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

                                   FORM 10-KSB

[X]  Annual report under Section 13 or 15 (d) of the Securities Exchange Act of
     1934 for the fiscal year ended March 31, 2002

[ ]  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.

State issuer's revenues for its most recent fiscal year:  $1,474,465

The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant as of June 21, 2002 was approximately
$6,118,613. 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 21, 2002, there were 18,407,493 shares of the common stock, $0.001
par value, of the registrant issued and outstanding.

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

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                              Preferred Voice, Inc.
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PART I

    Item 1.  Description of Business ...........................................  1
    Item 2.  Description of Properties ......................................... 14
    Item 3.  Legal Proceedings ................................................. 14
    Item 4.  Submission of Matters to a Vote of Security Holders ............... 15

PART II

    Item 5.  Market for Common Equity and Related Stockholder Matters .......... 16
    Item 6.  Management's Discussion and Analysis or Plan of Operations ........ 21
    Item 7.  Financial Statements .............................................. 26

PART III

    Item 9.  Directors, Executive Officers, Promoters and Control Persons;
    Compliance with Section 16(a) of the Exchange Act .......................... 27
    Item 10.  Executive Compensation ........................................... 29
    Item 11.  Security Ownership of Certain Beneficial Owners and Management ... 31
    Item 12.  Certain Relationships and Related Transactions ................... 33
    Item 13.  Exhibits, List and Reports on Form 8-K ........................... 34

SIGNATURES ..................................................................... 36
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                                     PART I

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

                         Item 1: Description of Business

Background of the Company

     We integrate and market 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 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 May of 2002
in its report on "Local Telephone Competition" that by the end of 200 there were
at least 1,300 such telephone companies providing over 174 million of the
approximately 191.8 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, 2000 that in 2000 alone,
local telephone common carriers spent over $15 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 118.4 million subscribers nationwide
at the end of June 2001. 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.

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     Competitive Local Telephone Companies

     As of June 2001, there were approximately 349 facilities based competitive
local telephone companies nationwide, providing approximately 17.3 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.

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

     Our initial marketing efforts are focused on telecommunications providers,
primarily cell phone companies 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 118.4 million subscribers in June of 2001 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.

     Our Market Strategy

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

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

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

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

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

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

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

     Primary Markets

     Cell Phone Companies. Of the approximately 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 markets because the
phone companies in these markets have an existing subscriber base. We believe
that many cell phone companies want to offer the benefits of speech recognition
services to their subscribers in order to maintain their subscriber base, but
the cell phone companies often find such services to be cost prohibitive. We
will provide and install our VIP system without charge. Our VIP system platform
is designed to work in a cell phone company's central office collocated
alongside its central office switch or can be remotely connected through voice
over internet protocol (VOIP). Unlike many other enhanced service companies'
boxes, our VIP system is connected to the switch via industry standard,
high-volume circuits, each of which is capable of carrying twenty-four (24)
simultaneous calls.

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

     The cell phone companies who contract with us are responsible for billing
and collecting revenue generated from the VIP system's enhanced services.
However, our VIP system can produce subscriber information for marketing or
billing use. In addition, we assist each phone company in marketing the services
by providing various co-branded advertising materials we have designed and by
training the contracting cell phone company's sales force and customer service
staff. As of June 21, 2002, we had entered into revenue sharing arrangements
with twenty-eight (28) cell phone companies, thirteen 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

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

     At the end of the last fiscal year, we relied upon thirteen providers'
subscribers for the revenue we have generated through the revenue sharing
agreements. As of May 31, 2002, approximately 114,000 of the contracting phone
companies' subscribers have subscribed or are currently "opting-in" to our
speech services from fifteen different phone companies, 11,200 of which
affirmatively subscribed to our services and 102,800 of which were automatically
subscribed to our services by their carrier and they will subsequently have the
option to "opt-out" of the service. By the fiscal quarter ending September 30,
2002, we expect to have four more phone company customers fully implemented and
beginning to generate revenue for the phone company and us. As we continue to
expand our business, we will not rely as much on these initial revenue share
arrangements.

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

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

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

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

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

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

     Secondary Markets

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

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

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

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

     Talk to Me Communications has been selling services since March of 2002,
but we have not yet installed our VIP systems for other distributor 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 had
an initial term of three years. 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 in most of the master distributors' markets which would
allow us to provide local service to most of these master distributors'
subscribers. Because of these setbacks, our Board of Directors 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.

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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.

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

     The VIP system's 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."

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     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.

     Information Gateway. The Information Gateway is a voice automated 411
platform where directory assistance, web content, voicemail, and email services
can be accessed. Carrier customers wanting to access the platform would dial
"1411" or "411" as the case may be and then choose which service they wished to
access.

