U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

[X] Annual report under Section 13 or 15 (d) of the  Securities  Exchange Act of
1934 for the fiscal  year  ended  March 31,  2001
[ ] Transition report under Section 13 or 15 (d) of  the Securities Exchange Act
of 1934 for the transition period from _____________ to ____________

Commission File Number 33-92894
                              PREFERRED VOICE, INC.
                 (Name of Small Business Issuer in its Charter)

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

6500 Greenville Avenue
Suite 570
Dallas, Texas                                                 75206
-------------------------------                          -------------------
(Address of Principal Executive Offices)                   (Zip code)

                                  214-265-9580
                              --------------------
                (Issuer's Telephone Number, Including Area Code.)

Securities registered under Section 12(b) of the Exchange Act:
         Title of Each Class                         Name of Each Exchange
         -------------------                          on Which Registered
                       NONE                          ---------------------
                                                              N/A

Securities registered under Section 12(g) of the Exchange Act:
    Common Stock, $0.001 par value
-------------------------------------------------
           (Title of class)

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

            Yes       X                  No
                --------------------       ---------------------

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

State issuer's revenues for its most recent fiscal year:  $138,097

The  aggregate  market  value  of  the  voting  and  non-voting  stock  held  by
non-affiliates  of  the  registrant  as  of  June  25,  2001  was  approximately
$31,491,382. For purposes of this computation, all executive officers, directors
and 10% stockholders were deemed affiliates.  Such a determination should not be
construed  as an  admission  that  such  executive  officers,  directors  or 10%
stockholders are affiliates.

As of June 25, 2001,  there were 15,744,571  shares of the common stock,  $0.001
par value, of the registrant issued and outstanding.

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


<PAGE>

<TABLE>
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                              Preferred Voice, Inc.

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<S>      <C>                                                                                                        <C>

PART I
         Item 1.  Description of Business....................................................................       1
         Item 2.  Description of Properties..................................................................       9
         Item 3.  Legal Proceedings..........................................................................       9
         Item 4.  Submission of Matters to a Vote of Security Holders........................................       10

PART II
         Item 5.  Market for Common Equity and Related Stockholder Matters...................................       11
         Item 6.  Management's Discussion and Analysis or Plan of Operations.................................       12
         Item 7.  Financial Statements.......................................................................       18

PART III
         Item 9.  Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of
         the Exchange Act....................................................................................       19
         Item 10.  Executive Compensation....................................................................       21
         Item 11.  Security Ownership of Certain Beneficial Owners and Management............................       22
         Item 12.  Certain Relationships and Related Transactions............................................       24
         Item 13.  Exhibits, List and Reports on Form 8-K....................................................       25


SIGNATURES...................................................................................................       28

INDEX TO EXHIBITS............................................................................................       29

</TABLE>


<PAGE>


                                     PART I


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

                         Item 1: Description of Business

Background of the Company

         We  integrate  and  market  speech  recognition  technologies  to phone
companies,  to enhance their overall package of voice services. Our key product,
the Voice  Integrated  Platform  ("VIP  system" or the  "system"),  successfully
integrates  the Philips Speech Pearl Natural  Dialog,  the brand name of Philips
Electronic North America Corporation's speech recognition  technology,  with our
proprietary  software  application.  The system is designed to utilize  standard
industrial grade hardware and a  microprocessor-based  computing system,  with a
Windows NT operating system that fits into a standard rack that can be placed in
the phone  company's  switch  room.  With the VIP system,  a  subscriber  to our
services can use natural  conversational  speech to access a variety of enhanced
service applications.  We believe that the Philips speech recognition technology
that its system incorporates is superior to other similar  technologies and that
its VIP  system's  enhanced  services  will become  standard  telephony  options
offered by phone companies in the 21st century.

         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 1995.  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. ("Brite").  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

         Local Telephone Companies

         Local   telephone    companies   comprise   the   largest   market   of
telecommunications  providers.  The Federal  Communications  Commission  ("FCC")
reported in August of 2000 in its report on "Local Telephone  Competition"  that
by the end of 1999 there were at least 1,300 providing over 181 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, 1999 that in 1999 alone,  local  telephone  common  carriers
spent over $12 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.

         Cell Phone Companies

         Cell  phone  companies  had  an  estimated  90.5  million   subscribers
nationwide  at the end of June  2000.  We believe  that the  number of  wireless
subscribers will increase to 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.  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 and voice
activated services.

                                       1
<PAGE>

         Competitive Local Telephone Companies

         As of December 1999,  there were  approximately  298  facilities  based
competitive local telephone companies  nationwide,  providing  approximately 8.3
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.  The
Texas  legislature  also passed an act  "relating to expanding  the  specialized
telecommunications devices assistance program and contracts for special features
of the  telecommunications  relay  access  service."  The  act  took  effect  on
September 1, 1999 and expanded an existing voucher program,  allowing the Public
Utilities  Commission and the Texas  Commission for the Deaf and Hard of Hearing
to issue vouchers and provide other  financial  assistance to  individuals  with
disabilities  that impair the  individuals'  ability to  effectively  access the
telephone  network.  The act allows the vouchers to be used to purchase services
that assist individuals with disabilities  impairing the individual's ability to
effectively  access the  telephone  network,  such as people with limited use of
their hands. Originally,  this law applied only to the hearing disabled, but the
legislature  amended the  original  act so that  people with other  disabilities
could also receive  vouchers for  qualifying  services.  We believe that the VIP
system is an economically feasible voice dialing and activated service that many
telecommunications  providers  can make  available to people with a  disability,
however,  at this time our services  have not been  purchased  with the vouchers
provided under the act.

         Many state governments have also proposed legislation regarding the use
of cellular  phones while  driving,  New York state  assembly being the first to
pass a statewide ban on the use of hand-held cell phones while driving. The bill
still requires governor  signature but indications are that the bill will become
law and become  effective  November 1, 2001.  The National  Conference  of State
Legislatures  has reported that in at least 39 states  legislators have proposed
bills  similar to the one passed by the New York  legislature.  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 and local  telephone  companies with
subscriber bases of 10,000 and above, with a greater marketing effort to be made
to  competitive  local  exchange   carriers,   or  competitive  local  telephone
companies,  in the near future.  The cell phone market has grown from 69 million
subscribers in 1998 to 97 million  subscribers in June of 2000 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,  local
telephone  companies,  competitive  local  telephone  companies  and cell  phone
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.

         Primary Markets

         Cell Phone  Companies.  Of the  approximately  722  cellular  telephone
markets  in the  United  States,  there  are 416  rural  service  areas  and 306
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

                                       2
<PAGE>

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.  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. We have entered into revenue sharing  arrangements  with
seventeen (17) cell phone companies, three of which are providing voice 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 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 fifteen (15) local telephone  companies,  one of which is already providing
voice services to its subscribers and pays 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  primarily  upon three
providers'  subscribers  for the revenue we have  generated  through the revenue
sharing  agreements.  A total of  87,054  of the  contracting  phone  companies'
subscribers have subscribed or are currently  "opting-in" to our speech services
as of  June  4,  2001  from  six  different  phone  companies,  6,610  of  which
affirmatively  subscribed to our services and 80,444 of which were automatically
subscribed to our services by their carrier and they will  subsequently have the
option to  "opt-out"  of the  service.  However,  by the fiscal  quarter  ending
September  30, 2001, 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.  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

                                       3
<PAGE>

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

         We  have  agreed  in  these  addenda  to  contribute  up to  $0.50  per
subscriber of 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. We are marketing
this plan to all of our contracting cell phone companies.

         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
area. 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,

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<PAGE>

then, monthly fees for such collocation. We have placed boxes in the Dallas area
to service our own direct subscribers.

         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 six large  metropolitan  areas.  The companies and the markets
they cover are the following:

         o        Best Voice, Inc. in Miami, Florida;
         o        Voice Retrieval, Inc. in Dallas, Texas;
         o        Amerivoice Telecommunications, Inc. in Milwaukee, Wisconsin;
         o        In Touch Solutions, L.L.C. in Myrtle Beach, South Carolina;
         o        Voicenet New Media, Inc. in Boston, Massachusetts; and
         o        Nomis Communications, Inc. in Houston, Texas.

We have not yet  installed  our VIP systems in these  areas.  The form of master
distributor   agreement  that  has  been  signed  by  all  participating  master
distributors  allows the  distributor  to market  and sell 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 provide  the
master  distributor  with  commissions  for  accounts  acquired  based  upon the
revenues billed and collected for such accounts. These agreements typically have
an initial term of three years, a number of which are set to terminate or expire
this year. During 1999, we experienced various  difficulties  creating a billing
system  which would allow us to bill the accounts  that the master  distributors
acquired. In February of 2000, the billing issues were resolved, but we have not
been able to contract  services from a competitive local telephone company which
would  allow  us  to  provide  local  service  to  these  master   distributors'
subscribers.  Because of these  setbacks,  our Board of Directors has approved a
form of contract to extend the term of these  agreements at no additional fee to
the  distributors  and we are  now  investigating  alternatives  so  that we can
provide our services in these areas through multiple phone companies.

Our Product and Services

         Our proprietary  speech-interaction 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 speech  recognition  enhanced services and applications to
help them offer voice services to their subscribers and increase their revenues.

         The Product

         We have developed what we believe to be a unique system that integrates
Philips'  Speech Pearl Natural  Dialog speech  recognition  software and our own
proprietary  software  called the VIP system.  We believe  that the system's new
hardware and software system provide the wide variety of new speech  recognition
enhanced   services   being  sought  by  phone   companies   in  a   deregulated
telecommunications  industry.  With the  system,  a phone  company can offer its
subscribers a variety of speech  recognition and call processing  services.  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.
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.

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<PAGE>

         The VIP system's speech  recognition  software  currently  incorporates
twelve (12) separate enhanced service applications that we have created with our
own software.  We use speech  recognition  technology  created by Philips Speech
Processing  to process  natural  dialogue  speech for our operating and software
systems. The speech recognition  software,  which is based on phonetics,  may be
programmed  to  be  speaker  dependent  or  speaker  independent.  The  software
recognizes  spoken words or sentences and completes the call as instructed.  The
speech  recognition  software  allows  callers to use  continuous  digit  speech
without  requiring  users to change the cadence of their speech or speak between
beeps to fit a speech  recognition  template or prompt.  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 in exchange for periodic
royalties we pay to Philips.

         The Services

         We have  designed a menu of speech  recognition  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  speech
recognition enhanced services are currently available through the VIP System for
delivery to subscribers by participating providers:

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

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

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

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

         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

                                       6
<PAGE>

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.

         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.

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

         Competition

         The speech  recognition  services  market is competitive  and marked by
rapid technological  innovations.  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.  We believe that ease of installation  and
implementation  of our product and  services,  along with the low up-front  cost
allows us to  effectively  compete in our  target  markets - the small to medium
size phone company market.  However, the market for our products and services is
constantly  evolving,  and we may not be able to  compete  successfully  against
current and potential future competitors.

