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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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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, 2003
| |  | ----------------------------------------



| ̈ |  | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
|- |  | -------------------------------------------------------------

| | EXCHANGE ACT OF 1934
| | --------------------



| |  | For the transition period from
 to
| |  | ----------------------------------



Commission File Number 33-92894



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PREFERRED VOICE, INC.

(Name of Small Business Issuer in its Charter)



|Delaware                                                       |  | 75-2440201                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer 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.)



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



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



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



Common Stock, $0.001 par value

(Title of class)



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Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for past 90 days.  Yes  x  No ̈



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



State issuers revenues for its most recent fiscal year: $2,124,876



The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of June 23, 2003 was approximately $ 1,750,288. 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 23, 2003, there were 18,407,493 shares of the common stock, $0.001
par value, of the registrant issued and 18,384,993 of such shares outstanding.



Transitional Small Business Disclosure Format:  Yes ̈No  x



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Preferred Voice, Inc.

|           |  | Page                                                                                                                     
|---------- |  | -------------------------------------------------------------------------------------------------------------------------
|PART I     |  |                                                                                                                          
|           |  | Item 1.  Description of Business                                                                                         
|           |  | Item 2.  Description of Properties                                                                                       
|           |  | Item 3.  Legal Proceedings                                                                                               
|           |  | Item 4.  Submission of Matters to a Vote of Security Holders                                                             
|           | 
|PART II    |  |                                                                                                                          
|           |  | Item 5.   Market for Common Equity and Related Stockholder Matters                                                       
|           |  | Item 6.   Managements Discussion and Analysis or Plan of Operations                                                     
|           |  | Item 7.   Financial Statements                                                                                           
|           |  | Item 8.   Changes In and Disagreements With Accountants on Accounting and Financial Disclosure                           
|           | 
|PART III   |  |                                                                                                                          
|           |  | Item 9.   Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
|           |  | Item 10. Executive Compensation                                                                                          
|           |  | Item 11. Security Ownership of Certain Beneficial Owners and Management                                                  
|           |  | Item 12. Certain Relationships and Related Transactions                                                                  
|           |  | Item 13. Exhibits, List and Reports on Form 8-K                                                                          
|           |  | Item 14. Controls and Procedures                                                                                         
|           | 
|SIGNATURES |  | 29                                                                                                                       







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PART I



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



Item 1: Description of Business



Background of
the Company



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



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



The Market and Market Strategy



Cell Phone Companies



Cell phone companies had an estimated 140.7 million subscribers nationwide at the end of December 2002. We believe that the number of wireless subscribers will increase to approximately 168 million subscribers by the end of 2003. The FCC
has licensed spectrum for up to eight operators per market in each of the 734 FCC designated cellular markets in the United States, Puerto Rico, Virgin Islands, Guam and other Territories and U.S. possessions. Wireless phones, are now a mass-market
consumer device with an overall wireless penetration rate of 45% of the U.S. population. We believe cell phone companies need to capitalize on this growth and that they want to differentiate themselves from each other to be competitive. Therefore,
many are beginning to offer their subscribers enhanced services, including voice messaging, e-mail reading, short message services and voice activated services.



Local Telephone Companies



Local telephone companies comprise the largest market of telecommunications providers. The Federal Communications Commission (FCC) reported in
May of 2003 in its report on Local Telephone Competition that by the end of 2002 there were at least 1,300 such telephone companies providing over 162 million of the approximately 187 million end-user service lines nationwide (carriers
with under 10,000 lines in a state were not required to report to the FCC). Local telephone companies already have an existing subscriber base, and we believe that many desire to add enhanced service options to increase revenue and deter potential
competition. The FCC reported in its Statistics of Communications Common Carrier report for year ended December 31, 2001 that in 2001 alone, local telephone common carriers spent over $16 billion on upgrading to digital central office
switches. These switches enable carriers to provide their subscribers the latest enhanced services. We believe many local telephone companies have already begun to utilize outboard platforms for certain call processing services, such as pre-paid
calling cards, as well as voice mail; however, we believe that the convenience of our VIP system will draw many local telephone companies to use our collocated systems.



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Competitive Local Telephone Companies



As of December 2002, there were approximately 350 facilities based
competitive local telephone companies nationwide, providing approximately 24.8 million end-user service lines nationwide. We believe that competitive local telephone companies will secure more than 17% of the $l60 billion local exchange market by
2004. We, therefore, believe that the competitive local telephone market will provide a significant marketing opportunity over the next two years.



Government Regulation



The Telecommunications Act of 1996 requires telecommunications providers to look for new solutions to provide disabled persons equal access to their
systems. Our VIP system may be able to provide a solution for phone companies obligations to the disabled. Section 255 of the Telecommunications Act of 1996 requires a provider of telecommunications service to ensure that its service is
accessible to and usable by individuals with disabilities, if readily achievable. Our VIP system with its voice activated services would allow people with limited manual dexterity, limited reach or strength, limited or no vision or other
disabilities to access the national telecommunication network.



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



Our initial marketing efforts are focused on telecommunications providers, primarily cell phone companies. Greater marketing effort will address local telephone companies with subscriber bases of 10,000 and above, and competitive local
exchange carriers, or competitive local telephone companies, in the near future. The cell phone market has grown from approximately 69 million subscribers in 1998 to approximately 140.7 million subscribers as of December 2002, and as prices for
cellular use drop, cellular use is becoming affordable to more economic segments of the population. These companies are already offering some enhanced services to their subscribers, such as voice mail, call forwarding, call waiting and caller
identification systems. In order to remain competitive, however, cell phone companies, local telephone companies, and competitive local telephone companies, need to provide their subscribers more enhanced services. We believe that our VIP system,
with its enhanced speech recognition services, provides a solution to satisfy this need.



Our Market Strategy



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



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



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



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|Contract. This allows the subscriber to test the services without affirmatively subscribing for the speech services we are offering through their cell
phone company.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



Primary Markets



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



The ease of installation and the fact that we do not charge for the box or
installation, make our system a cost effective option for smaller cell phone companies. However, we have entered into a revenue sharing arrangement with different cell phone companies based upon the revenue generated through sales of the enhanced
services to recoup our costs and generate profits. Generally, we contract to receive seventy percent (70%) of the first $215,000 of revenue generated by sale of our services to end users and decrease the revenue share down to thirty percent (30%)
once we have recovered $250,000 from the contract. Most of our contracts require that the phone companies generate at least $2,000 per month per system for us, based upon varied revenue sharing arrangements, or pay the difference if that amount is
not reached otherwise we have the right to terminate the contract.



The cell phone companies who contract with us are responsible for billing and collecting revenue generated from the VIP systems enhanced services. However, our VIP system can produce subscriber information for marketing or billing
use.In addition, we assist each phone company in marketing the services by providing various co-branded advertising materials we have designed and by training the contracting cell phone companys sales force and customer service staff.
As of June 23, 2003, we had entered into revenue sharing arrangements with thirty-one (31) cell phone companies, twenty of which are providing voice dial services to their subscribers and generating revenues for the cell phone companies and us.



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



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collecting, and like the cell phone companies they also receive our assistance in marketing the VIP systems
enhanced services. We have already entered into revenue sharing arrangements with eighteen (18) local telephone companies, three of which are providing voice dial services to their subscribers and paying us either a percentage of the charges they
receive for the various services we provide or a minimum amount for each of its subscribers to our services.



At the end of the last fiscal year, we relied upon twenty providers subscribers for the revenue we have generated through the revenue sharing
agreements. As of May 31, 2003, approximately 151,000 of the contracting phone companies subscribers have subscribed or are currently opting-in to our voice dial services from twenty different phone companies, 18,000 of which
affirmatively subscribed to our services and 133,000 of which were automatically subscribed to our services by their carrier and they will subsequently have the option to opt-out of the service. By the fiscal quarter ending September 30,
2003, we expect to have two more phone company customers fully implemented and beginning to generate revenue for the phone company and us. As we continue to expand our business, we will not rely as much on these initial revenue share arrangements.



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



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



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



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



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contract and the opt-out contracts, the cell phone company pays us either a percentage of the revenues received from the
phone companys subscribers for the services we offer in that area or a minimum amount for each of its subscribers subscribing to our services.



We have agreed in these addenda to contribute up to $0.50 per subscriber of the revenue we receive for our Safety Talk service to contracting cell phone
companies the costs of advertising the service for the first three months following the date such wireless phone companies commercially offer the service to their subscriber base. However, we believe that we could recover our advertising and
implementation costs with respect to a participating cell phone company under the opt-out contract within the first few months of service. Under our standard contract, we must make significant expenditures to market our product to
contracting companies service areas so that we can obtain initial subscribers. We may recover more of the revenue generated per subscriber under our standard contract by virtue of the higher percentages of the revenue split and the requisite
fees to be paid by the phone company per subscriber, but we may have fewer initial subscribers. The nature of the opt-out contract provides us initially with one-hundred percent (100%) of the subscriber base. We recognize that some subscribers will
elect to opt-out, but we believe that we are more likely to capture a greater number of subscribers because the service is automatically included until a subscriber opts out, or elects to discontinue the services. As a result we can
charge less per subscriber who retains the service and still realize greater overall revenues.



Secondary Markets



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



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



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



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

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

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

| |  |  | Speak, Inc. in Boston, Massachusetts; and
| | - |  | -----------------------------------------

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



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



Our Product and Services



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



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The Product



We have developed what we believe to be a unique system that integrates Scansofts Speech Pearl Natural Dialog speech
recognition software and our own proprietary software called the VIP system. We believe that the systems hardware and software provide a wide variety of speech enabled enhanced services and non-speech enabled call processing services being
sought by phone companies in a deregulated telecommunications industry. The system is versatile enough to work in conjunction with the switching platforms of a number of commonly used technologies, including the Lucent 5ES(2), Nortel DMS-100/500,
and Siemens/Stromberg Carlson switches.



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



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



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



The VIP systems
software currently incorporates several separate enhanced service applications that we have created with our own software. We use speech recognition technology created by Scansoft to process natural dialogue speech in all applications that require
speech recognition. The speech recognition software, which is based on phonetics, may be programmed to be speaker dependent or speaker independent. The software recognizes spoken words or sentences and completes the call as instructed. The speech
recognition software allows callers to use continuous digit speech without requiring users to change the cadence of their speech or speak between beeps to fit a speech recognition template or prompt. We have been granted a worldwide, non-exclusive
perpetual license to use the speech recognition capabilities they have licensed to us in our VIP system.



The Services



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



Speech Enabled Services



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



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



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Smart Line may also be used to screen calls allowing the subscriber to take the incoming call or forward it to voice
mail.



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



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



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



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



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



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



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



Secure Card. The Secure Card is a speech recognition voice activated
long distance calling card. A Secure Card subscriber will be able to dial an 800 access number and speak a security code, and the system will place a call from his or her personal voice directory. 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 he or she will hear the most current market summary. The subscriber may also retrieve quotes on specific stocks.



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Other Services



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



Network Services. We have signed a contract with a web-hosting
provider to provide our current services and new services across their VOIP network. We have placed our VIP system in the providers data center that is connected by routers to their telephone network, allowing us to provide a centralized
exchange for both speech recognition services and non-speech recognition services. Because we are able to use that network, we are able to offer not only our own speech recognition services, but also a speech recognition portal through which voice
portal providers, wireless application providers and other enhanced service providers can develop, manage and deliver their services to both wireless and wireline carriers and those carriers subscribers. Our software is compatible in all major
telecommunications switch and network environments, including SS7, ISDN and IS41 protocols.



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



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



Competition



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



Customer Service



We have 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 which the subscriber has chosen.