     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 subscriber to
choose to accept or deny the call. If the call is denied, the system will
forward the call to the subscriber's voice mail.

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

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     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.

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

     We believe that our network services will provide us with new sources of
revenue and an attractive addition to our current menu of services. We have
developed several programs that allow the third party service provider to
connect with a potential subscriber base that allows those providers to take
advantage of the network's economies of scale and ease of deployment to both
carriers and providers. As more carriers move away from collocating equipment in
their own switch rooms, our centralized network service platform will be a
marketable alternative.

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

     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, BeVocal, TellMe, 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. BeVocal provides voice dialing to carriers such as Qwest
Communications, while TellMe provides voice services to AT&T. 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.

                                       8

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

     Intervoice-Brite, Inc. 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 21, 2002, we had 20 employees, 19 of whom are full time
employees.


     Patents, Trademarks and Copyright

     The Preferred Voice name and logo, the VIP system, the SAM peripheral and
the names of products and services we offer are trademarks, registered
trademarks, service marks or registered service marks that we own. We

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rely on a combination of trade secret, copyright and non-disclosure/
confidentiality agreements to protect our proprietary rights in our software and
technology. There can be no assurance that such measures are or will be adequate
to protect our proprietary technology. Furthermore, there can be no assurance
that our competitors will not independently develop technologies that are
substantially equivalent or superior to our technology.

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

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

     We have received registered trademarks from the United States Patent and
Trademark Office for the following: Preferred/telecom, Preferred Voice, Secure
Card and Use Your Voice. We have applied for patents on our Voice Integrated
Platform and Method of Operation Thereof, Voice Integrated Platform and Method
of Operation Thereof with Release Links and Method and Apparatus That Provides a
Reusable Voice Path in Addition to Release Link Functionality for Use with a
Platform Having a Voice Activated Front End. We have applied for trademarks
related to our services: Safety Talk, Safety *Talk, Voice Accessed Content and
** Talk. 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 seven employees in our software/hardware
development and deployment department.

     Certain Risk Factors

     Risks Related to Our Business

     Limited revenue history.

     Because our commercial offerings of applications through the VIP system are
at an early stage, we are not currently deriving substantial revenue from the
services that we intend to provide going forward. We began actively marketing
the VIP system at the end of 1998. Accordingly, we have a limited operating
history upon which you can base an evaluation of us and our current prospects.
You must consider our prospects in light of the risks, expenses and difficulties
frequently encountered by companies in an early stage of development,
particularly companies in new and rapidly evolving markets, such as the voice
recognition market. Some of the risks, expenses and difficulties we face are the
following:

     .    reliance on the few phone companies with which we have deployed our
          services;

     .    creating recognition and more widespread acceptance of voice
          recognition services;

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

     .    reliance on significant equity investment to continue operations; and


                                       10

<PAGE>

     .    need to retain key management and software development in a
          competitive labor market.

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

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

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

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

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

     Our ability to continue to compete in the voice recognition services market
and grow our business is dependent in large part on a number of key senior
management, software development and sales and marketing employees. We currently
have only one written employment agreement for a specified term with William
Schereck, our President and Chief Operating Officer, however, we do not have
such agreements with any of our other executive officers, key technical or
managerial personnel. See "Executive Compensation--Employment Agreements." The
loss of any of our key employees' services could have a negative effect on our
ability to grow and achieve profitability.

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

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

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

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

     In addition, we cannot assure you that we will be able to effectively
manage potential conflicts in our strategic relationships, that economic
conditions or industry demand will not adversely affect the phone companies with
whom we contract or that such phone companies will not devote greater resources
to market and support the services of other companies not utilizing voice
recognition. Our future performance also will depend in part on our ability to
attract additional phone companies that will be able to market and support our
products effectively, especially in markets in which we have not previously sold
our products or services. We also rely on phone

                                       11

<PAGE>

companies to provide their subscribers who utilize our services customer support
for our services. If those phone companies fail to provide adequate customer
support, their subscribers who subscribe to our services could cease using our
services and applications, which could harm our customer goodwill, adversely
affect our ability to sell our services, and, therefore, impair our ability to
generate revenue.

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

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

     Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy or otherwise use our products or technology, to obtain and
use information that we regard as proprietary or to independently develop
similar or superior products or technology. Policing unauthorized use of our
products is difficult, and while we are unable to determine the extent to which
piracy of our software products exists, we expect that software piracy will be a
persistent problem. In addition, we may make our source code or products
available to our strategic partners, which may increase the likelihood that our
products are misappropriated or misused. We 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 also
applied for trademarks for Class 9-Preferred Voice, Class 38-Preferred Voice,
Safety Talk, Safety*Talk, BusinessConnect and ** Talk.

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

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

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

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

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

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

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

     We are currently involved in litigation related to a one-time sale of our
VIP system, which if decided adversely to our interests could have a material
adverse effect on our financial condition.