         Some of our competitors are Sprint  Corporation,  Comverse  Technology,
Wildfire  Communications,  Inc.  ("Wildfire"),  General  Magic,  Inc.  ("General
Magic") and Webley  Systems,  Inc.  ("Webley").  Currently,  Sprint  Corporation
provides its customers  with a voice dialing  service it calls "Voice  Command".
The  offering  allows  name and  number  voice  dialing  only on the  Sprint PCS
network.  The Tel@go product under development by Comverse  Technology  includes
voice dialing as well as other voice-directed  services. The Comverse concept to
deliver  speech driven  services is  subordinate  to the ultimate goal to deploy
Comverse voicemail systems.  Consequently,  the service is not directed at phone
companies with existing  voicemail  systems.  Wildfire and Webley,  both private
companies,  market a virtual  assistant  that uses  voice  activated  and speech
recognition  software to track and answer  voice mail,  e-mail and fax.  General
Magic has developed a similar service,  but it has used it to focus on providing
voice  services  through  the  Internet.  Accessline  Technologies,  Inc.,  Call
Sciences  Ltd. and  Intellivoice  Communications,  Inc.  are also voice  service
providers offering  applications  primarily for use on the Internet and wireless
phone systems.  These companies focus on marketing  services directly to the end
user.

                                       7
<PAGE>


         Intervoice-Brite,  Inc.  is the leading  supplier  of customer  premise
equipment  that  provides  call  processing  and  voice  recognition   services.
Intervoice has a significant  market share and markets to businesses and network
operators.  Intervoice's  revenues have steadily increased over the past several
years.  Intervoice  markets  directly to consumers and to larger local telephone
companies.  We,  on the  other  hand,  market  to  small  to  medium  local  and
competitive  local  telephone  companies  and cell  phone  companies  in similar
markets;  therefore,  we  do  not  believe  that  Intervoice  is  a  significant
competitor at this time.

         Other  competitors  offering  voice  recognition  applications  include
Glenayre Electronics,  Inc., Centigram Communications  Corporation,  Periphonics
Corporation,  a Nortel Networks company, Octel, a division of Lucent, and Aspect
Communications,  all of which  price  their  systems  for  marketing  to  larger
telephone companies.  Compaq, IBM and Lucent also have voice and call processing
systems  that  they  market  to larger  telephone  companies,  but it is a small
portion of their respective  businesses.  Companies such as AT&T,  MCI/Worldcom,
Inc., Sprint  Corporation and a number of wireless phone companies provide their
subscribers with voice mail and call forwarding  features,  applications that we
will be  marketing  in  conjunction  with our speech  recognition  applications;
however,  they already have gained large  subscriber  bases  through broad based
brand recognition.  We do not intend to market to the larger telephone companies
until we establish a strong market presence in the medium and smaller  telephone
company markets.

         We expect that additional  competition  will develop.  That competition
may include large companies with substantially greater financial,  marketing and
technical resources than those available to us. Such competition could adversely
affect our revenues and operating results.

         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.  This  program  is  currently  being used by Sleepy Eye
Telephone Company to assist new subscribers

         We train contracting phone companies'  customer service employees to be
able to answer  standard  questions  related  to the  services  we will  provide
through the VIP system, 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
your directory.  Therefore,  contracting  phone companies'  employees,  with the
assistance  of the  "Help Me"  service,  should  be able to  answer  the  common
questions subscribers will have about their service.

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

         Employees

         As of June 25, 2001, we had 34 employees, all of whom are full time.

         Patents, Trademarks and Copyright

         The  Preferred  Voice  name and logo,  the VIP  system 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

                                       8

<PAGE>

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,  Secure Card and Use
Your Voice.  We have  applied for patents on our Voice  Integrated  Platform and
Method  of  Operation  Thereof  and  Voice  Integrated  Platform  and  Method of
Operation Thereof with release links. We have applied for trademarks  related to
our services:  Safety Talk, Safety *Talk, Voice Accessed Content and ** Talk. We
have also  applied for  trademarks  on Class 9 - Preferred  Voice and Class 38 -
Preferred  Voice. We have not yet received  confirmation of registration of such
patents and trademarks.

         Core Technology and System Enhancement

         We have  spent  the last  three  years  developing  and  enhancing  our
proprietary  software in conjunction with testing the Philips Speech  Processing
software to create the  system.  We  estimate  that we have spent  approximately
$690,000 during the last two fiscal years in direct core technology  enhancement
and development activities and approximately $2,400,000 in indirect costs, which
costs  include  general  overhead  during  the time that our VIP  system  was in
development.  We have developed a high-density  data  processing VIP system,  to
enable a greater number of subscribers and volume of calls per system.  This new
model is currently in its test phase.  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 ten employees in our
software/hardware  development  and deployment  department.  We expect to add at
least four  additional  employees or  consultants  in this area by the middle of
2001.

                        Item 2: Description of Properties

         Our  executive  offices  are located in Dallas,  Texas.  We lease 9,678
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  $13,613.72  per  month  through
December 31, 2001, after which point it will be increased each year thereafter.


                            Item 3: Legal Proceedings

         KMC Telecom Holdings, Inc.

         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 provides for a total of 39 installations and grants
KMC the ability to add up to 81 additional installations. The agreement is for a
period of 10 years,  but KMC has the right to terminate the  agreement  annually
and on standard events of default.

         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
requested  a refund of most monies  paid  relating  to the initial  market and a
refund of all monies paid for other markets.  If we were required to refund such
monies,  it would result in a charge to revenue in the period that the refund is
ascertained.  Under the terms of the contract,  KMC failed to notify us if there
were any  remaining  faults in the VIP system after KMC's  fifteen (15) day test
period and we believe they are deemed to have accepted the system.  We responded
by informing KMC that under the terms of the agreement, KMC had already accepted
the initial installation and, therefore, had no right to terminate the agreement
with cause pursuant to the terms of the agreement.

         On  November  1,  2000,   KMC  wrote  to  us  again  and  disputed  our
interpretation of the agreement. KMC reiterated its termination of the agreement
and its request for  reimbursement of monies that it had paid. KMC added


                                       9
<PAGE>

that if we were correct that the agreement is not terminated, KMC would exercise
its right to remove all other  markets from the terms of the agreement and would
demand return of the license fee and hardware costs paid for those  markets.  We
dispute that we have any  obligation to refund license fees for markets that are
removed from the  agreement.  KMC also informed us that if the agreement were in
effect,  they believe that we have breached the provisions  requiring  escrow of
the  software.  While we have not  escrowed the  software,  we dispute that such
inaction constitutes a breach of the escrow provisions of the agreement.

         We filed a breach of contract  suit  against KMC on November  16, 2000.
The cause of action is styled in the name of the  principal  parties,  Preferred
Voice, Inc. v. KMC Telecom Holdings, Inc., Case No. 00-09351, filed in the 101st
Judicial District,  Dallas,  Texas. We are seeking general,  special and various
other damages,  including  attorneys  fees and  declaratory  judgment  regarding
certain terms of our contract with KMC.

         On March 1, 2001,  KMC gave us notice  that they were  terminating  the
Marketing  Agreement  between KMC and us without  cause  effective as of June 3,
2001, the second anniversary of the date of execution of the agreement, pursuant
to the terms of their contract with us. Pursuant to the Marketing Agreement,  as
a result of such termination KMC is not entitled to the return of the money that
it had paid to us under the Marketing Agreement.

         Proxhill Marketing, Limited

         On June 3,  1996,  we  entered  into a media  purchase  Agreement  with
Proxhill  Marketing  Limited whereby  Proxhill was to provide us with $1,200,000
worth of media credits in exchange for 400,000 shares of our common stock valued
at $2.00 per share, the fair market value of the stock on June 3, 1996.

         In April of 1998,  we launched  our first VIP system in Tampa,  Florida
where we attempted to utilize our media  credits to advertise  the launch of our
products. We utilized approximately $39,000 of our media credits on the campaign
and  realized  that the  media  provided  was well  below  that  which  had been
requested of the media buyer.

         In  December  of  1999,  we  retained  a media  expert  to  conduct  an
evaluation of the services Proxhill was retained to provide and it was confirmed
that the  services  we had  expected  to  receive  from  Proxhill  could  not be
delivered by Proxhill or the affiliate they had chosen to deliver the media.  We
requested a refund of our prepaid media  credits and or the  assignment of a new
media buyer that could  provide us with the  expertise  necessary  to deploy the
media we needed to  support  the  advertisement  and  marketing  of our  revenue
sharing  programs.  In May of 2000,  Proxhill  agreed  to try and move the media
credits to a new media vendor but never provided such a vendor.

         In March of 2001, we filed suit against  Proxhill  alleging  common law
fraud, fraudulent inducement,  statutory fraud and negligent  misrepresentation.
We are seeking to recover actual damages, exemplary damages, attorney's fees and
interest.

         In May of 2001,  Proxhill filed a lawsuit against us seeking injunctive
relief and  declaratory  judgment  claiming that our lawsuit against them should
have been filed in the State of  Colorado  courts,  Arapaho  County,  Englewood,
Colorado.  We are  currently  preparing  an  answer to deny all  injunctive  and
declaratory relief and are evaluating the filing of a counterclaim.  In addition
to denying  such  claims,  we intend to submit a motion to dismiss the action in
Colorado on the basis that we filed  claims first in the state of Texas and that
case will settle all issues which are part of the action filed in Colorado.


           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.



                                       10
<PAGE>



                                     PART II

         Item 5. Market for Common Equity and Related Stockholder Matters


         The Common Stock is listed on the OTC Electronic  Bulletin  Board.  The
following  table  indicates the quarterly  high and low bid price for the Common
Stock on the OTC Electronic  Bulletin Board for the fiscal year ending March 31,
2001 and  March  31,  2000.  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 2000                            HIGH                         LOW
1st Quarter                            $2.25                        $0.875
2nd Quarter                            $2.125                       $1.375
3rd Quarter                            $5.00                        $1.437
4th Quarter                            $7.625                       $3.375

Fiscal 2001
1st Quarter                            $5.50                        $2.00
2nd Quarter                            $4.66                        $2.03
3rd Quarter                            $3.50                        $0.75
4th Quarter                            $2.843                       $0.875

         On June 26, 2001, the closing bid price of the Common Stock as reported
on the OTC Electronic Bulletin Board was $2.25.

         As of June 26, 2001, there were  approximately  2,400 holders of record
of the Common Stock.

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

          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.

          Three  warrantholders  exercised their warrants to purchase a total of
10,736 shares of common  stock.  On July 13, 2000, we issued 5,000 shares of our
common stock to Eugene Starr at an exercise price of $3.00 per share pursuant to
the  exercise  of a warrant.  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.

                                       11
<PAGE>
          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.

         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 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,  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

                                       12
<PAGE>

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.), or is 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 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 once we include the master distributor marketing area in the network of
a VIP  system,  which  we  expect  to  occur  by the  end of  2001.  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.

         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 thirty-two (32) local telephone company and cell phone company multi-year
contracts.  Four  contracts  have been  fully  implemented  so that the  systems
installed pursuant to such contracts are already generating  revenues for us. As
of  April  30,  2001,   these  four  contracts  were   generating   revenues  of
approximately $19,000 per month. Since our deployments began in October of 2000,
we have experienced  increased  revenues each month but with a new technology it
is  difficult to project  continued  satisfaction  with the product;  therefore,
revenues  will  fluctuate  with   subscriber   additions  and  deletions.   Four
contracting  phone  companies are in the system  acceptance and early  marketing
stages,  and we should  generate  revenues  from these  contracts  by the second
quarter of the fiscal year ending March 31, 2002.