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



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



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Employees



As of June 23, 2003, we had 16 full time employees. None of our employees is represented by a labor organization. We
maintain various employee benefits plans and we believe we have excellent relations with our employees.



Patents, Trademarks and Copyright



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



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



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



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



Core Technology and
System Enhancement



We have spent the last three years
developing and enhancing our proprietary software in conjunction with testing the Scansoft software and development of switch integration to create the system. We estimate that we have spent approximately $188,000 during the last two fiscal years in
direct core technology enhancement. We continually evaluate and adjust our VIP system. The ever changing telephony and computer industry requires companies like ours to continue developing new or improved methods to process applications and as new
technology emerges new processes are created to better deploy our services. We currently have eight employees in our software/hardware development and deployment department.



Certain Risk Factors



Risks Related to Our Business



Limited revenue history.



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



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an early stage of development, particularly companies in new and rapidly evolving markets, such as the voice recognition
market. Some of the risks, expenses and difficulties we face are the following:



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Risks
Related to Our Industry



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



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



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



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



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



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



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marketing of new products, services and applications. In addition, our new products, services and applications may not
adequately meet the requirements of the marketplace or achieve market acceptance.



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



Our phone company customers are subject to a number of government regulations and industry standards. Our products, services
and applications must comply with these regulations and standards. Changes to these standards may require us to make periodic changes to our products and services. In addition, we have based our assumptions as to the probability of acceptance of our
services and the potential market for our services on the assumption that state and federal legislation related to disabled persons use of speech recognition applications and the regulation by state and federal authorities of cellular
telephone use while driving will drive demand. If such legislative action is not taken by regulatory authorities, it could have an adverse effect on our marketing efforts or even require us to expend significant amounts of capital on developing
modifications of our existing products and services or new products and services.



Item 2: Description of Properties



Our executive offices are located in Dallas, Texas. We lease 10,764 square feet of space in a facility as a tenant. The term of the lease is through December 31, 2005 and the rent is presently $15,458 per month through December 31, 2003,
after which point it will be increased each year thereafter.



Item 3: Legal Proceedings



On June
3, 1999, we entered into a software license agreement with KMC Telecom Holdings, Inc. Under the terms of the agreement, KMC paid us an initial license fee of $570,000. It has also paid us $391,000 for hardware for eight installations. The agreement
provided for a total of 39 installations and granted KMC the ability to add up to 81 additional installations.



To date, we have installed one system. On September 25, 2000, KMC wrote us and asserted that since it had not accepted the initial installation within
ninety (90) days, it was refusing to accept the system and exercising its right to terminate the agreement with cause under the terms of the agreement. KMC and Preferred agreed to a settlement agreement whereby Preferred will pay KMC $150,000 no
later than October 1, 2003.



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.



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PART II



Item 5. Market for Common Equity and Related Stockholder Matters



The Common Stock is listed on the OTC Electronic Bulletin Board. We plan to apply for listing on the NASD BBX board when it becomes available. The following table indicates the quarterly high and low bid price for the
Common Stock on the OTC Electronic Bulletin Board for the fiscal year ending March 31, 2003 and March 31, 2002. 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 2002 |  | HIGH |      | LOW
|----------- |  | ---- | ---- | ---
|1stQuarter  |  | $    | 3.40 |    
|2ndQuarter  |  | $    | 2.90 |    
|3rdQuarter  |  | $    | 2.90 |    
|4thQuarter  |  | $    | 2.12 |    



|Fiscal 2003 |  |   |      |  |   |     
|----------- |  | - | ---- |  | - | ----
|1stQuarter  |  | $ | 1.30 |  | $ | 0.35
|2ndQuarter  |  | $ | 0.44 |  | $ | 0.24
|3rdQuarter  |  | $ | 0.30 |  | $ | 0.10
|4thQuarter  |  | $ | 0.24 |  | $ | 0.11



On June 23, 2003, the
closing bid price of the Common Stock as reported on the OTC Electronic Bulletin Board was $0.10.



As of June 23, 2003, there were approximately 644 holders of record of the Common Stock. We believe the number of beneficial owners is substantially
greater than the number of record holders because brokers for the benefit of individual investors hold a significant amount of outstanding common stock in street name.



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



Recent Sales of Unregistered Securities



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



On September 3, 1998, we issued
Eugene Starr a warrant to purchase 5,000 shares of common stock at an exercise price of $3.00 per share on or before September 3, 2000. This warrant was exercised on July 13, 2000.



On September 3, 1998, Lawrence E. Steinberg agreed to loan us $100,000. In return, we issued Mr. Steinberg two promissory
notes and a warrant to purchase 100,000 shares of common stock at a price of $1.00 per share on or before October 16, 2001. The notes that were due on September 3, 1999 and October 16, 1999 were repaid on December 30, 1999, and the warrant was
exercised on October 16, 2001.



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



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



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| |  |  | On November 1, 1998, we issued J. Steven Emerson a warrant to purchase 50,000 shares of our common stock at an exercise price of $1.00 per share on or before November 1, 2001 at the
request of Bisbro. The warrant was exercised on March 28, 2001.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On February 10, 1999, we issued Edwin G. Bowles a warrant to purchase 25,000 shares of our common stock at an exercise price of $1.00 per share on or before February 10, 2001 for Mr. Bowles past work for us in
creating the billing system we use with phone companies. On May 10, 2000, Mr. Bowles exercised 15,196 of his warrants and his right to the additional shares subject to the warrant expired under the terms of the warrant agreement.



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



On April 6, 2000,
we issued 9,500 shares of our common stock to Anthony Clure at an exercise price of $1.03 per share pursuant to the exercise of an employee stock option.



Two warrantholders exercised their warrants to purchase a total of 5,736 shares of common stock. On July 18, 2000, we issued 736 shares of common stock to
Murray Alter in a cashless exercise of his warrant to purchase 2,500 shares of our common stock at an exercise price of $3.00 per share. The shares were issued on a net basis. On August 2, 2000, we issued 5,000 shares of our common stock to Patrick
Hund at an exercise price of $3.00 per share pursuant to the exercise of a warrant.



On August 16, 2000, we issued Craig Dierksheide and Ameritel Communications, LLC each warrants to purchase 13,750 and 11,250 shares of our common stock, respectively, at an exercise price of $1.00 per share to be
exercised on or before December 30, 2000, in exchange for a warrant to purchase 25,000 shares of our common stock at the same exercise price, that was previously issued to In Touch Solutions, LLC. On January 23, 2001, our board of directors resolved
to extend the terms of exercise of these warrants to December 30, 2002. On December 30, 2002, both of these warrants expired.



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



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



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



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



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our common stock to Mr. Newell at an exercise price of $1.03 per share pursuant to the exercise of an employee stock
option.



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



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



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



On November 21, 2001, we issued 2,420,000 units consisting of one share of our common stock and one warrant to purchase one-half of a share of common
stock at a purchase price of $1.25 per unit (the Purchase Price) to thirteen (13) investors. The aggregate proceeds of the offering were $3,025,000.00. The warrants are exercisable at an exercise price of $1.50 per share and are
exercisable for 5 years, subject to adjustments to the exercise price and number of shares issued on exercise on standard events, such as recapitalization or reorganization of Preferred. The investors accreditation was determined by
representations made by the respective investors regarding their accreditation in an investor questionnaire that accompanied each investors subscription agreement (the Subscription Agreement) for the units purchased in the offering
and we filed a Form D with the SEC in those states where such filing was required. T.R. Winston and Company Incorporated received an aggregate of ten percent (10%) of $1,725,000 of the proceeds of the offering as a commission payable to them in cash
for serving as placement agents on our behalf in this offering. The offer and sale of these securities was exempt from registration pursuant to Regulation D of the Securities Act. The Subscription Agreement and the warrant agreement used in
connection with this offering granted certain registration rights to the purchasers in this offering. Pursuant to such registration rights, we have filed a registration statement on Form SB-2, as amended, which has been declared effective by the
SEC, registering the resale of the shares of common stock issued on the placement and the shares to be issued in exercise of the warrants issued in the offering. The Subscription Agreement provides for a downward adjustment of the Purchase Price,
subject to certain exceptions, if we sell, or agree to sell, our securities at a purchase price (or with a conversion or exercise price) less than the Purchase Price prior to November 21, 2002.



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



On August 24, 2000, we completed the sale of 1,142,858 units consisting of one share of our common stock and one warrant to purchase one-fourth (1/4th) of a share of our common stock to eighteen (18) investors. The
units were sold at a purchase price of $2.625 per unit. The warrants are exercisable at an exercise price of $2.625 per share and are exercisable for 5 years, subject to adjustments to the exercise price and number of shares issued on exercise on
standard events, such as recapitalization or reorganization of Preferred. The investors accreditation was determined by representations made by the respective investors regarding their accreditation in an investor questionnaire that
accompanied each investors subscription agreement for the units purchased in the offering and we filed a Form D with the SEC and in those states were such filing was required. Stifel, Nicolaus & Company,



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Incorporated acted as placement agent for this offering and received a warrant to purchase 51,035 shares of our common
stock at any exercise price of $3.53 per share, subject to the same adjustments as those warrants offered in the offering. Stifel, also received commissions payable to it in cash in the amount of six percent (6%) of the gross proceeds of the
offering, which gross proceeds equaled $3,000,002.00. The offer and sale of these securities was exempt from registration pursuant to Regulation D of the Securities Act.



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



The following description of Managements Plan of Operation constitutes forward-looking statements for purposes of the Securities Act and
the Exchange Act and as such involves known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or
implied by such forward-looking statements. The words expect, estimate, anticipate, predict, believes, plan, seek, objective and similar expressions are
intended to identify forward-looking statements or elsewhere in this report. Important factors that could cause our actual results, performance or achievement to differ materially from our expectations include the following: 1) one or more of the
assumptions or other factors discussed in connection with particular forward-looking statements or elsewhere in this report prove not to be accurate; 2) we are unsuccessful in increasing sales through its anticipated marketing efforts; 3) mistakes
in cost estimates and cost overruns; 4) our inability to obtain financing for general operations including the marketing of our products; 5) non-acceptance of one or more of our products in the marketplace for whatever reason; 6) our inability to
supply any product to meet market demand; 7) generally unfavorable economic conditions which would adversely effect purchasing decisions by distributors, resellers or consumers; 8) development of a similar competing product at a similar price point;
9) the inability to adequately protect our intellectual property; 10) if we experience labor and/or employment problems such as the loss of key personnel, inability to hire and/or retain competent personnel, etc.; and 11) if we experience
unanticipated problems and/or force majeure events (including but not limited to accidents, fires, acts of God etc.), and are adversely affected by problems of its suppliers, shippers, customers or others. All written or oral forward-looking
statements attributable to us are expressly qualified in their entirety by such factors. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of unanticipated events. Notwithstanding the foregoing, we are not entitled to rely on the safe harbor for forward looking statements under 27A of the Securities Act or 21E of the
Exchange Act as long as our stock is classified as a penny stock within the meaning of Rule 3a51-1 of the Exchange Act. A penny stock is generally defined to be any equity security that has a market price (as defined in Rule 3a51-1) of less than
$5.00 per share, subject to certain exceptions.