     In 1999, we entered into an agreement with KMC Telecom Holdings, Inc. to
sell them VIP system platforms and license them the technology included in the
VIP system in thirty nine (39) markets. This agreement created a significant
fluctuation in our revenue for the quarter ended June 30, 1999 when the revenue
associated with the market licensing fee was recognized and for the quarters
ended September 30, 1999 and December 31, 1999 when KMC purchased testing
systems and services. KMC has asserted that it has not accepted the initial VIP
system we installed under the terms of our contract with them, and KMC has
requested a refund of most of the $961,000 they paid to us for a licensing fee
and eight installations. If we are required to refund that money, it could
result in a substantial charge to our revenues in the period in which the refund
is made and could have a material adverse effect on our financial condition. See
"Business--Legal Proceedings."

     Risks Related to Our Industry

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

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

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

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

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

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

                                       13

<PAGE>

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

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

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

                        Item 2: Description of Properties

     Our executive offices are located in Dallas, Texas. We lease 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 $15,141 per month through
December 31, 2002, 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 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.

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     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. In November of 2001, we received a ruling in the Colorado state action
denying all injunctive and declaratory relief sought by Preferred and we have
also filed 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. In February of 2002, we filed a
counterclaim in the Colorado action for breach of contract and an additional
counter claim for unjust enrichment.

           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.

                                       15

<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,
2002 and March 31, 2001. 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 2001                         HIGH                         LOW
1st Quarter                         $5.50                        $2.00
2nd Quarter                         $4.66                        $2.03
3rd Quarter                         $3.50                        $0.75
4th Quarter                         $2.843                       $0.875

Fiscal 2002

1st Quarter                         $3.40                        $1.75
2nd Quarter                         $2.90                        $0.90
3rd Quarter                         $2.90                        $0.98
4th Quarter                         $2.12                        $1.01

     On June 20, 2002, the closing bid price of the Common Stock as reported on
the OTC Electronic Bulletin Board was $0.50.

     As of June 20, 2002, 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 February 11, 1998, C. H. Fallon received a warrant to purchase 20,000
shares of our common stock at an exercise price of $1.25 per share on or before
February 11, 2001 in conjunction with signing a master distributor agreement. On
January 4, 2001, the warrant was extended to January 5, 2003.

     On February 11, 1998, Capital Growth Fund, Ltd. received a warrant to
purchase 200,000 shares of our common stock at an exercise price of $1.25 per
share on or before February 11, 2001 in conjunction with a lease financing
arrangement. On January 23, 2001, our board of directors resolved to extend the
term of exercise of the warrants to end ten days after the effective date of the
prospectus filed with a registration statement filed on Form SB-2 and declared
effective on August 23, 2001. On March 27, 2001, our board of directors resolved
to further extend the term of exercise of the warrant to February 11, 2004, for
their participation in our March 2001 offering.

     On April 23, 1998, we issued two new warrants--a warrant to purchase
200,000 shares of our common stock at an exercise price of $1.00 per share on or
before November 12, 1999 to Bisbro Investments, Ltd. and a warrant to purchase
100,000 shares of our common stock at an exercise price of $1.00 per share on or
before November 12, 1999 to Invest, Inc. On October 5, 1999, Bisbro exercised a
portion of its warrant to purchase 200,000 shares of our common stock with
respect to 22,297 of the warrant shares and a new warrant was issued for 177,703
shares of common stock. Also on October 5, 1999, both Bisbro's and Invest's
warrants were extended to November 12, 2000 and repriced from $1.00 to $1.25.
The previous warrants were granted in connection with a Regulation S offering we
conducted in 1995. On January 23, 2001, our board of directors resolved to
extend the term of exercise of the warrants to end ten days after the effective
date of the prospectus filed with a registration statement filed on Form SB-2
and declared effective on August 23, 2001. On March 27, 2001, our board of

                                       16

<PAGE>

directors resolved to further extend the term of exercise of these warrants to
October 5, 2003 for their participation in our March 2001 offering.

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

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

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

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

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

     .    On October 1, 1998, Bisbro loaned $20,000 to us. In return, we issued
          Bisbro a promissory note in the amount of $20,000 due on October 1,
          1999. This note was converted into shares of our common stock at a
          conversion price of $0.50 per share for 40,000 shares on June 18,
          1999.

     .    On October 1, 1998, Universal loaned $20,000 to us. In return, we
          issued Universal a promissory note in the amount of $20,000 due on
          October 1, 1999. This note was converted into shares of our common
          stock at a conversion price of $0.50 per share for 40,000 shares on
          June 18, 1999.