         We are still at an early stage of implementing our business plan. It 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:

         o        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;


                                       13
<PAGE>

         o        establish and maintain relationships with phone companies;

         o        make sure the VIP system works with the telephone  switches of
                  all of the major manufacturers;

         o        establish a lead time for delivery of hardware;

         o        achieve user acceptance for our services;

         o        generate reasonable margins on our services;

         o        deploy and  install  VIP  systems  on a timely and  acceptable
                  schedule;

         o        respond to competitive developments;

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

         o        continually   update  our   software  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  and no longer sell our
hardware  and  software  application  to such  companies,  as we found  that the
revenue  sharing  arrangement  embodied in our form  Marketing  Agreement  could
potentially provide a higher rate of return on investment to us over the life of
our standard contract.

         We recorded a net loss of $4,742,044, or $.34 per share, for the fiscal
year ended  March 31,  2001,  compared  to a net loss of  $993,066,  or $.09 per
share, for the fiscal year ended March 31, 2000, and a net loss of $690,598,  or
$.10 per share,  for the year ended  March 31,  1999.  The  increased  loss is a
result of our shift from  development of our services to full  deployment of our
services,  increased headcount and overhead to deploy services and revenues from
our new  revenue  sharing  plan did not begin  until the  fourth  quarter of the
fiscal year.

         Total Revenue

         Total  revenue for the fiscal year ended March 31,  2001,  was $138,097
compared to $885,134  and $180,383 for the fiscal years ended March 31, 2000 and
1999 respectively.  The decrease of revenue is due to the shift from sale of our
voice  recognition  platform to revenue sharing for the services provided by the
platform.  Of the 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". Of the $885,134 revenue booked for the
fiscal year ended March 31, 2000,  65% was from one-time  licensing fees paid by
KMC, 22% from sales of our VIP systems to KMC, 10% from phone  company  customer
tests, 3% from master  distributor fees for specific  marketing  rights,  and 1%
from service fees for our services,  "Emma the Perfect  Receptionist" and "Smart
Line." For the fiscal  period  ended March 31, 1999,  revenues of $180,383  were
generated,  94% from master  distributor  fees and the remaining 6% from service
fees for "Emma the Perfect  Receptionist"  and "Smart  Line".  The  reduction of
revenues reflects that in the fiscal year ended March 31, 2000, we obtained most
of our revenues from a single licensing  arrangement with KMC;  whereas,  in the
fiscal year  ending  March 31,  2001,  more than 50% of our  revenues  were from
revenue sharing agreements with our new phone company customers.

         We anticipate  that revenues from our revenue  sharing  agreements will
grow  gradually  in the fiscal year  ending  March 31,  2002,  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


                                       14
<PAGE>

systems,  such as was done in the KMC licensing  agreement,  as we are no longer
selling new master distributor markets or selling our VIP systems.


         Cost of Sales

         Cost of sales for the fiscal  year ended  March 31,  2001 was  $101,188
compared to $215,293  and $15,033 for the fiscal  years ended March 31, 2000 and
1999,  respectively.  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;  whereas,  in the previous  year 55% of the costs were for VIP
system  hardware  purchased  by KMC, 16% of the costs were  associated  with the
closing of the KMC licensing agreement,  and 29% were for network infrastructure
such as collocations,  connectivity,  system access and long distance. All costs
for fiscal year ended March 31,  1999 were for  network  infrastructure  such as
collocations,  connectivity,  system access and long  distance.  The decrease in
cost of  sales  from  2000 to 2001 is due to the move  from  the sale of  actual
hardware  to  basic  service  deployment  costs.  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, 2001 were  $4,011,608  compared to  $1,675,971  and  $768,024  for the
fiscal years ended March 31, 2000 and 1999,  respectively.  The  increases  from
1999 to 2000 and from 2000 to 2001 were primarily due to the staffing  increases
and increased  marketing  efforts of our revenue sharing program to wireline and
cell phone companies.

         We expect  that  selling,  general  and  administrative  expenses  will
continue  to  increase  through the fiscal  year  ending  March 31,  2002,  such
expenses to include  costs  related to increases in the number of employees  and
general overhead.

         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
$723,561 for  enhancement  of our core software and hardware  technology for the
fiscal year ended March 31, 2001 in  comparison  to $384,686 for the fiscal year
ended March 31,  2000.  The  increase in  expenditures  is due to the  continued
enhancement of our core technology.

         Extraordinary Items

         We have recognized  income from the  extinguishment of debt of $74,375,
$59,976 and  $88,828,  respectively,  for the fiscal years ended March 31, 2001,
2000 and 1999.  Most of this debt  related  to our  obligations  related  to our
long-distance business segment, which we disposed of in early 1997.

         Income Taxes

         As of March 31, 2001, we had cumulative federal net operating losses of
approximately  $11.6 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, 2001 were  $1,735,752,  an
increase of $362,461 from  $1,373,291 at March 31, 2000.  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.

         On June 3, 1999, we entered into a software license agreement with KMC.
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 provides for a total of 39 installations and grants 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
90 days,  it was  refusing  to accept  the system  and  exercising  its right to


                                       15
<PAGE>


terminate  the  agreement  with  cause  under  the  terms of the  contract.  KMC
requested  a refund of most monies  paid  relating  to the initial  market and a
refund of all monies paid for other markets.  We responded by informing KMC that
under  the  terms  of the  agreement,  KMC  had  already  accepted  the  initial
installation and, therefore,  had no right to terminate the agreement with cause
pursuant to the terms of the agreement.  If the judge were to determine that KMC
had properly  terminated  the contract for cause,  then KMC would be entitled to
the refund of money paid under the agreement.

         On November 16, 2000,  we filed a breach of contract  suit against KMC.
We continue to carry approximately $342,000 in deferred revenue related to sales
of  hardware  to KMC and we will  continue  to carry such  amounts  as  deferred
revenue  until the  conclusion  of and  final  judgment  on the case.  If we are
required  to refund  such  monies it would  result in a charge to revenue in the
period that the refund is ascertained  and could have a material  adverse effect
on our financial condition, particularly our liquidity.

         On March 1, 2001, KMC gave written notice to us that it was terminating
its agreement with us effective on the anniversary  date, June 3, 2001,  without
cause. Upon a termination without cause under the terms of the contract, neither
party would be entitled to receive any money back.  However, we will continue to
carry the $342,000 related to sales of hardware to KMC as deferred revenue until
final judgment is entered on this case.  See  "Business-Legal  Proceedings"  for
additional information regarding the legal proceedings.

         We have recently raised a significant amount of working capital through
private  equity  financings  that we believe  will  provide  us with  sufficient
working capital for the next eight months at which time we hope to be generating
revenues to cover our cash needs.  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.  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  $19,000  per month  but we expect  these to
continue to rise to a level to meet our monthly cash requirements by December of
2001.

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

         Future Obligations

         We project our working capital needs to be $1,200,000 over the next six
months  for  corporate  overhead  and will  require  approximately  $600,000  of
equipment financing to continue to deploy its systems in carrier locations.  Our
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  continued growth for the foreseeable  future. If we
are unable to generate  sufficient  revenue from  operations as projected in our
business plan, 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.

         During the next twelve months,  subject to raising  adequate capital or
securing financing for our VIP systems, we intend to:

         o    substantially increase our VIP system installations,

         o    continue marketing of our VIP systems,

         o    introduce new services, and


                                       16
<PAGE>


         o    continue refining the services we currently provide.

We do not  make  any  assurance  that we will be able to  raise  any  additional
capital  or to raise  capital on terms  satisfactory  to us. If we need to raise
additional  capital  before  October  11,  2001,  we may be  required  to  issue
additional  shares of our common stock to the  stockholders  who purchased their
stock in the April 11, 2001 offering  pursuant to the terms of the  subscription
agreement executed between us and such  stockholders.  Subject to our ability to
fund the cost,  we expect to hire or  contract  with  approximately  thirty (30)
additional persons during the next twelve (12) months,  primarily to support our
expanding marketing activities,  software and hardware  development,  and system
installations.  At June  26,  2001,  we  employed  thirty-four  (34)  full  time
employees.





                                       17
<PAGE>



                          Item 7. Financial Statements

                              PREFERRED VOICE, INC.
                              FINANCIAL STATEMENTS
                          MARCH 31, 2001, 2000 and 1999

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






                                       18
<PAGE>

                           INDEPENDENT AUDITORS' REPORT




The Board of Directors
   and Shareholders
Preferred Voice, Inc.

We have audited the accompanying  balance sheets of Preferred Voice,  Inc. as of
March 31, 2001 and 2000, and the related statements of operations, stockholders'
equity  (deficit) and cash flows for each of the three years in the period ended
March  31,  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, 2001 and 2000,  and the results of its  operations  and its cash flows
for each of the three years in the period  ended March 31, 2001,  in  conformity
with accounting principles generally accepted in the United States of America.


                                                PHILIP VOGEL & CO. PC

                                                 /s/ Philip Vogel & Co. PC


                                                Certified Public Accountants

Dallas, Texas

May 25, 2001


                                      F-1

<PAGE>






                              PREFERRED VOICE, INC.

                                 BALANCE SHEETS
                             MARCH 31, 2001 AND 2000

<TABLE>
<CAPTION>


                                                                                               2001               2000
                                                                                               ----               ----
<S>                                                                                           <C>                 <C>

       Assets

Current assets:
    Cash and cash equivalents                                                                 $1,735,752          $1,373,291
    Accounts receivable, net of allowance for doubtful
    accounts of $-0- in 2001 and $-0- in 2000                                                     39,141               3,924
 Employee advances                                                                                   922                   0
 Inventory                                                                                        49,085              84,724
 Prepaid expenses                                                                                    493             761,018
                                                                                          ---------------    ----------------

       Total current assets                                                                   $1,825,393          $2,222,957
                                                                                          ---------------    ----------------

Property and equipment:
    Computer equipment                                                                          $882,960            $321,248
    Furniture and fixtures                                                                        42,691              38,880
    Office equipment                                                                              61,889              18,198
    Software development                                                                         723,561             384,686
                                                                                          ---------------    ----------------

                                                                                              $1,711,101            $763,012
    Less accumulated depreciation                                                                531,195             253,143
                                                                                          ---------------    ----------------

       Net property and equipment                                                             $1,179,906            $509,869
                                                                                          ---------------    ----------------

Other assets:
    Deposits                                                                                     $14,093             $85,114
    Trademarks and patents                                                                        48,533               7,472
    Deferred stock issuance costs                                                                      0              19,803
                                                                                          ---------------    ----------------

       Total other assets                                                                        $62,626            $112,389
                                                                                          ---------------    ----------------

                                                                                              $3,067,925          $2,845,215
                                                                                          ===============    ================


</TABLE>
The accompanying notes are an integral part of these statements.


                                      F-2
<PAGE>

<TABLE>
<CAPTION>



                                                                                               2001               2000
                                                                                               ----               ----
<S>                                                                                         <C>                  <C>

       Liabilities and stockholders' equity

Current liabilities:
    Accounts payable                                                                            $338,270            $272,818
    Accrued payroll and payroll taxes                                                              3,589               2,265
    Accrued interest payable                                                                      44,451              39,851
    Accrued operating expenses                                                                    39,379              13,128
    Accrued vacation                                                                              22,194              11,853
    Customer deposits                                                                            342,118             390,992
    Current maturities of long-term debt                                                          30,000              30,000
    Note payable                                                                                  50,866              50,866
                                                                                          ---------------    ----------------

       Total current liabilities                                                                $870,867            $811,773
                                                                                          ---------------    ----------------

Commitments (Note J)


Stockholders' equity:
    Common stock, $0.001 par value;
      20,000,000 shares authorized, shares issued
      15,672,586 and 13,276,796, respectively                                                    $15,674             $13,277
    Additional paid-in capital                                                                13,856,051           8,952,788
    Accumulated deficit                                                                     (11,672,799)         (6,930,755)
                                                                                          ---------------    ----------------

                                                                                              $2,198,926          $2,035,310
 Treasury stock - 385,224 and 385,224
    shares, respectively, at cost                                                                  1,868               1,868
                                                                                          ---------------    ----------------

       Total stockholders' equity                                                             $2,197,058          $2,033,442
                                                                                          ---------------    ----------------

                                                                                              $3,067,925          $2,845,215
                                                                                          ===============    ================


</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-3
<PAGE>



                              PREFERRED VOICE, INC.