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



Overview



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



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



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We first attempted to sell our hardware and license our application software but after only one such
agreement with KMC Telecom Holdings, Inc. (KMC) we decided to pursue revenue sharing whereby we provide all hardware, software applications and support in exchange for a portion of revenue generated from the service provided by our
customer to their subscribers. Our entire sales force focuses on marketing our revenue sharing agreements and, to date, we have signed forty nine (49) local telephone company and cell phone company multi-year contracts. Twenty contracts have been
fully implemented so that the systems installed pursuant to such contracts are already generating revenues for us. As of May 31, 2003, these twenty contracts were generating revenues of approximately $151,000 per month. The revenue sharing agreement
is the primary method in which we intend to contract with customers to generate revenue going forward, but we will sell our equipment in situations where it is the only service solution for our customer. Since our deployments began in October of
2000, we have experienced increased revenues each but with a new technology it is difficult to project continued satisfaction with the product; therefore, revenues will fluctuate with subscriber additions and deletions. Two contracting phone
companies are in the system acceptance and early marketing stages, and we expect to generate revenues from these contracts by the second quarter of the fiscal year ending March 31, 2004.



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



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



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



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



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



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



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



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



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



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



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



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



Results of Operations



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



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our form Marketing Agreement could potentially provide a higher rate of return on investment to us over the life of our
standard contract.



We recorded a net loss of $1,251,953, or
$.07 per share, for the fiscal year ended March 31, 2003, compared to a net loss of $3,835,115, or $.23 per share, for the fiscal year ended March 31, 2002, and a net loss of $4,742,044, or $.34 per share, for the year ended March 31, 2001. The
decreased loss is a result of our shift from development of our services to full deployment of our services with increased sales.



Total Revenue



Total revenue for the fiscal year ended March 31, 2003, was $2,124,876 compared to $1,474,465 and $138,097 for the fiscal years ended March 31, 2002 and
2001 respectively. The increase of revenue reflects our commercial deployment of our services through revenue sharing agreements with our customers. Of the revenue booked for the fiscal year ended March 31, 2003, 98% was generated from revenue
sharing agreements, and 2% from direct sale service fees for Emma the Perfect Receptionist and Smart Line. Of the revenue booked for the fiscal year ended March 31, 2002, 71% was generated from revenue sharing agreements, 28%
was generated from sales of our VIP systems network services, and 1% from direct sale service fees for Emma the Perfect Receptionist and Smart Line. Of the $138,097 revenue booked for the fiscal year ended March 31, 2001, 54%
was generated from revenue sharing agreements, 35% was generated from sales of our VIP systems to KMC, and 11% from direct sale service fees for Emma the Perfect Receptionist and Smart Line.



We anticipate that revenues from our revenue sharing agreements will grow
gradually in the fiscal year ending March 31, 2004, as we continue to install VIP systems in the central switch offices of local telephone companies and cell phone companies which have already signed revenue sharing agreements. We do not anticipate
substantial revenue going forward from the sale of master distributorships or from direct licensing of the VIP systems, such as was done in the KMC licensing agreement.



Cost of Sales



Cost of sales for the fiscal year ended March 31, 2003 was $761,185 compared to $462,311 and $101,188 for the fiscal years
ended March 31, 2002 and 2001, respectively. For the fiscal year ended March 31, 2003, 85% of the costs were for network infrastructure, such as collocations, connectivity, system access, and long-distance and 15% was for voice activated dialing
market awareness programs in carrier customer territories. For the fiscal year ended March 31, 2002, 79% of the costs were for network infrastructure, such as collocations, connectivity, system access, and long-distance and 21% was for voice
activated dialing market awareness programs in carrier customer territories. For the fiscal year ended March 31, 2001, 69% of the costs were for network infrastructure, such as collocations, connectivity, system access, and long-distance and 31% of
the costs were for VIP system hardware purchased by KMC. Costs of sales for network infrastructure will continue to rise as more VIP systems are deployed to phone company customers.



Selling, General and Administrative



Selling, general and administrative expenses for the fiscal year ended March 31, 2003 were $2,805,827 compared to $4,854,006
and $4,011,608 for the fiscal years ended March 31, 2002 and 2001, respectively. The increases from 2001 to 2002 were primarily due to the staffing increases and increased marketing efforts of our revenue sharing program to wireline and cell phone
companies. The decrease from 2002 to 2003 was primarily from a 33% reduction of force in May of 2002.



We expect that selling, general and administrative expenses will stay level through the fiscal year ending March 31, 2004, as we do not have overhead
expansion needs until such time as our revenues meet our current capital requirements.



Core Technology Enhancements Software Applications and Hardware



We have not expensed any research and development costs for any of the periods stated on our financial statements, but we
have capitalized costs of $902,350 for enhancement of our core software and hardware technology for the fiscal year ended March 31, 2003 in comparison to $831,061 for the fiscal year ended March 31, 2002. The increase in expenditures is due to the
continued enhancement of our core technology.



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Extraordinary Items



We have recognized income from the extinguishment of debt of $236, $11,992, and $74,375, respectively, for the fiscal years
ended March 31, 2003, 2002, and 2001. Most of this debt related to our obligations in our long-distance business segment, which we disposed of in early 1997. The Company settled a lawsuit on November 18, 2002 that will require the company to pay
$150,000 to KMC Telecom Holdings, Inc. former customer no later than October 1, 2003. The company has recognized $342,579 of previously deferred revenue related to the customers deposit.



Income Taxes



As of March 31, 2003, we had cumulative federal net operating losses of
approximately $16.5 million, which can be used to offset future income subject to federal income tax through the fiscal year 2022. Net operating loss limitations may be imposed if changes in stock ownership of the company create a change of control
as provided in Section 382 of the Internal Revenue Code of 1986.



Liquidity and Capital Resources



Our cash and cash equivalents at March 31, 2003 were $55,760, a decrease of $1,246,994 from $1,302,754 at March 31, 2002. The Company has relied primarily on the issuance of stock and warrants to fund its operations since January of 1997
when it sold its long-distance resale operation.



Net cash used
for operating activities was $1,102,284 for the year ended March 31, 2003 compared to $3,073,216 for the year ended March 31, 2002. Net cash used for investing activities was $144,710 for the year ended March 31, 2003 compared to $1,248,831 for the
year ended March 31, 2002. Net cash provided by financing activities was $0.00 for the year ended March 31, 2003 compared to $3,889,049 for the year ended March 31, 2002.



On August 24, 2000, pursuant to Section 4(2) of the Securities Act and Regulation D thereunder, we conducted an offering of
1,142,858 units consisting of shares of our common stock and warrants to purchase shares of our common stock at $2.625 per share providing us with net proceeds of $2,787,531, for working capital. On April 11, 2001, pursuant to Section 4(2) of the
Securities Act and Regulation D thereunder, we conducted an offering of 1,187,500 units consisting of shares of our common stock and warrants to purchase shares of our common stock at $2.00 per share providing us with net proceeds of $1,752,500,
before commissions and expenses, for working capital. On November 21, 2001, pursuant to Section 4(2) of the Securities Act and Regulation D thereunder, we closed an offering of 2,420,000 units consisting of shares of our common stock and warrants to
purchase shares of our common stock at $1.25 per unit providing us with net proceeds of $2,849,625 for working capital.



On October 11, 2001, we entered into a Professional Services and Development Contract with VeriSign, Inc. in which VeriSign agreed to pay us an aggregate
contract amount of $500,000 for all of the deliverables to be delivered under that contract. Of the $500,000 contracted amount, $410,000 was earned before the contract was cancelled.



We have relied on the issuance of stock to fund our operations since January of 1997 when we sold our long-distance resale
operation. We began collecting revenues from our revenue sharing agreements in January of 2001. These revenues are approximately $158,000 per month but we expect these to continue to rise to a level to meet our monthly cash requirements by September
of 2003.



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



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Future Obligations



We project our working capital needs to be $1,200,000 over the next six months for corporate overhead and equipment
purchases to continue to deploy our systems in carrier locations. Management believes that current cash and cash equivalents and cash that may be generated from operations will be sufficient to meet these anticipated capital requirements and to
finance steady growth for the next six months. Such projections have been based on revenue trends from current customers and customers which are already under contract utilizing the revenue rates that we have experienced over the past six months
with our currently installed customers and projected cash requirements to support installation, sales and marketing, and general overhead. We may be forced to raise additional capital through the issuance of new shares, the exercise of outstanding
warrants, or reduce our current overhead. However, any projections of future cash needs and cash flows are subject to substantial uncertainty.



If further funding is required, and none is received, we would be forced to rely on our existing cash in the bank or secure short-term loans. If such
funding were not available, we would be forced to eliminate current overhead which will greatly impact our ability to continue to deploy services to our customers.



Item 7. Financial Statements



PREFERRED VOICE, INC.

FINANCIAL STATEMENTS

MARCH 31, 2003, 2002 and 2001



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



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



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





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PART III



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

Compliance with Section 16(a) of the
Exchange Act



Directors, Executive Officers, Promoters and Control
Persons



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



|Name and Business Address |  | Age |  | Office                                                                                              |  | Year First Elected Director
|------------------------- |  | --- |  | --------------------------------------------------------------------------------------------------- |  | ---------------------------
|Mary G. Merritt           |  | 46  |  | Director, Interim Chief Executive Officer, Executive Vice President-Finance and Secretary/Treasurer |  | 1994                       
|                          |  |     | 
|G. Ray Miller1            |  | 63  |  | Director                                                                                            |  | 1994                       
|                          |  |     | 
|Scott V. Ogilvie          |  | 48  |  | Director                                                                                            |  | 2000                       
|                          |  |     | 
|Leslie Melzer             |  | 50  |  | Director                                                                                            |  | 2001                       
|                          |  |     | 
|Richard K. Stone          |  | 42  |  | Executive Vice President-Business Development                                                       |  | N/A                        
|                          |  |     | 
|Bernard F. Bareis         |  | 43  |  | Vice President and Chief Technology Officer                                                         |  | N/A                        



|1 |  | Mr. Miller was our Chief Executive Officer from June 1994 until June 10, 2002.
|- |  | ------------------------------------------------------------------------------



Ms. Merritt is a founder of Preferred
Voice and has been a director since May, 1994. She has served as Interim Chief Executive Officer since January 2003 and has served as Executive Vice President  Finance and Secretary/Treasurer since inception. She served as President of Star of
Texas, Inc., a trust management account service, from 1989 to May 1994. She also served as Controller of United Medicorp for several months during 1992. Ms. Merritt is a certified public accountant and was employed by Ernst & Whinney from 1981
to 1989, her last position being senior manager for entrepreneurial services.



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



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



Ms. Melzerwas elected as a director of Preferred Voice on December 4, 2001. Ms. Melzer is a Vice President with Paragon Ranch, Inc., a company
that manages various investments on its own behalf, and has held this position since March of 1982.



Mr. Stone joined Preferred Voice in December 1998 and is currently serving as Executive Vice President of Business Development after serving for
two years as a Vice President of Sales and Marketing for US Metrolines, Inc. and Director of National Accounts at Matrix Communication, Inc., both Jensen UICI Companies. From June 1994 to March 1996, he served as Co-Founder/President of Telecable
Communications, Inc. and from February 1991 to June 1994 Director of Sales at Value Added Communications. All telecommunications oriented companies.



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



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



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



Item 10. Executive Compensation



The following tables set forth the compensation paid by the Company to certain executive officers during the fiscal years ended March 31, 2003, 2002, and 2001.