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

     .    On November 10, 1998, Bisbro loaned $30,000 to us. In return, we
          issued Bisbro a promissory note in the amount of $30,000 due on
          November 10, 1999. This note was converted into shares of our common
          stock at a conversion price of $0.50 per share for 60,000 shares on
          June 18, 1999.

     .    On January 5, 1999, Bisbro loaned $10,000 to us. In return, we issued
          Bisbro a promissory note in the amount of $10,000 due on January 5,
          2000. This note was converted into shares of our common stock at a
          conversion price of $0.50 per share for 20,000 shares on June 18,
          1999.

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

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

     On December 30, 1998, we issued In Touch Solutions, L.L.C. Answering
Services, Inc., Amerivoice Telecommunications, Inc., Voicenet New Media, Inc.,
Best Voice, Inc. and Nomis Communications, Inc., all companies who contracted
with us to become our master distributors, warrants to purchase an aggregate of
170,000

                                       17

<PAGE>

shares of our common stock at an exercise price of $1.00 per share on or before
December 30, 2000. On January 23, 2001, our board of directors resolved to
extend the exercise of these warrants to December 30, 2002. Voicenet New Media's
warrant has been assigned to Sean O'Donovan.

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

     On March 30, 1999, G. Tyler Runnels agreed to lend $43,000 to us. In
return, we issued Mr. Runnels a promissory note in the amount of $43,000 bearing
interest at a rate of 12% per annum due on March 30, 2000 and we issued him a
warrant to purchase 43,000 shares of our common stock at an exercise price of
$0.50 per share on or before March 31, 2004, in return for such loan. The note
was repaid with interest on June 16, 1999.

     On March 31, 1999, John B. Davies, Jacqueline Knapp and Larry Kupferberg
agreed to lend $50,000, $75,000 and $75,000 respectively to us. In return, we
issued Mr. Davies, Ms. Knapp and Mr. Kupferberg promissory notes in their
respective amounts bearing interest at a rate of 12% per annum due on March 31,
2000 and we issued John B. Davies, Jacqueline Knapp and Larry Kupferberg
warrants to purchase 50,000, 75,000 and 75,000 shares, respectively, at an
exercise price of $.50 per share on or before March 31, 2004. We have paid off
these notes and the warrant holders exercised the warrants.

     On March 31, 1999, we issued Kathryn Jergens a warrant to purchase 25,000
shares of our common stock at an exercise price of $0.84 per share on or before
March 31, 2004, for the use of Ms. Jergens' voice, as the voice of EMMA, the
Perfect Receptionist.

     On May 3, 1999, we issued John Meleky, Karl Koelker, Louis R. Battista and
Mark Battista warrants to purchase an aggregate of 25,000 shares of our common
stock at an exercise price of $1.37 per share on or before May 3, 2001, in
conjunction with their agreements to be master distributors of our services in
the Dallas area. The warrants have expired.

     On July 1, 1999, we issued 160,000 shares of common stock to Triton Capital
Investments Ltd. at a purchase price of $1.25 per share for $200,000.00. On the
same day, we also issued 160,000 shares of our common stock to JMG Capital
Partners, L.P. at a purchase price of $1.25 per share for $200,000.00.

     On September 21, 1999, we issued Southwest Texas Telephone a warrant to
purchase 5,000 shares of common stock of the company at an exercise price of
$1.66 per share on or before September 20, 2000 in conjunction with their
execution of our marketing and license agreements for the VIP system. This
warrant has expired.

     On December 1, 1999, we issued Alexander Associates a warrant to purchase
50,000 shares of our common stock at an exercise price of $1.50 per share on or
before December 1, 2004, for the services they provided in conjunction with a
research report conducted for our use. On May 8, 2001, James Stone, who was
doing business as Alexander Associates, asked that the warrant be reissued in
his name.

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

     On December 22, 1999, we issued 1,500,000 shares of our common stock to ten
(10) investors at a purchase price of $1.50 per share for an aggregate offering
price and total proceeds of $2,250,000.00. 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 shares of our common stock purchased in the
offering. We paid T.R. Winston, where G. Tyler Runnels, a shareholder of the
company, serves as Executive Vice President, a finder's fee of $200,000 in cash
in conjunction with this offering.

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

                                       18

<PAGE>

common stock to Lori Rubottom at a purchase price of $.20 per share pursuant to
the exercise of an employee stock option.

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

     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 a 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.