                            STATEMENTS OF OPERATIONS
                FOR THE YEARS ENDED MARCH 31, 2001, 2000 AND 1999


<TABLE>
<CAPTION>

                                                                            2001               2000                 1999
                                                                            ----               ----                 ----
<S>                                                                      <C>                <C>                     <C>

Sales                                                                        $138,097           $885,134              $180,383

Cost of sales                                                                 101,188            215,293                15,033
                                                                       ---------------    ---------------      ----------------

       Gross profit                                                           $36,909           $669,841              $165,350
                                                                       ---------------    ---------------      ----------------

Costs and expenses:
    Selling, general and administrative expenses                           $4,011,608         $1,675,971              $768,024
    Interest expense                                                            4,600             28,556               176,752
                                                                       ---------------    ---------------      ----------------

       Total costs and expenses                                            $4,016,208         $1,704,527              $944,776
                                                                       ---------------    ---------------      ----------------

Loss from operations                                                     $(3,979,299)       $(1,034,686)            $(779,426)
                                                                       ---------------    ---------------      ----------------

Other income (expense):
    Loss from sale of assets                                                       $0          $(18,356)                    $0
    Loss from impairment of assets                                          (837,120)                  0                     0
                                                                       ---------------    ---------------      ----------------

       Total other income (expense)                                        $(837,120)          $(18,356)                    $0
                                                                       ---------------    ---------------      ----------------

Loss from operations before income taxes
    and extraordinary item                                               $(4,816,419)       $(1,053,042)            $(779,426)

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

Loss from operations before extraordinary item                           $(4,816,419)       $(1,053,042)            $(779,426)

Extraordinary item:
    Gain from extinguishment of debt (less applicable
       income taxes of $-0-)(Note L)                                           74,375             59,976                88,828
                                                                       ---------------    ---------------      ----------------

Net loss                                                                 $(4,742,044)         $(993,066)            $(690,598)
                                                                       ===============    ===============      ================



Per share amounts:
    Loss from continuing operations                                    $       (0.35)     $       (0.10)       $        (0.11)
                                                                       ==============     ==============       ===============

    Gain from extinguishment of debt                                   $         0.01     $         0.01       $          0.01
                                                                       ==============     ==============       ===============

 Net loss                                                              $       (0.34)     $       (0.09)       $        (0.10)
                                                                       ==============     ==============       ===============


</TABLE>
The accompanying notes are an integral part of these statements.


                                      F-4
<PAGE>


                              PREFERRED VOICE, INC.

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                FOR THE YEARS ENDED MARCH 31, 2001, 2000 AND 1999

<TABLE>
<CAPTION>


                                                                                     Shares of common stock
                                                                     Authorized       Issued       Outstanding    In treasury
<S>                                                                    <C>             <C>             <C>            <C>

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

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

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

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

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

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

Balance - March 31, 2000                                               20,000,000     13,276,796      12,891,572      385,224
                                                                       ==========     ==========      ==========      =======

The accompanying notes are an integral part of these statements.

                                      F-5


<PAGE>

 Exercise of employee stock option - March 6, 2000                              0          9,500           9,500            0
 Exercise of stock warrants - May 10, 2000                                      0        335,196         335,196            0
 Issuance of common stock - May 23, 2000                                        0          5,000           5,000            0
 Issuance of common stock - July 13, 2000                                       0          5,000           5,000            0
 Exercise of stock warrants - July 18, 2000                                     0            736             736            0
 Exercise of stock warrants - August 2, 2000                                    0          5,000           5,000            0
 Issuance of common stock - August 21, 2000,
    net of stock issuance costs of $32,470                                      0      1,142,858       1,142,858            0
 Exercise of stock  warrants - January 8, 2001                                  0         30,000          30,000            0
 Exercise of stock warrants - March 28, 2001                                    0         50,000          50,000            0
 Issuance of common stock - March 28, 2001,
    net of stock issuance costs of $106,167                                     0        812,500         812,500            0
 Issuance of stock warrants to non-employees for
    services                                                                    0              0               0            0

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

Balance - March 31, 2001                                               20,000,000     15,672,586      15,287,362      385,224
                                                                    ============== ============== =============== ============

</TABLE>


The accompanying notes are an integral part of these statements.



                                      F-5
<PAGE>

<TABLE>
<CAPTION>

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

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

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

           112               0           55,876                0             55,988

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

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

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

             0               0                0        (993,066)          (993,066)
---------------  --------------   --------------  ---------------   ----------------
       $13,277        $(1,868)       $8,952,788     $(6,930,755)         $2,033,442
---------------  --------------   --------------  ---------------   ----------------

The accompanying notes are an integral part of these statements.

                                      F-6
<PAGE>


            10               0            9,491                0              9,501
           335               0          334,861                0            335,196
             5               0           13,430                0             13,435
             5               0           14,995                0             15,000
             1               0              (1)                0                  0
            30               0           29,970                0             30,000

         1,143               0        2,786,388                0          2,787,531
             5               0           14,995                0             15,000
            50               0           49,950                0             50,000

           813               0        1,518,022                0          1,518,835

             0               0          131,162                             131,162

             0               0                0      (4,742,044)        (4,742,044)
---------------  --------------   --------------  ---------------   ----------------

       $15,674        $(1,868)      $13,856,051    $(11,672,799)         $2,197,058
===============  ==============   ==============  ===============   ================

</TABLE>

The accompanying notes are an integral part of these statements.


                                      F-6
<PAGE>



                              PREFERRED VOICE, INC.

                            STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED MARCH 31, 2001, 2000 AND 1999


<TABLE>
<CAPTION>

                                                                                2001              2000               1999
                                                                                ----              ----               ----
<S>                                                                           <C>              <C>                   <C>

Cash flows from operating activities:
    Cash received from customers                                                   $54,006       $1,273,062            $179,510
    Cash paid to suppliers                                                     (3,643,002)      (2,096,249)           (498,072)
    Interest paid                                                                        0        (224,235)                   0
                                                                           ----------------  ---------------   -----------------

       Net cash used by operating activities                                  $(3,588,996)     $(1,047,422)          $(318,562)
                                                                           ----------------  ---------------   -----------------

Cash flows from investing activities:
    Capital expenditures                                                        $(948,089)       $(389,436)          $(151,772)
    Proceeds from sale of assets                                                         0            1,750               1,300
    Employee advances                                                                (922)            2,500             (2,500)
                                                                           ----------------  ---------------   -----------------

       Net cash used by investing activities                                    $(949,011)       $(385,186)          $(152,972)
                                                                           ----------------  ---------------   -----------------

Cash flows from financing activities:
    Proceeds from issuance of stock                                             $4,913,135       $2,811,952                  $0
    Proceeds from notes payable                                                          0          200,000             351,000
    Note principal payments                                                              0        (228,000)            (20,000)
    Proceeds from sale - leaseback transaction                                           0                0             100,000
    Stock issuance costs                                                          (12,667)         (19,803)                   0
                                                                           ----------------  ---------------   -----------------

       Net cash provided by financing activities                                $4,900,468       $2,764,149            $431,000
                                                                           ----------------  ---------------   -----------------

Net increase (decrease) in cash and cash equivalents                              $362,461       $1,331,541           $(40,534)

Cash and cash equivalents:
    Beginning of year                                                            1,373,291           41,750              82,284
                                                                           ----------------  ---------------   -----------------

 End of year                                                                    $1,735,752       $1,373,291             $41,750
                                                                           ================  ===============   =================

</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-7
<PAGE>

<TABLE>
<CAPTION>


                                                                                2001              2000               1999
                                                                                ----              ----               ----
<S>                                                                           <C>              <C>                   <C>

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

 Net loss                                                                     $(4,742,044)       $(993,066)          $(690,598)
                                                                          -----------------  ---------------   -----------------

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

    Depreciation                                                                  $278,052         $140,948             $80,113
    Amortization                                                                         0                0               2,869
    (Gain) loss on sale of assets                                                        0           18,356               (186)
    Impairment loss                                                                837,120                0                   0
    Fair value of stock warrants issued in
       exchange for services                                                       131,162                0                   0

    Changes in assets and liabilities:
       Increase in accounts receivable                                            (35,217)          (3,064)               (860)
       (Increase) decrease in inventory                                             35,639         (84,724)                   0
       (Increase) decrease in deposits                                             (5,081)          (3,579)               2,875
       (Increase) decrease in prepaid expenses                                       (493)                0              38,982
       Increase in patents and trademarks                                         (41,061)          (7,472)                   0
       Increase (decrease) in accounts payable                                    (40,715)         (91,016)              58,635
       Increase (decrease) in accrued expenses                                      42,516        (414,797)             189,608
       Increase (decrease) in customer deposits                                   (48,874)          390,992                   0
                                                                          -----------------  ---------------   -----------------

       Total adjustments                                                        $1,153,048        $(54,356)            $372,036
                                                                          -----------------  ---------------   -----------------

Net cash used by operating activities                                         $(3,588,996)     $(1,047,422)          $(318,562)
                                                                          =================  ===============   =================


Schedule of non-cash investing and financing activities:
    Issuance of common stock in exchange for debt                                       $0         $952,383          $1,879,809
                                                                          =================  ===============   =================


</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-8
<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS

Note A - General organization:

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


Note B - Summary of significant accounting policies:

   Cash and cash equivalents

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

   Accounts receivable

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

   Inventory

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

   Depreciation

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

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

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

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

   Income taxes

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


                                      F-9
<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS


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

   Fair value of financial instruments

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

   Revenue recognition

      The Company is engaged as a provider  of  telecommunication  products  and
   services.  Generally, the Company recognizes revenue under the accrual method
   when its services and products are provided.  During the year ended March 31,
   2001,  the majority of the  Company's  revenue  consisted of revenue  sharing
   receipts and billing one  customer  for  software and hardware  installation.
   Licensing  fees are paid in  order  to  obtain  the  rights  to  utilize  the
   Company's  software  applications  in certain  geographical  markets  and are
   recognized when the contract is executed.  Licensing fee income for the years
   ended  March  31,  2001,   2000  and  1999  was  $-0-,   $570,000  and  $-0-,
   respectively.  System sales revenues are recognized when the customer accepts
   the  system,  which  usually  occurs  within  five  days  from  delivery  and
   installation. System sale income for the years ended March 31, 2001, 2000 and
   1999 was $48,874, $195,496 and $-0-, respectively.  Revenue sharing income is
   recognized  when the  voice-dialing  services are provided.  Revenue  sharing
   income for the years  March 31,  2001,  2000 and 1999 was  $74,779,  $-0- and
   $-0-, respectively.

   Advertising expense

      The Company  expenses  advertising  costs when the  advertisement  occurs.
   Total  advertising  expense amounted to $74,158,  $39,613 and $42,269 for the
   years ended March 31, 2001, 2000 and 1999, 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.  Diluted  EPS has not been  presented  in the  accompanying  financial
   statements due to the Company's  losses from operations  which results in any
   potential common shares being antidilutive.