Annual Compensation



|                                                                                   |  |                      |  |        |                         |       |     |                           |  | Long Term Compensation                        
|---------------------------------------------------------------------------------- |  | -------------------- |  | ------ | ----------------------- | ----- | --- | ------------------------- |  | ----------------------------------------------
|Name/Principal Position                                                            |  | Year Ending March 31 |  | Salary |                         | Bonus |     | Other Annual Compensation |  | Securities Underlying Options Warrants Granted
|Mary G. Merritt Interim Chief Executive Officer, Executive Vice President Finance |  | 2003 2002 2001       |  | $ $ $  | 105,750 120,000 106,250 |       | $ $ |  250 10,000              |  |                                            
|                                                                                   |  |                      |  |        |                        
|Richard K. Stone Executive Vice PresidentBusiness Development                     |  | 2003 2002 2001       |  | $ $ $  | 80,400 100,700 96,000   |       | $ $ |  250 25,150              |  |                                            
|                                                                                   |  |                      |  |        |                        
|Bernard F. Bareis Vice President and Chief Technical Officer                       |  | 2003 2002 2001       |  | $      | 5,208                 |       |     |                        |  |                                            
|                                                                                   |  |                      |  |        |                        
|G. Ray Miller1                                                                     |  | 2003 2002 2001       |  | $ $ $  | 116,250 150,000 116,250 |       | $ $ |  250 10,000              |  |                                            
|                                                                                   |  |                      |  |        |                        
|William J. Schereck2                                                               |  | 2003 2002 2001       |  | $ $    | 144,229 158,229        |       | $   |  250                    |  |                                            



|1 |  | Mr. Miller was our Chief Executive Officer from June 1994 until June 10, 2002.
|- |  | ------------------------------------------------------------------------------

|2 |  | Mr. Schereck was our President from May of 2001 until January 15, 2003.
|- |  | -----------------------------------------------------------------------



No other stock
options or convertible securities were granted to the aforementioned executive officers during the fiscal years ended March 31, 2003, 2002, and 2001.



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Option/SAR Grants in Fiscal Year 2003



|Name                 |  | Number of Securities Underlying Options/SARsGranted |  | % of TotalOptions/SARsGranted to Employees in Fiscal Year1 |     |  | Exercise or Base Price ($/Sh) |  | Expiration Date      
|-------------------- |  | --------------------------------------------------- |  | ---------------------------------------------------------- | --- |  | ----------------------------- |  | ---------------------
|Mary G. Merritt      |  | 54,000                                              |  | 7.0                                                        | %   |  | 1.25                          |  | 07/15/2007           
|Richard K. Stone     |  | 40,000 55,000                                       |  | 5.2 7.1                                                    | % % |  | 1.25 1.50                     |  | 07/15/2007 11/22/2006
|Bernard Bareis       |  |                                                    |  |                                                           |     |  |                              |  |                     
|G. Ray Miller2       |  |                                                    |  |                                                           |     |  |                              |  |                     
|William J. Schereck3 |  | 79,000                                              |  | 10.2                                                       | %   |  | 1.25                          |  | 07/15/2007           



|1 |  | Based on a total of 775,000 shares underlying options of 665,000 and warrants of 110,000 issued during the fiscal year ended March 31, 2003.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|2 |  | Mr. Miller was our Chief Executive Officer from June 1994 until June 10, 2002
|- |  | -----------------------------------------------------------------------------

|3 |  | William Schereck was President from May 2001 until his leaving the Company on January 15, 2003.
|- |  | -----------------------------------------------------------------------------------------------



Aggregated Option Exercises in Fiscal Year

2003 and March 31 2003 Option Values



|                     |  | SharesAcquired OnExercise |  | ValueRealized |  | Number of SecuritiesUnderlying UnexercisedOption at March 31, 2003(#) |  | Value of Unexercised In-the-Money Options at March 31, 2003 ($)1
|-------------------- |  | ------------------------- |  | ------------- |  | --------------------------------------------------------------------- |  | ----------------------------------------------------------------
|Name:                |  |                           |  | Exercisable   |  | Unexercisable                                                         |  | Exercisable                                                     
|Mary G. Merritt      |  |                          |  |              |  | 488,750                                                               |  | 20,250                                                          
|Richard K. Stone     |  |                          |  |              |  | 191,000                                                               |  | 15,000                                                          
|G. Ray Miller2       |  |                          |  |              |  | 330,000                                                               |  |                                                                
|William J. Schereck3 |  |                          |  |              |  | 294,750                                                               |  |                                                                



|1 |  | Fair market value of the common stock is based upon the average of the closing bid and asked prices as reported by the OTC Bulletin Board for March 31, 2003.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 |  | Mr. Miller was our Chief Executive Officer from June 1994 until June 10, 2002
|- |  | -----------------------------------------------------------------------------

|3 |  | Mr. Schereck was President from May 2001 until his leaving the Company on January 15, 2003.
|- |  | -------------------------------------------------------------------------------------------



Equity Compensation Plan



|Plan Category                                              |  | Number of Securities To be Issued Upon Exercise of Outstanding Options, Warrants and Rights |  | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights |      | Number of Securites Remaining Available For Future IssuanceUnder EquityCompensation Plans (excluding securitiesin column (a))
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ---- | -----------------------------------------------------------------------------------------------------------------------------
|                                                           |  | (a)                                                                                         |  | (b)                                                                         |      | (c)                                                                                                                          
|Equity Compensation Plans Approved by Security Holders     |  | 1,415,875                                                                                   |  | $                                                                           | 1.23 |                                                                                                                              
|Equity Compensation Plans Not Approved by Security Holders |  | 0                                                                                           |  |                                                                             | 0    |                                                                                                                              
|Total                                                      |  | 1,415,875                                                                                   |  | $                                                                           | 1.23 |                                                                                                                              



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Item 11. Security Ownership of Certain Beneficial Owners and Management



The following table sets forth, as of the close of business on June 23, 2003, 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 23, 2003.



Beneficial Ownership(1), (2)



|Name of Beneficial Owner                                          |  | Number of Shares |  | Percentage |  
|----------------------------------------------------------------- |  | ---------------- |  | ---------- | -
|G. Ray Miller(3)                                                  |  | 2,621,028        |  | 13.99      | %
|Mary G. Merritt(4)                                                |  | 1,375,963        |  | 7.28       | %
|Scott Ogilvie(5)                                                  |  | 90,000           |  | *          |  
|Leslie Melzer(6)                                                  |  | 2,528,000        |  | 13.22      | %
|Richard K. Stone(7)                                               |  | 191,000          |  | 1.03       | %
|Bernard F. Bareis(8)                                              |  | 129,000          |  | *          |  
|William J. Schereck(9)                                            |  | 319,750          |  | 1.71       | %
|Lawrence E. Steinberg(10)                                         |  | 1,357,876        |  | 7.38       | %
|JMG Capital Partners, L.P.(11)                                    |  | 1,426,584        |  | 7.63       | %
|Paragon Ranch, Inc.(12)                                           |  | 2,037,000        |  | 10.72      | %
|JMG Triton Offshore Fund Ltd.(13)                                 |  | 1,423,584        |  | 7.61       | %
|All Directors and executive officers as a group (six persons)(14) |  | 6,934,991        |  | 34.16      | %

---



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



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

|2) |  | Based on 18,407,493 shares outstanding on June 23, 2003. Shares of common stock subject to options that are exercisable within 60 days of June 23, 2003, are deemed beneficially
owned by the person holding such options for the purposes of calculating the percentage of ownership of such person but are not treated as outstanding for the purpose of computing the percentage of any other person.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3) |  | Includes 330,000 shares issuable upon exercise of warrants.
|-- |  | -----------------------------------------------------------

|4) |  | Includes 330,000 shares issuable upon exercise of warrants, 158,750 issuable upon exercise of employee stock options, 45,000 shares held by her minor children, and 24,639 shares
held by Pegasus Settlement Trust.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5) |  | Includes 90,000 shares issuable upon exercise of warrants.
|-- |  | ----------------------------------------------------------

|6) |  | Includes 130,000 shares issuable upon exercise of warrants, 1,449,500 shares held by Paragon Ranch, Inc. and 587,500 shares issuable upon exercise of warrants held by Paragon Ranch,
Inc.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



25



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##### Table of Contents

|7) |  | Includes 10,000 shares issuable upon exercise of warrants, and 181,000 shares issuable upon exercise of employee stock options.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------

|8) |  | Includes 75,000 shares issuable upon exercise of employee stock options and 54,000 shares issuable upon exercise of employee stock options held by his spouse.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|9) |  | Includes 294,750 shares issuable upon exercise of employee stock options. Mr. Schereck was our President from May of 2001 until January 15, 2003.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|10) |  | Includes 216,440 shares in trusts of which he is the Trustee, two of which his children are beneficiaries. Mr. Steinbergs address is 5420 LBJ Freeway, LB 56, Dallas, Texas
75240.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|11) |  | Includes 300,000 shares issuable upon exercise of warrants. JMG Capital Partners address is 1999 Avenue of the Stars, Suite 2530, Los Angeles, California 90067. We have been
advised by JMG Capital Partners that Jonathan M. Glaser is the member-manager of JMG Capital Management, LLC, which is the general partner of JMG Capital Partners, and he is the natural person who has sole voting power over the shares held by JMG
Capital Partners.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12) |  | Includes 587,500 shares issuable upon exercise of warrants. Paragon Ranchs address is 1200 17thStreet, Suite 2660, Denver, Colorado 80202. We have been informed by Paragon Ranch that Leslie Melzer, Vice President of Paragon Ranch, and Richard L.
Gooding, President of Paragon Ranch, share voting power over the shares held by Paragon Ranch.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13) |  | Includes 300,000 shares issuable upon exercise of warrants. JMG Triton Offshore Fund Ltd.s address is Citco Building, Wickhams Cay, Road Town, Tortola, British Virgin Islands.
We have been informed by JMG Triton Offshore Fund Ltd. that Jonathan M. Glaser is the member-manager of Pacific Assets Management, LLC, which is the general partner of JMG Triton Offshore Fund Ltd., and he is the natural person who has sole voting
power over the shares held by JMG Triton Offshore Fund Ltd.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14) |  | Includes the shares described in footnotes 3 through 8.
|--- |  | -------------------------------------------------------



Item 12. Certain Relationships and Related Transactions



In a private offering we closed on April 11, 2001, Paragon Ranch purchased 125,000 shares and a warrant to purchase 62,500 shares at an exercise price of $2.00 per share on or before April 11, 2006. These shares and
warrants were issued to Paragon Ranch and Ms. Melzer at the same price as that paid by other investors in the offering.



On June 8, 2001, we issued 25,000 shares of our common stock to JMG Capital Partners, L.P. at an exercise price of $1.00 per share pursuant to its
exercise of a warrant. We also issued 25,000 shares of our common stock to Triton Capital Investments, Ltd. at an exercise price of $1.00 per share pursuant to its exercise of a warrant.



On October 16, 2001, we issued 100,000 shares of our common stock to Lawrence E. Steinberg at an exercise price of $1.00 per
share pursuant to the exercise of a warrant.



On November 20,
2001, we issued Gerard Hallaren a warrant to purchase 50,000 shares of our common stock at an exercise price of $1.50 per share on or before November 20, 2004, related to his position as a director of the company. On the same day, we issued Scott
Ogilvie a warrant to purchase 50,000 shares of our common stock at an exercise price of $1.50 per share on or before November 20, 2004, related to his position as a director of the company. On December 4, 2001 Mr. Hallaren resigned his position as a
director and has relinquished rights to 37,500 shares previously issued.



Also on November 20, 2001, we issued each of G. Ray Miller and Mary Merritt a warrant to purchase 80,000 shares of our common stock at an exercise price of $1.50 per share on or before November 20, 2004. The warrants
were issued for Mr. Millers and Ms. Merritts management contribution during 2001.