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

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

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

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

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

                                       19

<PAGE>

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

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

     On November 21, 2001, we issued 2,420,000 units consisting of one share of
our common stock and one warrant to purchase one-half of a share of common stock
at a purchase price of $1.25 per unit (the "Purchase Price") to thirteen (13)
investors. The aggregate proceeds of the offering were $3,025,000.00. The
warrants are exercisable at an exercise price of $1.50 per share and are
exercisable for 5 years, subject to adjustments to the exercise price and number
of shares issued on exercise on standard events, such as recapitalization or
reorganization of Preferred. The investors' accreditation was determined by
representations made by the respective investors regarding their accreditation
in an investor questionnaire that accompanied each investor's subscription
agreement (the "Subscription Agreement") for the units purchased in the offering
and we filed a Form D with the SEC in those states where such filing was
required. T.R. Winston and Company Incorporated received an aggregate of ten
percent (10%) of $1,725,000 of the proceeds of the offering as a commission
payable to them in cash for serving as placement agents on our behalf in this
offering. The offer and sale of these securities was exempt from registration
pursuant to Regulation D of the Securities Act. The Subscription Agreement and
the warrant agreement used in connection with this offering granted certain
registration rights to the purchasers in this offering. Pursuant to such
registration rights, we have filed a registration statement on Form SB-2, as
amended, which has been declared effective by the SEC, registering the resale of
the shares of common stock issued on the placement and the shares to be issued
in exercise of the warrants issued in the offering. The Subscription Agreement
provides for a downward adjustment of the Purchase Price, subject to certain
exceptions, if we sell, or agree to sell, our securities at a purchase price (or
with a conversion or exercise price) less than the Purchase Price prior to
November 21, 2002.

     On April 11, 2001, we issued 1,187,500 units consisting of one share of our
common stock and one warrant to purchase one-half (1/2) of a share of common
stock at a purchase price of $2.00 per unit to fourteen (14) investors. The
aggregate proceeds of the offering was $2,375,000.00. The warrants are
exercisable at an exercise price of $2.00 per share and are exercisable for 5
years, subject to adjustments to the exercise price and number of shares issued
on exercise on standard events, such as recapitalization or reorganization of
Preferred. The investors' accreditation was determined by representations made
by the respective investors regarding their accreditation in an investor
questionnaire that accompanied each investor's subscription agreement for the
units purchased in the offering and we filed a Form D with the SEC and in those
states where such filing was required. T.R. Winston and Sanders, Morris and
Harris received an aggregate of six percent (6%) of the proceeds of the offering
as a commission payable to them in cash for serving as placement agents on our
behalf in this offering. The offer and sale of these securities was exempt from
registration pursuant to Regulation D of the Securities Act.

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

                                       20

<PAGE>

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

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

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

     Overview

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

     In 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, the first deployment of which began in Miami, Florida in March of
2002. The second distribution channel is directly with Incumbent Local Exchange
Carriers, or local telephone companies, Wireless Communication Carriers, or cell
phone companies, and Competitive Local Exchange Carriers, or competitive local
telephone companies. This avenue of distribution is extremely attractive because
these companies already have the subscriber bases and the infrastructure to
service large numbers of subscribers. Our third distribution channel is through
our network services division which provides third party service application
providers access to wireline and wireless carriers through our voice over
internet protocol (VOIP) network hosted by a web hosting provider.

     We first attempted to sell our hardware and license our application
software but after only one such agreement with KMC Telecom Holdings, Inc.
("KMC") we decided to pursue revenue sharing whereby we provide all hardware,
software applications and support in exchange for a portion of revenue generated
from the service provided by our customer to their subscribers. Our entire sales
force focuses on marketing our revenue sharing agreements and, to date, we have
signed forty six (46) local telephone company and cell phone company multi-year
contracts. Fifteen contracts have been fully implemented so that the systems
installed pursuant to such contracts are already generating revenues for us. As
of May 31, 2002, these fifteen contracts were generating revenues of

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<PAGE>

approximately $130,000 per month. The revenue sharing agreement, and not the
sale of our hardware, is the primary method in which we intend to contract with
customers to generate revenue going forward. 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, 2003.

     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:

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

     .    establish and maintain relationships with phone companies;

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

     .    establish a lead time for delivery of hardware;

     .    achieve user acceptance for our services;

     .    generate reasonable margins on our services;

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

     .    respond to competitive developments;

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

     .    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 $3,835,115, or $.23 per share, for the fiscal
year ended March 31, 2002, compared to a net loss of $4,742,044, or $.34 per
share, for the fiscal year ended March 31, 2001, and a net loss of $993,066, or
$.09 per share, for the year ended March 31, 2000. The decreased loss is a
result of our shift from development of our services to full deployment of our
services with increased sales.