      Loss  per  share  is  based  on the  weighted  average  number  of  shares
   outstanding of 13,884,662, 11,283,538 and 7,205,065 for the years ended March
   31, 2001, 2000 and 1999, respectively.

   Amortization

      Fees and other  expenses  associated  with the  issuance  of  subordinated
   convertible  debentures are being amortized on the straight-line  method over
   the term of the debentures beginning in April, 1995. Amortization expense was
   $-0-,  $-0- and $2,869 for the years  ended  March 31,  2001,  2000 and 1999,
   respectively.

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


                                      F-10
<PAGE>

                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS


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

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

      The Company has adopted the provisions of SFAS No. 121, Accounting for the
   Impairment of Long-Lived  Assets and for Long-Lived Assets to Be Disposed Of.
   This  statement  requires  that  long-lived  assets  and  certain  identified
   intangibles  be  reviewed  for  impairment  whenever  events  or  changes  in
   circumstances  indicate  that the  carrying  amount  of an  asset  may not be
   recoverable.  Recoverability  of assets to be held and used is  measured by a
   comparison  on the  carrying  amount  of an asset to  future  net cash  flows
   expected to be generated by the asset.  If such assets are  considered  to be
   impaired,  the impairment to be recognized is measured by the amount by which
   the carrying amount of the assets exceed the fair value of the assets. Assets
   to be disposed of are  reported at the lower of the  carrying  amount or fair
   value less costs to sell.  An  impairment  loss in the amount of $837,120 was
   recognized during the year ended March 31, 2001 (see Note K).

   Comprehensive income

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

   Segments of an enterprise and related information

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

   New accounting pronouncements

      The  Company  adopted  the  provisions  of SFAS No.  133,  Accounting  for
   Derivative  Instruments and Hedging Activities on April 1, 2000. SFAS No. 133
   requires  that an  entity  recognize  all  derivatives  as  either  assets or
   liabilities  in  the  statement  of  financial  position  and  measure  those
   instruments at fair value. Adoption of this statement did not have a material
   impact on the  Company's  financial  position,  results of operations or cash
   flows as the Company has not entered into any derivative transactions.


Note C - Notes payable:

   Notes payable consist of the following at March 31, 2001 and 2000:
<TABLE>
<CAPTION>

                                                                                        2001         2000
      <S>                                                                               <C>          <C>

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

</TABLE>

      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, 2001, 2000 and 1999, respectively.

                                      F-11
<PAGE>

                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS


Note D - Long-term debt:

 Long-term debt consisted of the following at March 31, 2001 and 2000:
<TABLE>
<CAPTION>

                                                                                     2001         2000
      <S>                                                                          <C>           <C>

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

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

                                                                                   $30,000       $30,000
         Less current portion                                                       30,000        30,000
                                                                               -----------  ------------

         Total                                                                          $0            $0
                                                                               ===========  ============

</TABLE>

   Interest  expense  charged to operations  related to the  long-term  debt was
$4,600,  $20,072 and $112,553 for the years ended March 31, 2001, 2000 and 1999,
respectively.

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


Note E - Common stock:

   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 has not yet been
   approved by the Company's stockholders.

   Stock purchase warrants

      At March 31,  2001,  the  Company  had  outstanding  warrants  to purchase
   2,778,703  shares of the  Company's  common stock at prices which ranged from
   $0.50 per share to $4.00 per share.  The warrants are exercisable at any time
   and expire on dates ranging from May 3, 2001 to August 24, 2006. At March 31,
   2001, 2,778,703 shares of common stock were reserved for that purpose.


                                      F-12
<PAGE>

                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS


Note E - Common stock (continued):

   Common stock reserved

      At March 31, 2001,  shares of common stock were reserved for the following
purposes:

         Exercise of stock warrants                               2,778,703
         Exercise and future grants of stock options
          and stock appreciation rights under the
          1994 stock option plan                                    412,250
         Exercise and future grants of stock option
          and stock appreciation rights under the 2000
          stock option plan                                         750,000
                                                              --------------

                                                                  3,940,953
                                                              ==============


Note F - Income taxes:

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

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

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

                                                             2001               2000             1999
                                                             ----               ----             ----
        <S>                                                          <C>               <C>              <C>

        Current income taxes                                         $0                $0               $0

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

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

</TABLE>

                                      F-13
<PAGE>

                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS


Note F - Income taxes (continued):

   Deferred tax (liabilities) assets consist of the following:

<TABLE>
<CAPTION>

                                                                 2001              2000
                                                                 ----              ----

           <S>                                                 <C>                <C>

           Accumulated depreciation                              $(59,000)          $(38,000)
                                                            ---------------   ----------------

           Gross deferred tax liabilities                        $(59,000)          $(38,000)
                                                            ---------------   ----------------

           Stock warrant compensation                              $70,000                 $0
           Accrued liabilities                                       8,000              4,000
           Start-up expenditures                                         0              2,000
           Net operating loss carryforward                       3,881,000          2,324,000
                                                            ---------------   ----------------

           Gross deferred tax assets                            $3,959,000         $2,330,000
           Valuation allowance                                 (3,900,000)        (2,292,000)
                                                            ---------------   ----------------

           Net deferred tax assets                                 $59,000            $38,000
                                                            ---------------   ----------------

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

</TABLE>

<TABLE>
<CAPTION>
                                                                 2001              2000              1999
                                                                 ----              ----              ----
           <S>                                                  <C>                  <C>              <C>

           The increases in the deferred tax valuation
              allowance are as follows:                         $1,608,000           $303,000         $235,000
                                                            ===============   ================  ===============
</TABLE>

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

   The  Company  has  available  at  March  31,  2001,  a  net  operating   loss
carryforward  of  approximately  $11,414,000  which can be used to offset future
taxable  income  through  the  year  2021.  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 G - Stock option plans and warrants:

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

   Under the terms of the plan,  options  granted may be either  nonqualified or
incentive stock options,  and the exercise  price,  determined by the Committee,
may not be less  than the  fair  market  value of a share on the date of  grant.
Stock appreciation  rights granted in tandem with an option shall be exercisable
only to the extent the  underlying  option is  exercisable  and the grant  price
shall be equal to the  exercise  price of the  underlying  option.  At March 31,
2001,  options to purchase  412,000 shares at exercise  prices of $0.69 to $2.50
per share were  outstanding.  No stock  appreciation  rights had been granted at
March 31, 2001.

                                      F-14
<PAGE>

                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS


Note G - Stock option plans (continued):

   On September  29,  2000,  the Company  adopted an incentive  stock option and
other equity  participation  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 plan reserves  750,000 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 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,
2001,  options to purchase  576,000 shares at exercise  prices of $1.40 to $1.94
per share were  outstanding.  No stock  appreciation  rights had been granted at
March 31, 2001.

   During the years  ended March 31,  2001,  2000 and 1999,  the Company  issued
105,000,  -0- and  500,000  warrants,  respectively,  to  certain  officers  and
directors at exercise  prices  ranging from $0.84 to $2.93.  The warrants can be
exercised at any time and expire on various dates through March 31, 2004.


Note H - Proforma information related to stock options and warrants:

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

<TABLE>
<CAPTION>

                                              2001                   2000                  1999
                                              ----                   ----                  ----
        <S>                              <C>                   <C>                   <C>

        Expected dividend yield              0.00%                  0.00%                  0.00%

        Risk-free interest rate          4.14% - 6.35%          6.31% - 6.35%          5.06% - 5.09%

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

        Expected volatility                   172%                   177%                  189%

</TABLE>

   The  Company  applies APB  Opinion  No. 25 in  accounting  for its plans and,
accordingly,  has  recognized  no  compensation  expense  for stock  options  or
warrants  granted to employees  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  and
warrants  under SFAS No. 123,  the  Company's  net loss and loss per share would
have been increased to the proforma amounts indicated below:

<TABLE>
<CAPTION>

                                                             2001               2000             1999
                                                             ----               ----             ----
        <S>                                                <C>               <C>                <C>

        Net loss:
          As reported                                      $(4,742,044)        $(993,066)       $(690,598)
                                                        ================   ===============   ==============

          Proforma                                         $(5,384,131)      $(1,111,018)       $(841,514)
                                                        ================   ===============   ==============

</TABLE>

                                      F-15
<PAGE>

                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

Note H - Proforma information related to stock options and warrants (continued):
       <S>                                                     <C>               <C>              <C>

       Loss per common share:
         As reported                                           $(0.34)           $(0.09)          $(0.10)
                                                       ================   ===============   ==============

         Proforma                                              $(0.39)           $(0.10)          $(0.12)
                                                       ================   ===============   ==============
</TABLE>

   Proforma  loss  reflects  only  options  granted  in  2001,  2000  and  1999.
Therefore,  the full impact of calculating  compensation  cost for stock options
under SFAS No. 123 is not reflected in the proforma net income 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
during the years ended March 31, 2001, 2000 and 1999:
<TABLE>
<CAPTION>

                                                 2001                        2000                        1999
                                              2000 plan                   2000 plan                    2000 plan
                                        Number       Weighted      Number        Weighted       Number       Weighted
                                          of         average         of          average          of          average
                                        shares    exercise price   shares     exercise price    shares    exercise price
     <S>                                 <C>               <C>           <C>           <C>             <C>          <C>

     Outstanding at beginning of year          0           $0.00          0            $0.00           0            $0.00

     Granted                             576,000            1.45          0             0.00           0             0.00
     Exercised                                 0            0.00          0             0.00           0             0.00
     Expired                                   0            0.00          0             0.00           0             0.00
     Forfeited                                 0            0.00          0             0.00           0             0.00
                                      ----------  --------------  ----------  --------------- ----------- ----------------
     Outstanding at end of year          576,000           $1.45          0            $0.00           0            $0.00
                                      =========== =============== ==========  =============== =========== ================

     Options exercisable at end of       190,666           $1.45          0            $0.00           0            $0.00
     year

     Weighted average fair value of
       options granted at end of year    576,000           $1.21         $0               $0           0            $0.00
                                      ----------- --------------- ----------  ---------------  ---------- ----------------

</TABLE>

                                      F-16
<PAGE>

                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>


                                                 2001                        2000                         1999
                                              1994 plan                   1994 plan                    1994 plan
                                        Number       Weighted      Number        Weighted       Number        Weighted
                                          of         average         of          average          of           average
                                        shares    exercise price   shares     exercise price    shares     exercise price
     <S>                                 <C>               <C>      <C>                <C>      <C>                  <C>

     Outstanding at beginning of year    406,500           $0.96    382,750            $0.92      297,000            $1.00

     Granted                              15,000            2.50     30,000             1.50      245,750             0.86
     Exercised                           (9,500)            1.00    (1,250)             0.53            0             0.00
     Expired                                   0            0.00          0             0.00            0             0.00
     Forfeited                                 0            0.00    (5,000)             1.03    (160,000)             1.00
                                       ----------     ----------  ----------  --------------- ------------ ----------------

     Outstanding at end of year          412,000           $0.96    406,500            $0.96      382,750            $0.96
                                      =========== =============== ==========  =============== ============ ================

     Options exercisable at end of       392,000           $0.96    304,583            $0.94      173,250            $0.93
     year

     Weighted average fair value of
       options granted at end of year     15,000           $2.09     30,000            $1.28      245,750            $0.75
                                      ------------ -------------- ----------  --------------- ------------ ----------------

</TABLE>



                                      F-17
<PAGE>





                                                 PREFERRED VOICE, INC.