In a private offering we closed on November 21, 2001, Paragon Ranch and Leslie Melzer purchased 800,000 and 160,000 shares of our common stock, respectively, and warrants to purchase 400,000 and 80,000 shares of our
common stock, respectively, at an exercise price of $1.50 per share on or before November 21, 2006. These shares and warrants were issued to Paragon Ranch and Ms. Melzer at the same price as that paid by other investors in the offering.



On December 12, 2001, we issued Gerard Hallaren a warrant to purchase
15,000 shares of our common stock at an exercise price of $2.20 per share on or before December 12, 2004, related to his appointment to the companys advisory council.



26



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##### Table of Contents

Also on December 12, 2001, we issued Leslie Melzer a warrant to purchase 37,500 shares of our common
stock at an exercise price of $2.20 per share on or before December 12, 2004, related to her appointment to the companys board of directors.



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



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



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



(a) Exhibits



|Exhibit Number |  | Description of Exhibit                                                                                                                                                         
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               | 
|3.1(1)         |  | Certificate of Incorporation of Preferred/telecom, Inc. filed on August 3, 1992 with the Secretary of State of Delaware (Exhibit 3.1)                                          
|               | 
|3.2(1)         |  | Certificate of Amendment, filed on May 2, 1994 with the Secretary of State of Delaware (Exhibit 3.2)                                                                           
|               | 
|3.3(1)         |  | Certificate of Amendment, filed on March 21, 1995 with the Secretary of State of Delaware (Exhibit 3.3)                                                                        
|               | 
|3.4(2)         |  | Certificate of Amendment, filed on July 27, 1995 with the Secretary of State of Delaware (Exhibit 3.5)                                                                         
|               | 
|3.5(3)         |  | Certificate of Amendment, filed on March 7, 1997 with the Secretary of State of Delaware (Exhibit 3.5)                                                                         
|               | 
|3.6(1)         |  | Bylaws of Preferred/telecom, Inc. (Exhibit 3.4)                                                                                                                                
|               | 
|10.1(4)        |  | Form of Warrant Certificate and Schedule of Warrant Certificates (Exhibit 10.1)                                                                                                
|               | 
|10.2(5)        |  | Volume License Agreement between Philips Speech Processing North America, a division of Philips Electronics North America Corporation and Preferred Voice, Inc. (Exhibit
10.31)
|               | 
|10.3(6)        |  | Form of Subscription Agreement between Preferred Voice, Inc. and certain purchasers of Preferred Voice, Inc. common stock (Exhibit 10.1)                                       
|               | 
|10.4(6)        |  | Form of Warrant Certificate (Exhibit 10.2)                                                                                                                                     
|               | 
|10.5(6)        |  | Warrant No. 122 issued to Stifel, Nicolaus & Company, Inc. (Exhibit 10.3)                                                                                                      
|               | 
|10.6(5)        |  | Second Amendment to Lease between Dallas Office Portfolio, L.P., as successor in interest to Greenville Avenue Properties, Ltd. and Preferred Voice, Inc. (Exhibit
10.3)       
|               | 
|10.7(1)        |  | Preferred/telecom, Inc. 1994 Stock Plan for Incentive and Non-Qualified Stock Options (Exhibit 10.5)                                                                           
|               | 
|10.8(7)        |  | 2000 Stock Plan for Incentive Stock Options and Other Equity Participation (Exhibit 10.1)                                                                                      
|               | 
|10.9(8)        |  | Form of Subscription Agreement by and between Preferred Voice, Inc. and certain signatories thereto (Exhibit 10.1)                                                             
|               | 
|10.10(8)       |  | Form of Warrant Certificate, issued by Preferred Voice, Inc. pursuant to the Subscription Agreement filed as Exhibit 10.9 hereto (Exhibit 10.2)                                
|               | 
|10.11(9)       |  | Patent License Agreement by and between Preferred Voice, Inc. and KoninKlijkePhilips Electronics N.V.*(Exhibit 10.2)                                                           
|               | 
|10.12(10)      |  | Form of Subscription Agreement, by and between Preferred Voice, Inc. and certain signatories thereto (Exhibit 10.1)                                                            
|               | 
|23            |  | Consent of Philip Vogel & Co. PC                                                                                                                                               
|               | 
|99.1          |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                         
|               | 
|99.2          |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                         



27



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##### Table of Contents

---

| |  | Filed herewith.
|- |  | ---------------

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

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

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

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

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

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

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

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

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

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



(b) Reports on Form 8-K



None



Item 14. Controls and Procedures



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



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



28



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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: June 30, 2003 |  |  |  | By:                  
|                    |  |  |  |                      



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



|SIGNATURE                               |  | TITLE                                                                                                   |  | DATE         
|--------------------------------------- |  | ------------------------------------------------------------------------------------------------------- |  | -------------
|                                        |  |                                                                                                        
|/s/    G. RAY MILLERG. Ray Miller       |  | Chairman of the Board of Directors                                                                      |  | June 30, 2003
|                                        |  |                                                                                                        
|/s/    MARY G. MERRITTMary G. Merritt   |  | Secretary, Treasurer and Executive Vice President of Finance and Director (Principal Executive Officer) |  | June 30, 2003
|                                        |  |                                                                                                        
|/s/    ERNEST GILLESPIEErnest Gillespie |  | Controller (Principal Accounting Officer)                                                               |  | June 30, 2003
|                                        |  |                                                                                                        
|/s/    SCOTT OGILVIEScott Ogilvie       |  | Director                                                                                                |  | June 30, 2003
|                                        |  |                                                                                                        
|/s/    LESLIE MELZERLeslie Melzer       |  | Director                                                                                                |  | June 30, 2003



29



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##### Table of Contents

CERTIFICATIONS



I, Mary G. Merritt, certify that:



1. I have reviewed this annual report on Form 10-KSB of Preferred Voice, Inc.;



2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;



3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.



4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



a. designed such
disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual
report is being prepared;



b. evaluated the effectiveness of the
registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date); and



c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;



5. The registrants other certifying officer
and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent function):



a. all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and



b. any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal controls; and



6. The
registrants other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



|                               
|-------------------------------
|/s/    MARY G.
MERRITT         
|Mary G. Merritt                
|Interim Chief Executive Officer
|(Principal Executive Officer)  
|                               
|June 30, 2003                  



30



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##### Table of Contents

I, Ernest Gillespie, certify that:



1. I have reviewed this annual report on Form 10-KSB of Preferred Voice, Inc.;



2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;



3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.



4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) for the registrant and we have:



a. designed such
disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual
report is being prepared;



b. evaluated the effectiveness of the
registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date); and



c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;



5. The registrants other certifying officers
and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent function):



a. all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and



b. any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal controls; and



6. The
registrants other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



|                                                         
|---------------------------------------------------------
|/s/    ERNEST
GILLESPIE                                  
|Ernest Gillespie Controller (Principal Financial Officer)
|                                                         
|June 30, 2003                                            





31



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##### Table of Contents

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, 2003 and 2002, and the related statements of operations, stockholders equity (deficit) and cash flows for the years ended March 31, 2003, 2002 and 2001. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Preferred Voice, Inc. as of March 31, 2003 and 2002, and the results of its operations and its cash flows for the years ended March 31, 2003, 2002 and 2001, in conformity with accounting principles generally
accepted in the United States of America.



PHILIP VOGEL & CO. PC



Certified Public Accountants



Dallas, Texas



April 24, 2003





F-1



---

##### Table of Contents

PREFERRED VOICE, INC.

BALANCE SHEETS

MARCH 31, 2003 AND 2002



|                                                                                                               |  | 2003 |           | 2002
|-------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ----
|Assets                                                                                                         |  |      |           |     
|Current assets:                                                                                                |  |      |           |     
|Cash and cash equivalents                                                                                      |  | $    | 55,760    |     
|Accounts receivable, net of allowance for doubtful accounts of $-0- and and $36,070, respectively              |  |      | 220,706   |     
|Employee advances                                                                                              |  |      | 675       |     
|Prepaid expenses                                                                                               |  |      | 4,730     |     
|                                                                                                               |  |      |           |     
|Total current assets                                                                                           |  | $    | 281,871   |     
|                                                                                                               |  |      |           |     
|Property and equipment:                                                                                        |  |      |           |     
|Computer equipment                                                                                             |  | $    | 1,726,289 |     
|Furniture and fixtures                                                                                         |  |      | 42,691    |     
|Office equipment                                                                                               |  |      | 62,997    |     
|                                                                                                               |  |      |           |     
|                                                                                                               |  | $    | 1,831,977 |     
|Less accumulated depreciation                                                                                  |  |      | 690,430   |     
|                                                                                                               |  |      |           |     
|Net property and equipment                                                                                     |  | $    | 1,141,547 |     
|                                                                                                               |  |      |           |     
|Other assets:                                                                                                  |  |      |           |     
|Capitalized software development costs, net of accumulated amortization of $751,545 and $588,814, respectively |  | $    | 225,032   |     
|Deposits                                                                                                       |  |      | 23,019    |     
|Trademarks and patents, net of accumulated amortization of $1,819 and $-0-, respectively                       |  |      | 74,539    |     
|                                                                                                               |  |      |           |     
|Total other assets                                                                                             |  | $    | 322,590   |     
|                                                                                                               |  |      |           |     
|Total assets                                                                                                   |  | $    | 1,746,008 |     
|                                                                                                               |  |      |           |     



The accompanying
notes are an integral part of these statements



F-2



---

##### Table of Contents

|                                                                                      |  | 2003 |             |   | 2002 |  
|------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | -
|Liabilities and stockholders equity                                                  |  |      |             |   |      |  
|Current liabilities:                                                                  |  |      |             |   |      |  
|Accounts payable                                                                      |  | $    | 299,369     |   |      | $
|Accrued operating expenses                                                            |  |      | 69,418      |   |      |  
|Accrued vacation                                                                      |  |      | 6,690       |   |      |  
|Accrued payroll and payroll taxes                                                     |  |      | 11,847      |   |      |  
|Accrued interest payable                                                              |  |      | 33,319      |   |      |  
|Accrued lawsuit settlement                                                            |  |      | 150,000     |   |      |  
|Deferred revenue                                                                      |  |      | 0           |   |      |  
|Notes payable                                                                         |  |      | 100,866     |   |      |  
|                                                                                      |  |      |             |   |      |  
|Total current liabilities                                                             |  | $    | 671,509     |   |      | $
|                                                                                      |  |      |             |   |      |  
|Long-term debt                                                                        |  | $    | 0           |   |      | $
|                                                                                      |  |      |             |   |      |  
|Commitments and contingences (Notes I, L and M)                                       |  |      |             |   |      |  
|Stockholders equity:                                                                 |  |      |             |   |      |  
|Common stock, $0.001 par value 50,000,000 shares authorized; shares issued 18,407,493 |  | $    | 18,407      |   |      | $
|Additional paid-in capital                                                            |  |      | 17,817,465  |   |      |  
|Accumulated deficit                                                                   |  |      | (16,759,867 | ) |      |  
|Treasury stock  22,500 and385,224 shares at cost, respectively                       |  |      | (1,506      | ) |      |  
|                                                                                      |  |      |             |   |      |  
|Total stockholders equity                                                            |  | $    | 1,074,499   |   |      | $
|                                                                                      |  |      |             |   |      |  
|Total liabilities and stockholders equity                                            |  | $    | 1,746,008   |   |      | $
|                                                                                      |  |      |             |   |      |  





F-3



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##### Table of Contents

PREFERRED VOICE, INC.

