Form of Subscription Agreement and Schedule (4.8)
10.31*               Volume License Agreement between Philips Speech Processing North America, a division of
                     Philips Electronics North America Corporation, and Preferred Voice, Inc.+
27*                  Financial Data Schedule

<FN>

*Filed herewith

** Filed as an exhibit to the  Company's  Form  10-KSB for the fiscal year ended
March 31, 1999 (File no. 33-92894) and incorporated herein by reference.

*** Filed as an exhibit to the Company's  Form 10-QSB for the quarter ended June
30, 1999 (File no. 33-92894) and incorporated herein by reference.

**** Filed as an exhibit to the  Company's  Form  10-QSB for the  quarter  ended
September 30, 1999 (File no. 33-92894) and incorporated herein by reference.

***** Filed as an exhibit to the  Company's  Form  10-QSB for the quarter  ended
December 31, 1999 (File no. 33- 92894) and incorporated by reference.

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

</FN>
</TABLE>

(b)      Reports on Form 8-K

         None

                                       22



<PAGE>




SIGNATURES

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

                                                   Preferred Voice, Inc.
                                                   (Registrant)



Date: July 14, 2000                                By:  /s/ G. Ray Miller
                                                        ------------------------
                                                        G. Ray Miller, President


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

<TABLE>
<CAPTION>

                  SIGNATURE                                       OFFICE                                 DATE
                  ---------                                       ------                                 ----
<S>                                            <C>                                                  <C>

/s/ G. Ray Miller                              President, Chief Executive Officer and               July 14, 2000
----------------------------                   Chairman of the Board of Directors
G. Ray Miller                                  (Principal Executive Officer)

/s/ Mary G. Merritt                            Secretary, Treasurer and Vice President              July 14, 2000
----------------------------                   of Finance
Mary G. Merritt


</TABLE>

                                       23



<PAGE>



                                INDEX TO EXHIBITS

      Exhibit
      Numbers        Description of Exhibit
      -------        ----------------------

      10.1           Form  of  Warrant  Certificate   and  Schedule  of  Warrant
                     Certificates
      10.31          Volume License Agreement between  Philips Speech Processing
                     North  merica, a  division  of  Philips  Electronics  North
                     America Corporation, and Preferred Voice, Inc.
      27             Financial Data Schedule

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

                                       24