                                       22

<PAGE>

     Total Revenue

     Total revenue for the fiscal year ended March 31, 2002, was $1,474,465
compared to $138,097 and $885,134 for the fiscal years ended March 31, 2001 and
2000 respectively. The increase of revenue reflects our commercial deployment of
our services through revenue sharing agreements with our customers. Of the
revenue booked for the fiscal year ended March 31, 2002, 71% was generated from
revenue sharing agreements, 28% was generated from sales of our VIP systems
network services, and 1% from direct sale service fees for "Emma the Perfect
Receptionist" and "Smart Line". Of the 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." The reduction of revenues from year end 2000 to
year end 2001 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, 2003, as we continue to install
VIP systems in the central switch offices of local telephone companies and cell
phone companies which have already signed revenue sharing agreements. We do not
anticipate substantial revenue going forward from the sale of master
distributorships or from direct licensing of the VIP systems, such as was done
in the KMC licensing agreement, 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, 2002 was $462,311
compared to $101,188 and $215,293 for the fiscal years ended March 31, 2001 and
2000, respectively. For the fiscal year ended March 31, 2002, 79% of the costs
were for network infrastructure, such as collocations, connectivity, system
access, and long-distance and 21% was for voice activated dialing market
awareness programs in carrier customer territories. For the fiscal year ended
March 31, 2001, 69% of the costs were for network infrastructure, such as
collocations, connectivity, system access, and long-distance and 31% of the
costs were for VIP system hardware purchased by KMC; whereas, in the fiscal year
ended March 31, 2000 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. 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, 2002 were $4,854,006 compared to $4,011,608 and $1,675,971 for the
fiscal years ended March 31, 2001 and 2000, respectively. The increases from
2000 to 2001 and from 2001 to 2002 were primarily due to the staffing increases
and increased marketing efforts of our revenue sharing program to wireline and
cell phone companies.

     We expect that selling, general and administrative expenses will decrease
through the fiscal year ending March 31, 2003, as we have initiated an overhead
reduction plan and freeze on hiring until such time as our revenues meet our
current capital requirements.

     Core Technology Enhancements Software Applications and Hardware

     We have not expensed any research and development costs for any of the
periods stated on our financial statements, but we have capitalized costs of
$905,288 for enhancement of our core software and hardware technology for the
fiscal year ended March 31, 2002 in comparison to $723,561 for the fiscal year
ended March 31, 2001. The increase in expenditures is due to the continued
enhancement of our core technology.

                                       23

<PAGE>

     Extraordinary Items

     We have recognized income from the extinguishment of debt of $11,992,
$74,375, and $59,976 respectively, for the fiscal years ended March 31, 2002,
2001, and 2000. 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, 2002, we had cumulative federal net operating losses of
approximately $15 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, 2002 were $1,302,754, a decrease
of $432,998 from $1,735,752 at March 31, 2001. 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 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.

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

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

                                       24

<PAGE>

     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 $130,000 per month but we expect these to
continue to rise to a level to meet our monthly cash requirements by October of
2002.

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

     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 November 21, 2002, we may be required to issue
additional shares of our common stock to the stockholders who purchased their
stock in the November 21, 2002 offering pursuant to the terms of the
subscription agreement executed between us and such stockholders. At this time
we are not projecting any requirements for additional employees during the next
twelve (12) months. On May 31, 2002, we implemented a thirty-three (33) percent
reduction in force and at June 20, 2002 we employed twenty (20) employees,
nineteen (19) that were full time employees.

                                       25

<PAGE>

                          Item 7. Financial Statements

                              PREFERRED VOICE, INC.
                              FINANCIAL STATEMENTS
                          MARCH 31, 2002, 2001 and 2000

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

                                       26

<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>
William J. Schereck           56      President and Chief Operating Officer                  N/A

Mary G. Merritt               45      Director, Executive Vice                               1994
                                      President-Finance and
                                      Secretary/Treasurer

G. Ray Miller/1/              62      Director                                               1994

Scott V. Ogilvie              47      Director                                               2000

Leslie Melzer                 49      Director                                               2001

Richard K. Stone              41      Sr. Vice President-Sales                               N/A

Robert R. Williams            52      Vice President-Software Development                    N/A
</TABLE>
/1/  Mr. Miller was our Chief Executive Officer from June 1994 until June 10,
     2002.

     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. Miller is a founder of Preferred Voice. He has served as an officer and
Director of the company since May 1994; he was Chief Executive Officer from June
1994 until June 10, 2002 and was President from April 1997 to May of 2001. 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. Ogilvie was elected as a director of Preferred Voice on February 20,
2000. Mr. Ogilvie is a Managing Director with Capital Investment Company and has
been so since September of 2000. Before that, Mr. Ogilvie was employed by
Classic Residence by Hyatt as Managing Director of Development-Western Division
since January of 1998. From the middle of 1993 to December of 1998, Mr. Ogilvie
was a partner in the John Buck Company, a full service real estate brokerage,
development and property management company.

                                       27

<PAGE>

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

     Mr. Stone joined Preferred Voice in December 1998 and is currently serving
as Vice President of 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. 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.

                                       28

<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, 2002, 2001,
and 2000.