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED MARCH 31, 2003, 2002 AND 2001



|                                         |  | 2003 |            |   | 2002 |   |            | 2001 | 
|---------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- | 
|Sales                                    |  | $    | 2,124,876  |   |      | $ | 1,474,465  |      | 
|Cost of sales                            |  |      | 761,185    |   |      |   | 462,311    |      | 
|                                         |  |      |            |   |      |   |            |      | 
|Gross profit                             |  | $    | 1,363,691  |   |      | $ | 1,012,154  |      | 
|                                         |  |      |            |   |      |   |            |      | 
|General and administrative expenses      |  | $    | 2,805,827  |   |      | $ | 4,854,006  |      | 
|                                         |  |      |            |   |      |   |            |      | 
|Loss from operations                     |  | $    | (1,442,136 | ) |      | $ | (3,841,852 | )    | 
|                                         |  |      |            |   |      |   |            |      | 
|Other income (expense):                  |  |      |            |   |      |   |            |      | 
|Interest income                          |  | $    | 5,419      |   |      | $ | 0          |      | 
|Interest expense                         |  |      | (5,016     | ) |      |   | (5,255     | )    | 
|Other income                             |  |      | 236        |   |      |   | 11,992     |      | 
|Other expense                            |  |      | (3,035     | ) |      |   | 0          |      | 
|Negotiated settlement                    |  |      | 342,579    |   |      |   | 0          |      | 
|Lawsuit settlement                       |  |      | (150,000   | ) |      |   | 0          |      | 
|                                         |  |      |            |   |      |   |            |      | 
|Total other income (expense)             |  | $    | 190,183    |   |      | $ | 6,737      |      | 
|                                         |  |      |            |   |      |   |            |      | 
|Loss from operations before income taxes |  | $    | (1,251,953 | ) |      | $ | (3,835,115 | )    | 
|Provision for income taxes               |  |      | 0          |   |      |   | 0          |      | 
|                                         |  |      |            |   |      |   |            |      | 
|Net loss                                 |  | $    | (1,251,953 | ) |      | $ | (3,835,115 | )    | 
|                                         |  |      |            |   |      |   |            |      | 
|Per share amounts:                       |  |      |            |   |      |   |            |      | 
|Net loss per share                       |  | $    | (0.07      | ) |      | $ | (0.23      | )    | 
|                                         |  |      |            |   |      |   |            |      | 



The accompanying
notes are an integral part of these statements



F-4



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##### Table of Contents

PREFERRED VOICE, INC.

STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE YEARS ENDED MARCH 31, 2003, 2002 AND 2001



|                                                                 |  | Shares of common stock | 
|---------------------------------------------------------------- |  | ---------------------- | 
|                                                                 |  | Authorized             | 
|BalanceMarch 31, 2000                                           |  | 20,000,000             | 
|Exercise of employee stock options                               |  | 0                      | 
|Exercised warrants                                               |  | 0                      | 
|Issuance of common stock net of stock issuance costs of $138,637 |  | 0                      | 
|Issuance of stock warrants to non-employee for services          |  | 0                      | 
|Net loss for the year ended March 31, 2001                       |  | 0                      | 
|                                                                 |  |                        | 
|BalanceMarch 31, 2001                                           |  | 20,000,000             | 
|Conversion of note payable to stock                              |  | 0                      | 
|Exercised warrants                                               |  | 0                      | 
|Warrants issued to non-employees                                 |  | 0                      | 
|Issuance of common stock net of stock issuance costs of $232,986 |  | 0                      | 
|Increase in authorized shares                                    |  | 30,000,000             | 
|Cancellation of treasury stock                                   |  | 0                      | 
|Net loss for the year ended March 31, 2002                       |  | 0                      | 
|                                                                 |  |                        | 
|BalanceMarch 31, 2002                                           |  | 50,000,000             | 
|Net loss for the year ended March 31, 2003                       |  | 0                      | 
|                                                                 |  |                        | 
|BalanceMarch 31, 2003                                           |  | 50,000,000             | 
|                                                                 |  |                        | 



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##### Table of Contents

|Amounts      |  |          |        |  
|------------ |  | -------- | ------ | -
|Common       |  |          |        |  
|stock $0.001 |  | Treasury |        |  
|par value    |  | stock    |        |  
|$13,277      |  | $        | (1,868 | )
|10           |  |          | 0      |  
|420          |  |          | 0      |  
|1,967        |  |          | 0      |  
|0            |  |          | 0      |  
|0            |  |          | 0      |  
|             |  |          |        |  
|$15,674      |  | $        | (1,868 | )
|18           |  |          | 0      |  
|275          |  |          | 0      |  
|0            |  |          | 0      |  
|2,803        |  |          | 0      |  
|0            |  |          | 0      |  
|(363)        |  |          | 362    |  
|0            |  |          | 0      |  
|             |  |          |        |  
|$18,407      |  | $        | (1,506 | )
|0            |  |          | 0      |  
|             |  |          |        |  
|$18,407      |  | $        | (1,506 | )
|             |  |          |        |  





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##### Table of Contents

PREFERRED VOICE, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED MARCH 31, 2003, 2002 AND 2001



|                                                     |  | 2003 |            |   | 2002 |   |            | 2001 | 
|---------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- | 
|Cash flows from operating activities:                |  |      |            |   |      |   |            |      | 
|Cash received from customers                         |  | $    | 2,065,305  |   |      | $ | 1,365,158  |      | 
|Cash paid to suppliers and employees                 |  |      | (3,167,992 | ) |      |   | (4,438,374 | )    | 
|Interest received                                    |  |      | 5,419      |   |      |   | 0          |      | 
|Interest paid                                        |  |      | (5,016     | ) |      |   | 0          |      | 
|                                                     |  |      |            |   |      |   |            |      | 
|Net cash used by operating activities                |  | $    | (1,102,284 | ) |      | $ | (3,073,216 | )    | 
|                                                     |  |      |            |   |      |   |            |      | 
|Cash flows from investing activities:                |  |      |            |   |      |   |            |      | 
|Capital expenditures                                 |  | $    | (148,413   | ) |      | $ | (1,247,115 | )    | 
|Proceeds from sale of assets                         |  |      | 1,740      |   |      |   | 0          |      | 
|Employee advances (repayments)                       |  |      | 1,963      |   |      |   | (1,716     | )    | 
|                                                     |  |      |            |   |      |   |            |      | 
|Net cash used by investing activities                |  | $    | (144,710   | ) |      | $ | (1,248,831 | )    | 
|                                                     |  |      |            |   |      |   |            |      | 
|Cash flows from financing activities:                |  |      |            |   |      |   |            |      | 
|Proceeds from issuance of stock                      |  | $    | 0          |   |      | $ | 4,072,035  |      | 
|Proceeds from notes payable                          |  |      | 0          |   |      |   | 50,000     |      | 
|Stock issuance costs                                 |  |      | 0          |   |      |   | (232,986   | )    | 
|                                                     |  |      |            |   |      |   |            |      | 
|Net cash provided by financing activities            |  | $    | 0          |   |      | $ | 3,889,049  |      | 
|                                                     |  |      |            |   |      |   |            |      | 
|Net increase (decrease) in cash and cash equivalents |  | $    | (1,246,994 | ) |      | $ | (432,998   | )    | 
|Cash and cash equivalents:                           |  |      |            |   |      |   |            |      | 
|Beginning of year                                    |  |      | 1,302,754  |   |      |   | 1,735,752  |      | 
|                                                     |  |      |            |   |      |   |            |      | 
|End of year                                          |  | $    | 55,760     |   |      | $ | 1,302,754  |      | 
|                                                     |  |      |            |   |      |   |            |      | 



The accompanying
notes are an integral part of these statements



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##### Table of Contents

|                                                                            |  | 2003 |            |   | 2002 |   |            | 2001 | 
|--------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- | 
|Reconciliation of net loss to net cash used by operating activities:        |  |      |            |   |      |   |            |      | 
|Net loss                                                                    |  | $    | (1,251,953 | ) |      | $ | (3,835,115 | )    | 
|                                                                            |  |      |            |   |      |   |            |      | 
|Adjustments to reconcile net loss to net cash used by operating activities: |  |      |            |   |      |   |            |      | 
|Depreciation                                                                |  | $    | 283,737    |   |      | $ | 465,723    |      | 
|Amortization                                                                |  |      | 164,549    |   |      |   | 264,067    |      | 
|Gain on sale of fixed assets                                                |  |      | 1,021      |   |      |   | 0          |      | 
|Impairment loss                                                             |  |      | 2,014      |   |      |   | 0          |      | 
|Fair value of stock warrants issued in exchange for services                |  |      | 0          |   |      |   | 91,186     |      | 
|Forgiveness of debt                                                         |  |      | 0          |   |      |   | (11,992    | )    | 
|Changes in assets and liabilities:                                          |  |      |            |   |      |   |            |      | 
|Increase in accounts receivable                                             |  |      | (57,766    | ) |      |   | (123,799   | )    | 
|Decrease in inventory                                                       |  |      | 0          |   |      |   | 49,085     |      | 
|(Increase) decrease in deposits                                             |  |      | 0          |   |      |   | (8,926     | )    | 
|(Increase) decrease in prepaid expenses                                     |  |      | 23,681     |   |      |   | (27,918    | )    | 
|Decrease in accounts payable                                                |  |      | (34,267    | ) |      |   | (4,634     | )    | 
|Increase in accrued expenses                                                |  |      | 111,319    |   |      |   | 66,607     |      | 
|Increase (decrease) in deferred revenue                                     |  |      | (344,619   | ) |      |   | 2,500      |      | 
|                                                                            |  |      |            |   |      |   |            |      | 
|Total adjustments                                                           |  | $    | 149,669    |   |      | $ | 761,899    |      | 
|                                                                            |  |      |            |   |      |   |            |      | 
|Net cash used by operating activities                                       |  | $    | (1,102,284 | ) |      | $ | (3,073,216 | )    | 
|                                                                            |  |      |            |   |      |   |            |      | 





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##### Table of Contents

PREFERRED VOICE



NOTES TO FINANCIAL STATEMENTS



Note
AGeneral organization:



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



Note BSummary of significant accounting policies:



Cash and cash equivalents



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



Concentration of business, market and credit risks



In the normal course of business, the Company extends unsecured credit to its customers with payment terms generally 30 days. Because
of the credit risk involved, management provides an allowance for doubtful accounts 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.



On December 26, 2001, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) No. 01-06,
Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others. This SOP provides certain presentation and disclosure changes for entities with trade receivables and is effective
for periods beginning January 1, 2002, and thereafter. The Company does not believe adoption will have a material effect on the financial statements.



At March 31, 2003, the Company had cash balances of approximately $114,400 in banking institutions in excess of federally insured amounts.
These balances are before considering outstanding items.



During the years ended March 31, 2003, 2002 and 2001, approximately $271,243 (12.8%), $410,000 (27.8%) and $103,000 (74.6%), respectively, of the Companys total sales were derived from one, one and two
customers, respectively. At March 31, 2003, 2002 and 2001, no single customer accounted for a material portion of accounts receivable.



Capitalized software development



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



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##### Table of Contents

PREFERRED VOICE



NOTES TO FINANCIAL STATEMENTS



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



During the years ended March 31, 2003, 2002 and 2001, software development costs capitalized were $71,288, $181,728 and $338,875,
respectively. The amortization of capitalized software development costs for the years ended March 31, 2003, 2002 and 2001 was $162,730, $264,067 and $165,847, respectively.



Depreciation



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



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



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



|Computer equipment     |  | 5 years
|---------------------- |  | -------
|Furniture and fixtures |  | 5 years
|Office equipment       |  | 5 years



Depreciation expense for the years ended March 31, 2003, 2002 and 2001 was $283,737, $465,723 and $278,052, respectively.