                                             NOTES TO FINANCIAL STATEMENTS



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

<TABLE>
<CAPTION>

                                                 2001                        2000                         1999
                                               Warrants                    Warrants                     Warrants
                                         Number      Weighted      Number        Weighted       Number        Weighted
                                           of        average         of          average          of           average
                                         shares   exercise price   shares     exercise price    shares     exercise price
     <S>                                  <C>              <C>      <C>                <C>        <C>                <C>

     Outstanding at beginning of year     800,000          $0.90    800,000            $0.90      300,000            $1.00

     Granted                              105,000           2.66          0             0.00      500,000             0.84
     Exercised                                  0           0.00          0             0.00            0             0.00
     Expired                                    0           0.00          0             0.00            0             0.00
                                       --------------  ---------  ----------  --------------- ------------ ----------------
     Outstanding at end of year           905,000          $1.10    800,000            $0.90      800,000            $0.90
                                       ==============  ========== ==========  =============== ============ ================

     Warrants exercisable at end of       905,000          $1.10    800,000            $0.90      800,000            $0.90
     year

     Weighted average fair value of
       Warrants granted at end of year    105,000          $1.96          0            $0.00      500,000            $0.73
                                       --------------  ---------- ----------  --------------- ------------ ----------------

</TABLE>

Note I - Stock warrants:

   During the years  ended March 31,  2001,  2000 and 1999,  the Company  issued
151,035,  130,000  and  220,000  warrants,   respectively,  to  certain  service
providers and business  partners at exercise prices ranging from $0.84 to $3.53.
The warrants can be  exercised at any time and expire at various  dates  through
August 24, 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.  The  Company
recognized $131,162 as compensation expense during the year ended March 31, 2001
related to warrants issued to non-employees.  No compensation  expense or assets
were  recognized  by the Company  during the years ended March 31, 2000 and 1999
with  respect  to  warrants  issued to  non-employees  as the  amounts  were not
significant to the financial statements.




                                      F-18
<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>

                                              2001                   2000                  1999
                                              ----                   ----                  ----
        <S>                               <C>                  <C>                    <C>

        Expected dividend yield              0.00%                  0.00%                  0.00%

        Risk-free interest rate              5.69%                  6.35%                  5.06%

        Expected life                     0.5 years to         0.5 years to 2.5       1 years to 2.5
                                           3.5 years                years                  years

        Expected volatility                   172%                   177%                  189%

</TABLE>




                                      F-19
<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS

Note I - Stock warrants (continued):

   Following is a summary of warrants issued to  non-employees  during the years
ended March 31, 2001, 2000 and 1999:
<TABLE>
<CAPTION>

                                                 2001                        2000                         1999
                                         Number      Weighted      Number        Weighted       Number        Weighted
                                           of        average         of          average          of           average
                                         shares   exercise price   shares     exercise price    shares     exercise price
     <S>                                  <C>              <C>      <C>                <C>        <C>                <C>

     Outstanding at beginning of year     470,000          $1.36    340,000            $1.30      120,000            $1.88

     Granted                              151,035           3.01    130,000             1.52      220,000             0.98
     Exercised                                  0           0.00          0             0.00            0             0.00
     Expired                                    0           0.00          0             0.00            0             0.00
                                          --------    ----------    --------    ------------     ---------       ----------

     Outstanding at end of year           621,035          $1.76    470,000            $1.36      340,000            $1.30
                                          ========    ==========    ========    ============     =========       ==========

     Warrants exercisable at end of       621,035          $1.76    470,000            $1.36      340,000            $1.30
     year

     Weighted average fair value of
       Warrants granted at end of year    151,035          $1.67    130,000            $1.08      220,000            $0.77
                                          --------    ----------    --------    ------------     ---------       ----------

</TABLE>

   Following is an overall  summary of the stock warrant  activity for the years
ended March 31, 2001, 2000 and 1999:

<TABLE>
<CAPTION>

                                              2001                         2000                          1999
                                     Number        Weighted       Number         Weighted       Number       Weighted
                                       of          average          of           average          of          average
                                     shares     exercise price    shares      exercise price    shares    exercise price
     <S>                             <C>                 <C>      <C>                  <C>     <C>                  <C>

     Outstanding at beginning
           of year                   2,303,203           $1.14    2,605,500            $1.07   1,142,500            $1.34

        Issued                         973,000            2.39      130,000             1.52   1,463,000             0.86
        Exercised                    (420,196)            1.02    (402,297)             0.71           0             0.00
        Expired                       (77,304)            2.01     (30,000)             4.88           0             0.00
                                     ---------- ---------------  -----------     ------------  ----------   --------------


     Outstanding at end of year      2,778,703           $1.75    2,303,203            $1.14   2,605,500            $1.07
                                     ========== ===============  ===========     ============ ===========   ==============
</TABLE>

                                      F-20
<PAGE>

                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS


Note J - 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, 2001:

               Year ending
                March 31,                                         Amount

                  2002                                             $178,123
                  2003                                              176,433
                  2004                                              169,524
                  2005                                              170,526
                  2006                                              127,895
                                                                -------------

                                                                   $822,501
                                                                =============

      Total rent expense charged to operations was $153,515, $76,317 and $49,111
   for the years ended March 31, 2001, 2000 and 1999, respectively.


Note K - Barter transaction:

   On June 3, 1996, the Company entered into a media purchase  agreement for the
promotion of its products and services with Proxhill Marketing, Ltd. (Proxhill).
Under the terms of the agreement,  the Company committed to purchase  $1,200,000
of media  advertising  time in exchange for 200,000  shares of common stock at a
value of $4.00 per share, and $400,000 in cash. The agreement is for a period of
five  years.  For each  purchase of media  advertising  time,  the Company  will
receive  a barter  credit  equal to  66.67% of the  transaction  value  with the
remaining  balance  payable in cash.  A prepaid  barter  credit in the amount of
$761,018 and prepaid media  commissions in the amount of $76,102 are included in
other assets in the accompanying  balance sheet at March 31, 2000. In connection
with this agreement,  the Company issued to Proxhill 50,000 warrants to purchase
the  Company's  common stock at a price of $4.00 per share.  The options  expire
June 3, 2001. The Company and Proxhill are currently involved in litigation over
the  agreement  and 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 L - Sale - leaseback transaction:

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


                                      F-21

<PAGE>

                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS


Note M - Extinguishment of debt:

   During the years ended March 31, 2001, 2000 and 1999, 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,  $59,976 and $88,828,
respectively,   which  has  been  reported  as  an  extraordinary  item  in  the
accompanying statements of operations.


Note N -  Going concern:

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

   On June 3, 1999, the Company entered into a software  license  agreement with
KMC Telecom Holdings, Inc. (KMC). Under the terms of the agreement, KMC paid the
Company initial license fees of $570,000 for the rights to utilize the Company's
software  applications in certain  geographical  markets. The agreement is for a
period of 10 years and provides for a total of 39  installations  and grants KMC
the ability to add up to 81 additional  installations.  The agreement also calls
for KMC to pay the Company a monthly  license fee ranging  from $1,000 to $3,500
per month for each  software  and  hardware  installation  beginning in the 25th
month after each  installation.  As of March 31, 2001, the Company had completed
one installation.

   On September 25, 2000, KMC notified the Company that the initial installation
would  not be  accepted  and KMC  intends  to  terminate  the  software  license
agreement. In addition, KMC requested the refund of the initial license fees and
other amounts paid to the Company.  The Company  believes it has fully  complied
with the terms and conditions of the agreement and intends to vigorously  defend
its position.  Accordingly,  no provision for losses in connection  with the KMC
agreement  has  been  charged  to  operations  in  the  accompanying   financial
statements.  If required to refund such  monies,  it would result in a charge to
revenue  in the  period  that the  refund is  ascertained  and could  impair the
Company's ability to continue as a going concern.  The Company filed a breach of
contract suit against KMC on November 16, 2000.

   In August 2000, the Company completed the issuance of an additional 1,142,858
common  shares  through a private  offering,  resulting in net proceeds  (net of
stock  issuance  costs) of  $2,787,531.  In connection  with the  offering,  the
Company  also issued  warrants to purchase  285,715  shares of common stock at a
price of $2.625 per share.

   In April 2001, the Company  completed a private  placement  offering in which
937,500  shares  of  common  stock  were  issued  at a price of $2.00  per share
resulting  in net  proceeds  (net of stock  issuance  costs) of  $1,752,500.  In
connection  with the  offering,  the Company  also  issued  warrants to purchase
593,750 shares of common stock at a price of $2.00 per share.

   As of March 31,  2001,  the Company has entered into thirty  revenue  sharing
agreements  with various  telecommunication  service  providers  throughout  the
United States.  Generally, the agreements provide for the Company to receive 30%
to 70% of the revenue from the sale of the Company's services depending upon the
level of  revenue  generated.  The  Company  began  receiving  revenue  from the
agreements in November 2000.

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

                                      F-22
<PAGE>

                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS



Note O - Concentrations:

   Concentrations of credit risk

      At March 31, 2001,  the Company had cash balances of  $1,735,340  with one
   banking  institution,  which is in excess of the federally  insured amount of
   $100,000 per institution.  These balances are before considering  outstanding
   items.

   Concentrations of business - major customers

      During the year ended March 31, 2000, a substantial portion of its revenue
   was derived from one customer.  Revenue from this customer was  approximately
   $853,000.

      During the year ended March 31, 2001, a substantial portion of its revenue
   was  derived  from four  customers.  Revenue  from these four  customers  was
   approximately $118,000.




                                      F-23
<PAGE>


                                    PART III

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

Directors, Executive Officers, Promoters and Control Persons

         The Board of  Directors  currently  consists  of 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:

<TABLE>
<CAPTION>

Name and Business Address              Age     Office                                     Year First Elected Director
-------------------------              ---     ------                                     ---------------------------
<S>                                    <C>     <C>                                                    <C>

G. Ray Miller                          61      Director and Chief Executive                           1994
                                               Officer

William J. Schereck                    55      President and Chief Operating Officer                  N/A

Mary G. Merritt                        44      Director, Executive Vice                               1994
                                               President-Finance and
                                               Secretary/Treasurer

Scott V. Ogilvie                       46      Director                                               2000

Gerard F. Hallaren                     44      Director                                               2000

Richard K. Stone                       40      Sr. Vice President-Enterprise Sales                    N/A

William D. Sprague                     52      Vice President - Corporate Operations                  N/A

Robert R. Williams                     51      Vice President-Software Development                    N/A

</TABLE>


         Mr. Miller is a founder of Preferred Voice. He has served as an officer
and Director of the company since May 1994; he has been Chief Executive  Officer
since June 1994 and was President  from April 1997 to May of 2001.  Prior to the
founding of the company,  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.  Schereck  joined  Preferred  Voice in May of 2001 as President and
Chief Operating  Officer bringing more than 15 years of senior-level  management
experience.  From June of 2000 until joining  Preferred,  he was Chief Operating
Officer  of  Intelix,  LLC.  From  May of 1998 to June of  2000,  he ran his own
management   consulting   business  providing   management  skills  to  start-up
e-commerce and high-tech companies. Before that, from August of 1995 to February
of 1998,  he was President and Chief  Executive  Officer of TV Shopping  Network
Limited, and from July of 1993 to May of 1995 he was with QVC, Inc. in positions
of Executive Vice President and President for its international division.