                               Annual Compensation
<TABLE>
<CAPTION>
                                                                                      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>
William J. Schereck                2002       $158,229       $250         -            400,000
President                          2001          -           -            -               -
                                   2000          -           -            -               -


G. Ray Miller/1/                   2002       $150,000       $250         -             80,000
                                   2001       $116,250    $10,000         -             50,000
                                   2000        $70,083    $10,000         -               -


Mary G. Merritt                    2002       $120,000       $250         -             80,000
Vice President - Finance           2001       $106,250    $10,000         -             50,000
                                   2000        $72,666    $15,000         -               -


Richard K. Stone                   2002       $100,700       $250         -              6,000
Senior Vice President - Sales      2001        $96,000    $25,150         -             30,000
                                   2000        $92,769    $10,500         -               -


Robert R. Williams                 2002        $59,250     $5,250     $78,000*           7,000
Vice President - Software          2001        $42,000     $5,000     $78,000*          95,000
Development                        2000        $42,000       -        $78,000*            -


Ronald K. Miller/2/                2002       $118,667     $5,250         -             68,750
                                   2001        $30,667    $25,150         -             40,000
                                   2000           -       $10,500         -               -
</TABLE>
/1/  Mr. Miller was our Chief Executive Officer from June 1994 until June 10,
     2002.
/2/  Ronald Miller was Sr. Vice President - Sales from December 2001 until his
     leaving the Company on May 31, 2002.

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

No other stock options or convertible securities were granted to the
aforementioned executive officers during the fiscal years ended March 31, 2002,
2001, and 2000.

                                       29

<PAGE>

                      Option/SAR Grants in Fiscal Year 2002

<TABLE>
<CAPTION>
                               Number of          % of Total Options/SARs
                         Securities Underlying      Granted to Employees     Exercise or Base
          Name            Options/SARs Granted       in Fiscal Year/1/        Price ($/Sh)      Expiration Date
          ----           ---------------------       -----------------        ------------      ---------------
<S>                      <C>                      <C>                        <C>                <C>
G. Ray Miller                    80,000                    10.4%                  1.50              11/20/04
                                300,000                    39.1%                  1.50             9/21/2011
William J. Schereck             100,000                    13.0%                  3.00             9/21/2011
Mary G. Merritt                  80,000                    10.4%                  1.50              11/20/04
Richard K. Stone                  6,000                      .8%                  1.50              11/20/06
Robert R. Williams                7,000                      .9%                  1.50              11/20/06
Ronald K. Miller2                60,000                     7.8%                  2.42                7/1/06
                                  8,750                     1.1%                  1.50              11/20/06
</TABLE>

/1/  Based on a total of 767,825 shares underlying options of 607,825 and
     warrants of 160,000 issued during the fiscal year ended March 31, 2002. All
     warrants are currently exercisable.
/2/  Ronald Miller was Sr. Vice President - Sales from December 2001 until his
     leaving the Company on May 31, 2002.

                   Aggregated Option Exercises in Fiscal Year
                      2002 and March 28 2002 Option Values
<TABLE>
<CAPTION>
                                                            Number of Securities              Value of Unexercised
                                                           Underlying Unexercised             In-the-Money Options
                               Shares                   Option at March 28, 2002 (#)         at March 28, 2002 ($)/1/
                              Acquired       Value      ----------------------------      ----------------------------
Name:                       On Exercise    Realized     Exercisable    Unexercisable      Exercisable    Unexercisable
----                        -----------    --------     -----------    -------------      -----------    -------------
<S>                         <C>            <C>          <C>            <C>                <C>            <C>
G. Ray Miller                    --           --          555,000          25,000          175,000            --
William J. Schereck              --           --          212,500         187,500             --              --
Mary G. Merritt                  --           --          455,000          25,000          145,000            --
Richard K. Stone                 --           --          137,500          18,500           73,200            --
Robert R. Williams               --           --          142,917          39,083           21,600            --
Ronal K. Miller/2/               --           --           23,646          85,104             --              --
</TABLE>
/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 28, 2002.
/2/  Ronald Miller was Sr. Vice President - Sales from December 2001 until his
     leaving the Company on May 31, 2002.