Fair value of financial instruments



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



Revenue recognition



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



During the year ended March 31,
2003, the majority of the Companys revenue consisted of revenue sharing receipts. Revenue sharing income is recognized when the voice dialing services are provided, generally monthly. Revenue sharing income for the years ended March 31, 2003,
2002 and 2001 was $2,025,359, $1,044,380 and $74,779, respectively.



During the year ended March 31, 2001, the majority of the Companys revenue consisted of nonrefundable fees for the exclusive rights for customers to use the Companys application software in certain
geographic market and installation of equipment in multiple sites. The Company recorded the nonrefundable fees when the contract was executed as the earnings process had been completed and fee income had been collected. Income generated from



F-10



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##### Table of Contents

PREFERRED VOICE



NOTES TO FINANCIAL STATEMENTS



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



the installation of equipment was recognized upon the completion of each individual site. Deferred revenue associated with uncompleted installations at
March 31, 2001 was $344,618.



Advertising expense



The Company expenses advertising costs when
the advertisement occurs. Total advertising expense amounted to $18,110, $17,350 and $74,158 for the years ended March 31, 2003, 2002 and 2001, 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. Since the Company
incurred a loss from operations for the years ended March 31, 2003, 2002 and 2001, no computation of diluted EPS has been performed.



Loss per share is based on the weighted average number of shares outstanding of 18,407,493, 16,581,164 and 13,884,662 for the years ended
March 31, 2003, 2002 and 2001, respectively.



Income
taxes



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



Trademarks and patents



Certain costs incurred for the registration of trademarks and patents are capitalized and amortized. The amortization is calculated using
the straight-line method, beginning when it is approved and continuing over its estimated useful or legal life, generally between 5 and 20 years.



The amortization of trademarks and patents for the year ended March 31, 2003 was $1,819. At March 31, 2002 and 2001, approval of patents
and trademarks was still pending; therefore, no amortization expense for trademarks and patents was recorded for the years ended March 31, 2002 and 2001.



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. An
impairment loss in the amount of $2,014, $-0- and $837,120 was recognized during the years ended March 31, 2003, 2002 and 2001, respectively (see Note J).



F-11



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##### Table of Contents

PREFERRED VOICE



NOTES TO FINANCIAL STATEMENTS



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



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



Use of estimates



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



Reclassification



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



Reporting comprehensive income and operating segments



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



Stock based compensation



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



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



F-12



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##### Table of Contents

PREFERRED VOICE



NOTES TO FINANCIAL STATEMENTS



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



Gain from extinguishment of debt



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



Note CNotes payable:



Notes payable consist of the following:



|                                                                                                                                                                                                                      |  | 2003 |         | 2002
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ----
|Note payable, Brite Voice Systems, Inc., dated January 31, 1997. Note is unsecured.                                                                                                                                   |  | $    | 50,866  |     
|Note payable, 10% interest rate. Principal and interest payable on September 30, 2003. Convertible into shares of the
Companys common stock at a conversion rate of $2.00 of indebtedness per share of common stock. |  |      | 50,000  |     
|                                                                                                                                                                                                                      |  |      |         |     
|Total                                                                                                                                                                                                                 |  | $    | 100,866 |     
|                                                                                                                                                                                                                      |  |      |         |     



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, 2003, 2002 and 2001, respectively.



Interest expense charged to operations related to the notes payable was $5,016, $5,255 and $4,600 for the years ended March 31, 2003, 2002 and 2001, respectively.



Note DCommon stock:



Common stock authorized



On September 29, 2000, the Companys Board of Directors adopted a resolution to increase the number of authorized shares of common
stock from 20,000,000 to 50,000,000. The increase in authorized shares was approved by the Companys stockholders on September 21, 2001.



Stock purchase warrants



At March 31, 2003 the Company had outstanding warrants to purchase 4,083,703 shares of the Companys common stock at prices which
ranged from $0.50 per share to $3.53 per share. The warrants are exercisable at any time and expire through November 20, 2006. At March 31, 2003, 4,083,703 shares of common stock were reserved for that purpose.



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##### Table of Contents

PREFERRED VOICE



NOTES TO FINANCIAL STATEMENTS



Note DCommon stock (continued):



Common stock reserved



At March 31, 2003, shares of common stock were reserved for the following purposes:



|Exercise of stock warrants                                                                                |  | 4,083,703
|--------------------------------------------------------------------------------------------------------- |  | ---------
|Exercise of future grants of stock options and stock appreciation rights under the 1994 stock option plan |  | 337,132  
|Exercise of future grants of stock options and stock appreciation rights under the 2000 stock option plan |  | 2,000,000
|                                                                                                          |  |          
|                                                                                                          |  | 6,420,835
|                                                                                                          |  |          



Note E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 as of March 31, consists of:



|                                                             |  | 2003 |   | 2002 |   | 2001
|------------------------------------------------------------ |  | ---- | - | ---- | - | ----
|Current income taxes                                         |  | $    | 0 |      | $ | 0   
|Change in deferred income taxes due to temporary differences |  |      | 0 |      |   | 0   
|                                                             |  |      |   |      |   |     
|                                                             |  | $    | 0 |      | $ | 0   
|                                                             |  |      |   |      |   |     



F-14



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##### Table of Contents

PREFERRED VOICE



NOTES TO FINANCIAL STATEMENTS



Note EIncome taxes (continued):



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



|                                                                  |  | 2003 |            |   | 2002 |   |            | 2001 | 
|----------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- | 
|Accumulated depreciation                                          |  | $    | (52,000    | ) |      | $ | (3,500     | )    | 
|                                                                  |  |      |            |   |      |   |            |      | 
|Gross deferred tax liabilities                                    |  | $    | (52,000    | ) |      | $ | (3,500     | )    | 
|                                                                  |  |      |            |   |      |   |            |      | 
|Stock warrant compensation                                        |  | $    | 0          |   |      | $ | 31,000     |      | 
|Accrued liabilities                                               |  |      | 2,000      |   |      |   | 8,000      |      | 
|Net operating loss carryforward                                   |  |      | 5,610,000  |   |      |   | 5,121,000  |      | 
|                                                                  |  |      |            |   |      |   |            |      | 
|Gross deferred tax assets                                         |  | $    | 5,612,000  |   |      | $ | 5,160,000  |      | 
|Valuation allowance                                               |  |      | (5,560,000 | ) |      |   | (5,156,500 | )    | 
|                                                                  |  |      |            |   |      |   |            |      | 
|                                                                  |  | $    | 52,000     |   |      | $ | 3,500      |      | 
|                                                                  |  |      |            |   |      |   |            |      | 
|Net deferred tax assets                                           |  | $    | 0          |   |      | $ | 0          |      | 
|                                                                  |  |      |            |   |      |   |            |      | 
|The change in the deferred tax valuation allowance is as follows: |  | $    | 403,500    |   |      | $ | 1,256,500  |      | 
|                                                                  |  |      |            |   |      |   |            |      | 



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



The Company has available at March 31, 2003, a net operating loss carryforward of approximately $16,500,000, which can be used to offset
future taxable income through the year 2022. Utilization of net operating loss carryforwards in the future may be limited if changes in the Companys stock ownership create a change of control as provided in Section 382 of the Internal Revenue
Code.



Note FEmployee stock option plans:



1994 Plan



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



Under the terms of the 1994 Plan, options granted may be either nonqualified or incentive stock options, and the exercise price,
determined by the Committee, may not be less than the fair market value of a share on the date of grant. Stock appreciation rights granted in tandem with an option shall be exercisable only to the extent the underlying option is exercisable and the
grant price shall be equal to the exercise price of the underlying option. At March 31, 2003, options to purchase 252,000 shares at exercise prices of $0.69 to $2.50 per share were outstanding. No stock appreciation rights had been granted at March
31, 2003.



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NOTES TO FINANCIAL STATEMENTS



Note F  Employee stock option plans (continued):



As of March 31, 2003, 112,868 of these options have been exercised, 84,882 have been forfeited, 252,000 remain outstanding, and 247,000
were vested and exercisable. At March 31, 2003, the remaining weighted average contractual life was 5.4 years.



2000 Plan



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



Under the terms of the 2000 Plan, options granted may be
either nonqualified or incentive stock options, and the exercise price, determined by the Committee, may not be less than the fair market value of a share on the date of the grant. Stock appreciation rights granted in tandem with an option shall be
exercisable only to the extent the underlying option is exercisable and the grant price shall be equal to the exercise price of the underlying option. At March 31, 2003, options to purchase 1,163,875 shares at exercise prices of $1.25 to $3.00 per
share were outstanding. No stock appreciation rights had been granted at March 31, 2003.



As of March 31, 2003, none of these options have been exercised, 412,700 have been forfeited, 1,163,875 remain outstanding, and 334,563
were vested and exercisable. At March 31, 2003, the remaining weighted average contractual life was 9.0 years.



Employee warrants



As of March 31, 2003, none of the employee warrants have been exercised or forfeited, 345,000 expired, 750,000 remain outstanding, and
750,000 were vested and exercisable. At March 31, 2003, the remaining weighted average contractual life was approximately 0.2 years.



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



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



|                        |  | 2003          |  | 2002          |  | 2001         
|----------------------- |  | ------------- |  | ------------- |  | -------------
|Expected dividend yield |  | 0.00%         |  | 0.00%         |  | 0.00%        
|Risk-free interest rate |  | 2.28%4.39%   |  | 2.28%5.06%   |  | 4.14%6.35%  
|Expected life           |  | 1.52.5 years |  | 2.53.5 years |  | 1.53.5 years
|Expected volatility     |  | 69%191%      |  | 165%189%     |  | 172%         



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PREFERRED VOICE



NOTES TO FINANCIAL STATEMENTS



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



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



|                       |  | 2003 |            |   | 2002 |   |            | 2001 | 
|---------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- | 
|Net loss:              |  |      |            |   |      |   |            |      | 
|As reported            |  | $    | (1,251,954 | ) |      | $ | (3,835,114 | )    | 
|                       |  |      |            |   |      |   |            |      | 
|Proforma               |  | $    | (1,434,703 | ) |      | $ | (4,409,704 | )    | 
|                       |  |      |            |   |      |   |            |      | 
|Loss per common share: |  |      |            |   |      |   |            |      | 
|As reported            |  | $    | (0.07      | ) |      | $ | (0.23      | )    | 
|                       |  |      |            |   |      |   |            |      | 
|Proforma               |  | $    | (0.08      | ) |      | $ | (0.26      | )    | 
|                       |  |      |            |   |      |   |            |      | 



Proforma loss reflects only options granted during the years ended March 31, 2003, 2002 and 2001. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the proforma net loss
amounts presented above because compensation cost is reflected over the options vesting period.