         Ms.  Merritt  is a founder of  Preferred  Voice and has been a director
since  May,   1994.   She  has   served  as  Vice   President   -  Finance   and
Secretary/Treasurer  since inception.  She served as President of Star of Texas,
Inc., a trust management account service, from 1989 to May 1994. She 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.  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

                                       19
<PAGE>

1998.  From the middle of 1993 to December of 1998, Mr. Ogilvie was a partner in
the John Buck Company,  a full service real estate  brokerage,  development  and
property management company.

         Mr.  Hallaren was elected as a director of Preferred Voice on September
19,  2000.  Mr.  Hallaren  has been with First  Albany/FAC  Equities as Sr. Vice
President  Technology Strategy since May of 2001. From 1998 until April of 2001,
Mr.  Hallaren was a Managing  Director  with Stifel,  Nicolaus & Co., Inc. . Mr.
Hallaren  joined  Hanifen & Imhoff,  a  predecessor  to Stifel,  starting in its
capital markets groups as Research Director and then moving to Corporate Finance
in 1999. From early 1993 to 1998, Mr. Hallaren worked for Invesco Funds Group as
co-manager  of its  Technology  funds  and  sole  manager  of its  Environmental
Services Fund.

         Mr.  Stone  joined  Preferred  Voice in  December  1998 as Senior  Vice
President of Sales and Marketing, his position title recently changing to Senior
Vice  President  of  Enterprise  Sales,  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 .
Before that from June 1994 to March 1996, he served as  Co-Founder/President  of
Telecable  Communications,  Inc. and from February 1991 to June 1994 Director of
Sales at Value Added  Communications.  All of the  businesses in which Mr. Stone
has worked are telecommunications oriented companies.

         Mr.  Sprague joined  Preferred  Voice in July 1999 as Vice President of
Corporate   Operations   responsible   for  product   development,   production,
deployment, technical support, customer service and day-to-day operations of the
company.  Mr.  Sprague brings to us over 29 years of experience in operations in
the  telecommunications  industry.  From 1982 until joining  Preferred Voice, he
held executive and  managerial  positions in network  engineering,  planning and
technical operations, both in the field and headquarters, with GTE. He also held
the position of Chief Engineer at Citizens  Utilities Company of California from
1976 to 1979. He has spoken at a number of industry forums  regarding  telephony
access technologies and issues.

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

         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.

                                       20
<PAGE>



                         Item 10. Executive Compensation

         The following tables set forth the compensation  paid by the Company to
certain  executive  officers during the fiscal year ended March 31, 2001,  2000,
and1999.

<TABLE>
<CAPTION>

                               Annual Compensation

                                                                                                    Long Term
                                                                                                   Compensation
                                                                                               ---------------------
                                                                                                    Securities
                                                                                                    Underlying
                                  Year Ending                                 Other Annual       Options/Warrants
Name/Principal Position            March 31         Salary       Bonus        Compensation           Granted
-----------------------            --------         ------       -----        ------------           -------
<S>                                  <C>          <C>            <C>            <C>                  <C>


G. Ray Miller - Chief                2001         $116,250       $10,000            -                 50,000
Executive Officer                    2000          $70,083       $10,000            -                   -
                                     1999          $48,000          -               -                250,000


Mary G. Merritt                      2001          $106,250      $10,000            -                 50,000
Vice President - Finance             2000          $72,666       $15,000            -                   -
                                     1999          $48,000          -               -                250,000


Richard K. Stone                     2001          $96,000       $25,150            -                 30,000
Senior Vice President -              2000          $92,769       $10,500            -                   -
Enterprise Sales                     1999          $11,538          -               -                120,000


William D. Sprague                   2001          $120,000         -               -                 50,000
Vice President - Corporate           2000          $67,879       $20,000            -                 30,000
Operations                           1999             -             -               -                   -


Robert R. Williams                   2001          $42,000       $5,000         $78,000*              70,000
Vice President - Software            2000          $42,000          -           $78,000*                -
Development                          1999          $42,500          -           $78,000*                -

-------------------------------
<FN>

* Consists of $6,500 per month paid to a business wholly owned by Mr.  Williams,
as set forth in "Certain Transactions."
</FN>
</TABLE>

No  other  stock  options  or  convertible   securities   were  granted  to  the
aforementioned  executive officers during the fiscal years ended March 31, 2001,
2000, and 1999.


                                       21
<PAGE>

<TABLE>
<CAPTION>

                                      Option/SAR Grants in Fiscal Year 2001

                                   Number of               % of Total
                                   Securities             Options/SARs
                                   Underlying             Granted to
                                   Options/SAR            Employees              Exercise or Base
            Name                    Granted              in Fiscal Year(1)        Price ($/Sh)          Expiration Date
            ----                    -------              -----------------        ------------          ---------------
<S>                                  <C>                    <C>                     <C>                  <C>

G. Ray Miller                        50,000                  8.46%                  1.40                 12/21/05
Mary G. Merritt                      50,000                  8.46%                  1.40                 12/21/05
Richard K. Stone                     30,000                  5.08%                  1.40                 12/21/05
William D. Sprague                   50,000                  8.46%                  1.40                 12/21/05
Robert R. Williams                   70,000                 11.84%                  1.40                 12/21/05

<FN>

(1) Based on a total of 591,000  shares  underlying  options  issued  during the
fiscal year ended March 31, 2001.

</FN>
</TABLE>

<TABLE>
<CAPTION>

                                      Aggregated Option Exercises in Fiscal Year
                                         2001 and March 30, 2001 Option Values


                                                             Number of Securities            Value of Unexercised
                                                         Underlying Unexercised Option       In-the-Money Options
                               Shares                        at March 30, 2001 (#)         at March 30, 2001 ($)(1)
                              Acquired        Value          ---------------------         ------------------------
Name:                       On Exercise     Realized     Exercisable    Unexercisable    Exercisable    Unexercisable
----                        -----------     --------     -----------    -------------    -----------    -------------
<S>                              <C>           <C>          <C>              <C>            <C>             <C>

G. Ray Miller                    --            --           450,000          50,000         291,105         32,345
Mary G. Merritt                  --            --           350,000          50,000         226,415         32,345
William D. Sprague               --            --            10,000          70,000           6,469         45,283
Richard K. Stone                 --            --            80,000          70,000          51,752         45,283
Robert R. Williams               --            --           105,000          70,000          67,925         45,283
<FN>

(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 30, 2001.
</FN>
</TABLE>

     Item 11. Security Ownership of Certain Beneficial Owners and Management

         The following table sets forth, as of the close of business on June 24,
2001, 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 24, 2001.

                          Beneficial Ownership (1), (2)

                                                 Number of
Name of Beneficial Owner                         Shares             Percentage
------------------------                         ------             ----------

Pegasus Settlement Trust (3)                    2,715,667              17.25%

G. Ray Miller (4)                                 530,250               3.27%

Mary G. Merritt(5)                                812,574               5.05%

Gerard Hallaren(6)                                 23,333                   *

Scott Ogilvie(7)                                   40,000                   *

                                       22
<PAGE>


Richard K. Stone(8)                                80,000                   *

Robert R. Williams(9)                             108,500                   *

William D. Sprague(10)                             50,000                   *

Lawrence E. Steinberg(11)                       1,407,576               8.88%

JMG Capital Partners, L.P.(12)                    824,584               5.16%

Capitol Growth Fund, Ltd.(13)                     806,471               5.04%

Paragon Ranch(14)                                 812,500               5.10%

JMG Triton Offshore Fund Ltd. (15)                825,834               5.25%

All Directors and executive officers
 as a group (eight persons)(16)                 1,645,657               9.79%

------------

*        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  15,744,571  shares  outstanding  on June 25, 2001.  Shares of
         common stock subject to options that are exercisable  within 60 days of
         June 25, 2001, are deemed beneficially owned by the person holding such
         options for the purposes of calculating  the percentage of ownership of
         such  person but are not  treated  as  outstanding  for the  purpose of
         computing the percentage of any other person.
3)       Pegasus Settlement Trust is a Channel Islands Trust of which SG Hambros
         Trust Company (Jersey) Limited of 7 the Esplanade,  St. Helier, Jersey,
         Channel  Islands  is  Trustee,  and  Mary  Merritt  is  protector.  The
         protector  has the power to appoint new or  additional  trustees of the
         trust.  The  Trustee  has sole  voting and  dispositive  power over the
         shares  pursuant to the terms of the Trust  document.  G. Ray Miller is
         the sole beneficiary of the Trust.  Pegasus  Settlement Trust's address
         is % SG Hambros Trust Company (Jersey)  Limited,  7 The Esplanade,  St.
         Helier, Jersey, Channel Islands JE4 8RT.
4)       Includes 450,000 shares issuable upon exercise of warrants.  Mr. Miller
         is the sole beneficiary of the Pegasus  Settlement Trust but is not the
         beneficial  owner of the common  stock  owned by the Trust  because Mr.
         Miller does not exercise voting or investment power over such shares.
5)       Includes  350,000  shares  issuable upon  exercise of warrants,  45,000
         shares held by her minor children.
6)       Includes 13,333 shares issuable upon exercise of warrants.
7)       Includes 40,000 shares issuable upon exercise of warrants.
8)       Includes  80,000  shares  issuable  upon  exercise  of  employee  stock
         options.
9)       Includes 25,000 shares  issuable upon exercise of warrants,  and 80,000
         shares issuable upon exercise of employee stock options.
10)      Includes  20,000  shares  issuable  upon  exercise of  employee  stock
         options.
11)      Includes  100,000 shares issuable upon exercise of warrants held by Mr.
         Steinberg and 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.
12)      Includes 125,000 shares issuable upon exercise of warrants. JMG Capital
         Partners' address is 1999 Avenue of the Stars, Suite 2530, Los Angeles,
         California  90067.  The  information  provided  herein  is based on the
         Schedule  13G  filed  with  the  SEC on June  8,  2001  by JMG  Capital
         Partners, L.P.
13)      Includes  262,500  shares  issuable upon exercise of warrants.  Capitol
         Growth Fund,  Ltd.'s  address is 1999 Avenue of the Stars,  Suite 2530,
         Los Angeles, California 90067
14)      Includes  187,500  shares  issuable upon exercise of warrants.  Paragon
         Ranch's address is 1200 17th Street, Suite 2660, Denver, Colorado 80202
15)      JMG Triton  Offshore Fund Ltd.'s  address is Citco  Building,  Wickhams
         Cay,  Road Town,  Tortola,  British  Virgin  Islands.  The  information
         provided herein is based on the Schedule 13G filed with the SEC on June
         8, 2001 by JMG Triton Offshore Fund Ltd.
16)      Includes the shares described in footnotes 4 through 10.


                                       23
<PAGE>


             Item 12. Certain Relationships and Related Transactions


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

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

         On April 14,  2000,  we issued  Scott V.  Ogilvie a warrant to purchase
40,000 shares of our common stock at an exercise  price of $2.50 per share on or
before April 14, 2003 related to his position as a director of the company.

         On April 14, 2000,  we issued  Robert R. Williams a warrant to purchase
25,000 shares of our common stock at an exercise  price of $2.50 per share on or
before  April 14, 2003 related to his position as an officer and employee of the
company.

         Stifel, Nicolaus & Company, Incorporated acted as a placement agent for
an August 24, 2000 private  placement of our securities and received warrants to
purchase  51,035  shares of our common  stock at an exercise  price of $3.53 per
share,  subject to adjustments to the exercise price and number of shares issued
upon exercise on standard events,  such as declaration of dividends by Preferred
or reorganization or recapitalization  of Preferred,  in addition to commissions
payable to it in cash in the amount of 6% of the gross  proceeds of the offering
which gross proceeds equaled  $3,000,002.  Stifel's warrants are exercisable for
five years beginning on the first anniversary of the completion of the offering.
Gerard Hallaren was a Managing Director of Stifel until April of 2001.