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



|                                                               |  | 2000 stock award and incentive plan (2000 Plan)
|-------------------------------------------------------------- |  | -----------------------------------------------
|                                                               |  | 2003                                           
|                                                               |  | Number of shares                               
|Outstanding at beginning of year                               |  | 1,051,825                                      
|Granted                                                        |  | 792,750                                        
|Exercised                                                      |  | 0                                              
|Forfeited                                                      |  | (280,700                                       
|Cancelled                                                      |  | (400,000                                       
|Expired                                                        |  | 0                                              
|                                                               |  |                                                
|Outstanding at end of year                                     |  | 1,163,875                                      
|                                                               |  |                                                
|Options exercisable at end of year                             |  | 334,563                                        
|Weighted average fair value of options granted during the year |  | 792,750                                        



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Preferred Voice



NOTES TO FINANCIAL STATEMENTS



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



|                                                               |  | 1994 stock award and incentive plan (1994 Plan)
|-------------------------------------------------------------- |  | -----------------------------------------------
|                                                               |  | 2003                                           
|                                                               |  | Number of shares                               
|Outstanding at beginning of year                               |  | 297,000                                        
|Granted                                                        |  | 0                                              
|Exercised                                                      |  | 0                                              
|Forfeited                                                      |  | (45,000                                        
|Expired                                                        |  | 0                                              
|                                                               |  |                                                
|Outstanding at end of year                                     |  | 252,000                                        
|                                                               |  |                                                
|Options exercisable at end of year                             |  | 247,000                                        
|Weighted average fair value of options granted during the year |  | 0                                              



Following is a summary of warrants issued to employees:



|                                                               |  | Employee warrants
|-------------------------------------------------------------- |  | -----------------
|                                                               |  | 2003             
|                                                               |  | Number of shares 
|Outstanding at beginning of year                               |  | 985,000          
|Granted                                                        |  | 110,000          
|Exercised                                                      |  | 0                
|Forfeited                                                      |  | 0                
|Expired                                                        |  | (300,000         
|                                                               |  |                  
|Outstanding at end of year                                     |  | 795,000          
|                                                               |  |                  
|Options exercisable at end of year                             |  | 795,000          
|Weighted average fair value of options granted during the year |  | 110,000          



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NOTES TO FINANCIAL STATEMENTS



Note HStock warrants:



During the years ended March 31, 2003, 2002 and 2001, the Company issued 0, 180,000 and 151,035 warrants to certain service providers and
business partners at exercise prices ranging from $0.84 to $4.00. The warrants can be exercised at any time and expire at various dates through November 22, 2006.



In accordance with SFAS No. 123, the Company accounts for warrants issued to non-employees at fair value of
the warrants at the grant date. For the years ended March 31, 2003, 2002 and 2001, the Company recognized $-0-, $91,186 and $131,162, respectively, as compensation expense and $-0- as stock issuance cost during the years ended March 31, 2003, 2002
and 2001 related to warrants issued to non-employees.



For the years ended March 31, 2003, 2002 and 2001, the Company issued 0, 1,575,000 and 716,965 warrants, respectively, in connection with stock offerings. These warrants were not issued in exchange for goods and services; therefore, no
compensation expense was recognized by the Company during the years ended March 31, 2003, 2002 and 2001.



As of March 31, 2003, 1,022,493 of these warrants have been exercised; none have been forfeited; and 4,083,703 remain outstanding, of
which 4,083,703 were vested and exercisable. At March 31, 2003, the remaining weighted average contractual life was approximately 2.1 years.



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



|                        |  | 2003 |  | 2002     |  | 2001         
|----------------------- |  | ---- |  | -------- |  | -------------
|Expected dividend yield |  | N/A  |  | 0.00%    |  | 0.00%        
|Risk-free interest rate |  | N/A  |  | 4.39%    |  | 5.69%        
|Expected life           |  | N/A  |  | 1.5years |  | 0.53.5 years
|Expected volatility     |  | N/A  |  | 86%131% |  | 172%         



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



|                                                               |  | 2003             |   | 2002 |                                 | 2001
|-------------------------------------------------------------- |  | ---------------- | - | ---- | ------------------------------- | ----
|                                                               |  | Number of shares |   |      | Weighted average exercise price |     
|Outstanding at beginning of year                               |  | 801,035          |   |      | $                               | 1.76
|Granted                                                        |  | 0                |   |      |                                 | 0.00
|Exercised                                                      |  | 0                |   |      |                                 | 0.00
|Forfeited                                                      |  | 0                |   |      |                                 | 0.00
|Expired                                                        |  | (45,000          | ) |      |                                 | 1.12
|                                                               |  |                  |   |      |                                 |     
|Outstanding at end of year                                     |  | 756,035          |   |      | $                               | 1.76
|                                                               |  |                  |   |      |                                 |     
|Options exercisable at end of year                             |  | 756,035          |   |      | $                               | 1.76
|Weighted average fair value of options granted during the year |  | 0                |   |      | $                               | 0.00



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PREFERRED VOICE



NOTES TO FINANCIAL STATEMENTS



Note HStock warrants (continued):



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



|                                                               |  | 2003             |  | 2002                            |      | 2001            
|-------------------------------------------------------------- |  | ---------------- |  | ------------------------------- | ---- | ----------------
|                                                               |  | Number of shares |  | Weighted average exercise price |      | Number of shares
|Outstanding at beginning of year                               |  | 2,532,668        |  | $                               | 1.64 |                 
|Granted                                                        |  | 0                |  |                                 | 0.00 |                 
|Exercised                                                      |  | 0                |  |                                 | 0.00 |                 
|Forfeited                                                      |  | 0                |  |                                 | 0.00 |                 
|Expired                                                        |  | 0                |  |                                 | 0.00 |                 
|                                                               |  |                  |  |                                 |      |                 
|Outstanding at end of year                                     |  | 2,532,668        |  | $                               | 1.64 |                 
|                                                               |  |                  |  |                                 |      |                 
|Options exercisable at end of year                             |  | 2,532,668        |  | $                               | 1.64 |                 
|Weighted average fair value of options granted during the year |  | 0                |  | $                               | 0.00 |                 



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



|                                                               |  | 2003             |   | 2002 |                                 | 2001
|-------------------------------------------------------------- |  | ---------------- | - | ---- | ------------------------------- | ----
|                                                               |  | Number of shares |   |      | Weighted average exercise price |     
|Outstanding at beginning of year                               |  | 4,318,703        |   |      | $                               | 1.62
|Granted                                                        |  | 110,000          |   |      |                                 | 1.25
|Exercised                                                      |  | 0                |   |      |                                 | 0.00
|Forfeited                                                      |  | 0                |   |      |                                 | 0.00
|Expired                                                        |  | (345,000         | ) |      |                                 | 1.01
|                                                               |  |                  |   |      |                                 |     
|Outstanding at end of year                                     |  | 4,083,703        |   |      | $                               | 1.67
|                                                               |  |                  |   |      |                                 |     
|Options exercisable at end of year                             |  | 4,083,703        |   |      | $                               | 1.67
|Weighted average fair value of options granted during the year |  | 110,000          |   |      | $                               | 0.04



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PREFERRED VOICE



NOTES TO FINANCIAL STATEMENTS



Note ICommitments:



The Company leases its office facilities and various office equipment under operating leases expiring through December 2005. Following is
a schedule of future minimum lease payments required under the above operating leases as of March 31, 2003:



|Year ending March
31, |  | Amount  
|--------------------- |  | --------
|2004                  |  | $174,395
|2005                  |  | 175,398 
|2006                  |  | 132,766 
|                      |  |         
|                      |  | $482,559



Total
rent expense charged to operations was $292,940, $238,859 and $153,515 for the years ended March 31, 2003, 2002 and 2001, 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. 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 expired June 3, 2001. Due to the uncertainty of the realization of the barter credits, the Company recognized an impairment
loss in the amount of $837,120 during the year ended March 31, 2001.



Note
KExtinguishment of debt:



During the
year ended March 31, 2002, the Company negotiated settlement of amounts owed to a certain holder of a note payable by the Company. The negotiated settlement resulted in a reduction of the Companys notes and accrued interest payable in the
amount of $11,992, which has been reported as other income in the accompanying statements of operations.



During the year ended March 31, 2001, 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 $74,375, which has been reported as other income in the accompanying statements of operations.



Note LNegotiated settlement and lawsuit settlement:



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



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NOTES TO FINANCIAL STATEMENTS



Note LNegotiated settlement and lawsuit settlement (continued):



The lawsuit proceeded to trial and the jury returned its verdict; but prior to any judgment being signed by the court, the parties
announced that all matters in dispute between them had been resolved by an agreement. The court accepted the agreement. The agreement called for the Company to pay $150,000 to the customer no later than October 31, 2003. The Company has recognized
$342,579 of previously deferred revenue related to the customers deposits.



Note MOperations and managements intent:



Operating losses



The
Company has incurred substantial operating losses to date. These losses have significantly depleted the Companys cash balances. The Company does not have enough cash to continue to fund large operating losses. The ability of the Company to
continue as a going concern is dependent on its ability to eliminate these operating losses.



Overview



The Company began operations in May 1994 as a traditional 1+ long-distance reseller. Recognizing the declines in telecommunications service prices and the decreasing margins being experienced in long distance sales, the Company decided to
sell their long distance customer base and assets in early 1997. Since June 1997, they have focused solely on the development, testing, and deployment of voice activated telecommunications services that would allow any consumers the ability to
dial calls using their voice.



In
December 1998, the Company realized that it would need extensive amounts of working capital to sell and market its services directly to individual consumers. Therefore, the Company began researching venues which already had inherent customer or
subscriber 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 the distributors will be a source of direct subscriber addition once
it includes the master distributor marketing area in the network of a VIP system, the first deployment of which began in Miami, Florida in March 2002, Boston, Massachusetts on January 1, 2003 and Chicago, Illinois opening in May 2003. The second
distribution channel is directly with (1) Incumbent Local Exchange Carriers or local telephone companies, (2) Wireless Communication Carriers or cell phone companies and (3) Competitive Local Exchange Carriers or competitive local telephone
companies. This avenue of distribution is extremely attractive because these companies already have the subscriber bases and the infrastructure to service large numbers of subscribers. The third distribution channel is through the network services
division which provides third party service application providers access to wireline and wireless carriers through voice over internet protocol (VOIP) network hosted by a web-hosting provider.



The Company first attempted to sell its hardware and license
application software but after only one such agreement with KMC Telecom Holdings, Inc. (KMC) decided to pursue revenue sharing whereby the Company provides all hardware, software applications and support in exchange for a portion of
revenue generated from the service provided by the customer to their subscribers. The entire sales force focuses on marketing revenue sharing agreements and, to date, has signed fifty-one (51) local telephone company and cell phone company
multi-year contracts. Eighteen contracts have been fully implemented so that the systems installed pursuant to such contracts are already generating revenues. As of March 31, 2003, these eighteen contracts were generating revenues of approximately
$160,000 per month. The revenue sharing agreement, and not the sale of hardware, is the primary method in which the Company intends to contract with customers to generate revenue going forward. With a new technology it is difficult to project
continued satisfaction with the product; therefore, revenues will fluctuate with subscriber additions and deletions. Two contracting phone companies are in the system acceptance and early



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PREFERRED VOICES



NOTES TO FINANCIAL STATEMENTS



Note MOperations and managements intent (continued):



marketing stages, and the Company should generate revenues from these contracts in the first quarter of the fiscal year ending March 31, 2004.



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



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

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

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

| |  |  | establish a lead time for delivery of hardware;
| | - |  | -----------------------------------------------

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

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

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

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

| |  |  | mitigate risk associated with technology by obtaining patents and copyrights and other protections of the Companys intellectual property; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | continually update software to meet the needs of consumers.
| | - |  | -----------------------------------------------------------



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



Future Obligations



Management believes that current cash and cash equivalents
and cash that may be generated from operations will be sufficient to meet anticipated capital requirements and to finance continued growth. Such projections are based on continued growth from current customers and customers which are already under
contract utilizing the revenue rates that the Company has experienced over the past six months with currently installed customers and projected cash requirements to support installation, sales and marketing, and general overhead. The Company may be
forced to raise additional capital through the issuance of new shares, the exercise of outstanding warrants, or reduction of current overhead. However, any projections of future cash needs and cash flows are subject to substantial uncertainty.



On May 31, 2002, the Company implemented a
thirty-three percent (33%) reduction in force.



F-23