         On September 19, 2000, we issued Gerard  Hallaren a warrant to purchase
40,000 shares of our common stock at an exercise  price of $2.93 per share on or
before September 19, 2003, related to his position as a director of the company.

         In January  2001,  we extended  the terms of G. Ray  Miller's  and Mary
Merritt's  warrants to purchase  200,000 shares and 100,000 shares of our common
stock,  respectively,  which were to expire on January 5, 2001.  We extended the
term of exercise of those warrants to terminate on January 5, 2003.

         We currently have an oral agreement  with Business  Hotlines  Technical
Service (Hotlines), a business wholly owned and operated by Robert Williams, the
Vice President of Software Development,  to develop application software for us.
We have  orally  agreed to pay  Hotlines  $6,500  per  month for its  consulting
services.

         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)


                                       24
<PAGE>


3.6(1)            Bylaws of Preferred/telecom, Inc. (Exhibit 3.4)
4.1(1)            Specimen    Certificate    evidencing    Common    Stock    of
                  Preferred/telecom, Inc. (Exhibit 4.1)
10.1(6)           Form  of  Warrant   Certificate   and   Schedule   of  Warrant
                  Certificates (Exhibit 10.1)
10.2(5)           Subscription  Agreement  and  Letter of  Investment  Intent of
                  Triton Capital Investments,  Ltd., dated July 1, 1999 (Exhibit
                  10.1)
10.3(5)           Subscription  Agreement and Letter of Investment Intent of JMG
                  Capital Partners, L.P., dated July 1, 1999 (Exhibit 10.2)
10.4(7)           Volume License  Agreement  between  Philips Speech  Processing
                  North America, a division of Philips Electronics North America
                  Corporation and Preferred Voice, Inc. (Exhibit 10.31)
10.5(8)           Form of Subscription  Agreement  between Preferred Voice, Inc.
                  and certain  purchasers of Preferred Voice,  Inc. common stock
                  (Exhibit 10.1)
10.6(8)           Form of Warrant Certificate (Exhibit 10.2)
10.7(8)           Warrant  No. 122 issued to  Stifel,  Nicolaus & Company,  Inc.
                  (Exhibit 10.3)
10.8(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)
10.9(1)           Preferred/telecom,  Inc.  1994  Stock Plan for  Incentive  and
                  Non-Qualified Stock Options (Exhibit 10.5)
10.10(9)          2000 Stock Plan for  Incentive  Stock Options and Other Equity
                  Participation (Exhibit 10.1)
10.11(9)          Form of Incentive Stock Option Agreement (Exhibit 10.2)
10.12 (4)         Marketing  Agreement  between  Preferred Voice, Inc. and North
                  Carolina  RSA 3  Cellular  Telephone  Co.  dba  Carolina  West
                  Wireless (Exhibit 10.18)
10.13 (4)         Amendment  to  Marketing  Agreement  and North  Carolina RSA 3
                  Cellular  Telephone Co. dba Carolina  West  Wireless  (Exhibit
                  10.19)
10.14 (4)         Marketing Agreement between Preferred Voice, Inc. and Cellular
                  Mobile Systems of St. Cloud, LLP (Exhibit 10.20)
10.15 (4)         Amendment to Marketing Agreement between Preferred Voice, Inc.
                  and Cellular Mobile Systems of St. Cloud, LLP (Exhibit 10.21)
10.16 (4)         Software License  Agreement  between Preferred Voice, Inc. and
                  Carolina West Wireless (Exhibit 10.22)
10.17 (4)         Software License  Agreement  between Preferred Voice, Inc. and
                  Cellular Mobile Systems of St. Cloud, LLP (Exhibit 10.23)
10.18(11)         Form of Subscription Agreement by and between Preferred Voice,
                  Inc. and certain signatories thereto (Exhibit 10.1)
10.19(11)         Form of Warrant  Certificate,  issued by Preferred Voice, Inc.
                  pursuant  to the  Subscription  Agreement  attached as Exhibit
                  10.24 hereto (Exhibit 10.2)
10.20(3)          Software License Agreement between Rural Cellular  Corporation
                  and Preferred Voice, Inc. (Exhibit 10.26)
10.21(3)          Marketing  Agreement  between Rural  Corporation and Preferred
                  Voice, Inc. (Exhibit 10.27)
10.22(3)          Software   License    Agreement   between   Midwest   Wireless
                  Communications,  L.L.C.  and Preferred  Voice,  Inc.  (Exhibit
                  10.32)
10.23(3)          Marketing  Agreement between Midwest Wireless  Communications,
                  L.L.C. and Preferred Voice, Inc. (Exhibit 10.33)
24+               Power of Attorney (included on signature page)

------------

+        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
         Amendment No. 1 to the Registration  Statement on Form SB-2, filed with
         the Securities and Exchange Commission on June 14, 2001.


                                       25
<PAGE>

(5)      Incorporated  by reference to the exhibit shown in  parenthesis  to our
         Quarterly  Report on Form 10-QSB for the quarter  ended  September  30,
         1999, filed by us with the Securities and Exchange Commission.
(6)      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
(7)      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.
(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 September 15, 2000.
(9)      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.
(10)     Incorporated  by reference to the exhibit shown in  parenthesis  to our
         Quarterly  Report on Form 10-QSB for the  quarter  ended  December  31,
         1996, filed by us with the Securities and Exchange Commission.
(11)     Incorporated  by reference to the exhibit shown in  parenthesis  to our
         Current  Report on Form 8-K,  filed with the  Securities  and  Exchange
         Commission on May 7, 2001.

(b)      Reports on Form 8-K

         None





                                       26

<PAGE>


                                   SIGNATURES

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

                                           Preferred Voice, Inc.
                                           (Registrant)



Date: June 29, 2001                        By: /s/ G. Ray Miller
                                              ----------------------------------
                                              G. Ray Miller, Chief Executive
                                                             Officer


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


                  SIGNATURE                                      TITLE                                 DATE
                  ---------                                      -----                                 ----
<S>                                            <C>                                                <C>


/s/ G. Ray Miller                              Chief Executive Officer and                        June 29, 2001
-------------------------------------------    Chairman of the Board of Directors
G. Ray Miller                                  (Principal Executive Officer)


/s/ Mary G. Merritt                            Secretary, Treasurer and Vice President of         June 29, 2001
------------------------------------------     Finance and Director
Mary G. Merritt                                (Principal Accounting Officer)


/s/ Scott V. Ogilvie
------------------------------------------     Director                                           June 29, 2001
Scott V. Ogilvie



------------------------------------------     Director                                           June ___, 2001
Gerard Hallaren
</TABLE>


                                       27

<PAGE>


                                INDEX TO 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)
4.1(1)            Specimen    Certificate    evidencing    Common    Stock    of
                  Preferred/telecom, Inc. (Exhibit 4.1)
10.1(6)           Form  of  Warrant   Certificate   and   Schedule   of  Warrant
                  Certificates (Exhibit 10.1)
10.2(5)           Subscription  Agreement  and  Letter of  Investment  Intent of
                  Triton Capital Investments,  Ltd., dated July 1, 1999 (Exhibit
                  10.1)
10.3(5)           Subscription  Agreement and Letter of Investment Intent of JMG
                  Capital Partners, L.P., dated July 1, 1999 (Exhibit 10.2)
10.4(7)           Volume License  Agreement  between  Philips Speech  Processing
                  North America, a division of Philips Electronics North America
                  Corporation and Preferred Voice, Inc. (Exhibit 10.31)
10.5(8)           Form of Subscription  Agreement  between Preferred Voice, Inc.
                  and certain  purchasers of Preferred Voice,  Inc. common stock
                  (Exhibit 10.1)
10.6(8)           Form of Warrant Certificate (Exhibit 10.2)
10.7(8)           Warrant  No. 122 issued to  Stifel,  Nicolaus & Company,  Inc.
                  (Exhibit 10.3)
10.8(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)
10.9(1)           Preferred/telecom,  Inc.  1994  Stock Plan for  Incentive  and
                  Non-Qualified Stock Options (Exhibit 10.5)
10.10(9)          2000 Stock Plan for  Incentive  Stock Options and Other Equity
                  Participation (Exhibit 10.1)
10.11(9)          Form of Incentive Stock Option Agreement (Exhibit 10.2)
10.12 (4)         Marketing  Agreement  between  Preferred Voice, Inc. and North
                  Carolina  RSA 3  Cellular  Telephone  Co.  dba  Carolina  West
                  Wireless (Exhibit 10.18)
10.13 (4)         Amendment  to  Marketing  Agreement  and North  Carolina RSA 3
                  Cellular  Telephone Co. dba Carolina  West  Wireless  (Exhibit
                  10.19)
10.14 (4)         Marketing Agreement between Preferred Voice, Inc. and Cellular
                  Mobile Systems of St. Cloud, LLP (Exhibit 10.20)
10.15 (4)         Amendment to Marketing Agreement between Preferred Voice, Inc.
                  and Cellular Mobile Systems of St. Cloud, LLP (Exhibit 10.21)
10.16 (4)         Software License  Agreement  between Preferred Voice, Inc. and
                  Carolina West Wireless (Exhibit 10.22)
10.17 (4)         Software License  Agreement  between Preferred Voice, Inc. and
                  Cellular Mobile Systems of St. Cloud, LLP (Exhibit 10.23)
10.18(11)         Form of Subscription Agreement by and between Preferred Voice,
                  Inc. and certain signatories thereto (Exhibit 10.1)
10.19(11)         Form of Warrant  Certificate,  issued by Preferred Voice, Inc.
                  pursuant  to the  Subscription  Agreement  attached as Exhibit
                  10.24 hereto (Exhibit 10.2)
10.20(3)          Software License Agreement between Rural Cellular  Corporation
                  and Preferred Voice, Inc. (Exhibit 10.26)
10.21(3)          Marketing  Agreement  between Rural  Corporation and Preferred
                  Voice, Inc. (Exhibit 10.27)
10.22(3)          Software   License    Agreement   between   Midwest   Wireless
                  Communications,  L.L.C.  and Preferred  Voice,  Inc.  (Exhibit
                  10.32)
10.23(3)          Marketing  Agreement between Midwest Wireless  Communications,
                  L.L.C. and Preferred Voice, Inc. (Exhibit 10.33)
24+               Power of Attorney (included on signature page)

                                       28
<PAGE>

------------

+        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
         Amendment No. 1 to the Registration  Statement on Form SB-2, filed with
         the Securities and Exchange Commission on June 14, 2001.
(5)      Incorporated  by reference to the exhibit shown in  parenthesis  to our
         Quarterly  Report on Form 10-QSB for the quarter  ended  September  30,
         1999, filed by us with the Securities and Exchange Commission.
(6)      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
(7)      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.
(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 September 15, 2000.
(9)      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.
(10)     Incorporated  by reference to the exhibit shown in  parenthesis  to our
         Quarterly  Report on Form 10-QSB for the  quarter  ended  December  31,
         1996, filed by us with the Securities and Exchange Commission.
(11)     Incorporated  by reference to the exhibit shown in  parenthesis  to our
         Current  Report on Form 8-K,  filed with the  Securities  and  Exchange
         Commission on May 7, 2001.








                                       29