                            Equity Compensation Plan
<TABLE>
<CAPTION>
                            Number of Securities                                Number of Securites
                            To be Issued Upon         Weighted-Average          Remaining Available For
                            Exercise of               Exercise Price of         Future Issuance Under Equity
                            Outstanding Options,      Outstanding Options,      Compensation Plans (excluding
Plan Category               Warrants and Rights       Warrants and Rights       securities in column (a))
-------------               --------------------      -------------------       -----------------------------
<S>                         <C>                       <C>                       <C>
                            (a)                       (b)                       (c)
Equity Compensation
Plans Approved by
Security Holders                   1,348,825                   $1.51                          988,307

Equity Compensation
Plans Not Approved by                      0                       0                                0
Security Holders

Total                              1,348,825                   $1.51                          988,307
</TABLE>

                                       30

<PAGE>

     Employment Agreements

     We executed an employment agreement with William J. Schereck, Jr. on
September 6, 2001 for a term of two years from such date. Mr. Schereck has
agreed to act as President and Chief Operating Officer of Preferred for a salary
of $175,000 per year less applicable withholding taxes. We have agreed to pay
Mr. Schereck a bonus equal to 1 1/2% of our earnings, if any, before interest,
taxes and amortization each fiscal quarter. We also agreed to reimburse Mr.
Schereck for the costs of his move to Dallas. Mr. Schereck is entitled to annual
paid vacation leave and sick days and reimbursement of business expenses, as
established by Preferred's policies regarding such matters. We have also agreed
to indemnify Mr. Schereck for all losses sustained by him as a direct result of
the discharge of his duties for Preferred and to advance expenses to him if he
is required to defend any action in his official capacity, to the extent
permitted by Delaware law.

     Mr. Schereck has been granted three stock options pursuant to the terms of
the employment agreement and individual stock option agreements. The first
option is a fully vested option to purchase 150,000 shares of our common stock
at an exercise price of $1.50 per share. We may purchase the shares at $1.50 per
share purchased by Mr. Schereck pursuant to such option in the event he
voluntarily terminates his employment prior to January 1, 2002. The second is an
option to purchase 150,000 shares of our common stock at an exercise price of
$1.50 which shall vest 1/24th per month beginning upon commencement of Mr.
Schereck's employment on May 28, 2001. The final option is an option to purchase
100,000 shares of our common stock at an exercise price of $3.00 per share which
shall also vest 1/24th per month beginning upon commencement of Mr. Schereck's
employment on May 28, 2001, but may not be exercised before we achieve two
consecutive calendar quarters of positive EBITA. Each of the options will
terminate on termination of Mr. Schereck's employment or the tenth anniversary.
All options shall immediately vest (a) upon any merger or acquisition resulting
in a change of control, or (b) in the event of the involuntary termination of G.
Ray Miller as chief executive officer.

     The agreement will automatically terminate if Mr. Schereck dies, and may be
terminated by us if he becomes disabled, upon 10 days written notice. We may
also terminate this agreement for cause by giving written notice of termination
to Mr. Schereck. "Cause" includes the breach of the agreement by Mr. Schereck
and failure to perform his duties and Mr. Schereck's failure to cure such breach
or failure within 15 days of written notice from us. If Mr. Schereck is
terminated for cause, all of his rights under the agreement will cease as of the
effective date of the termination, except that he will be entitled to receive
his accrued salary and any other payments and benefits to which he is entitled
under our employee benefit plans.

     Mr. Schereck has also agreed to certain terms regarding keeping
confidential information of the company confidential. He has also agreed that he
will not compete with us during the term of this employment agreement and for
two years after the termination of his employment. He has further agreed that he
will not interfere with our relationships with customers and suppliers during
the term of his agreement and thereafter he will not solicit business from our
customers for two years following the termination of his employment.

     Item 11. Security Ownership of Certain Beneficial Owners and Management

     The following table sets forth, as of the close of business on June 21,
2002, 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 21, 2002.

                          Beneficial Ownership /(1)/, /(2)/

                                                       Number of
Name of Beneficial Owner                                Shares        Percentage
------------------------                               ---------      ----------
Pegasus Settlement Trust/(3)/                          2,715,667          14.75%

G. Ray Miller/(4)/                                       602,250           3.18%


                                       31

<PAGE>

Mary G. Merritt/(5)/                                   3,633,241          19.26%

William J. Schereck/(6)/                                 253,750           1.36%

Scott Ogilvie/(7)/                                        90,000               *

Leslie Melzer/(8)/                                     2,483,500          12.99%

Richard K. Stone/(9)/                                    140,000               *

Robert R. Williams/(10)/                                 149,333               *

Ronald K. Miller/(11)/                                    27,292               *

Lawrence E. Steinberg/(12)/                            1,357,876           7.38%

JMG Capital Partners, L.P./(13)/                       1,426,584           7.63%

Paragon Ranch, Inc./(14)/                              2,037,000          10.72%

JMG Triton Offshore Fund Ltd./(15)/                    1,423,584           7.61%

All Directors and executive
   officers as a group (eight persons)/(16)/           7,379,366          35.51%

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

*    Less than one percent (1%).

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

2)   Based on 18,407,493 shares outstanding on June 21, 2002. Shares of common
     stock subject to options that are exercisable within 60 days of June 21,
     2002, 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 the 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. We have been advised by Pegasus Settlement Trust that a
     number of natural persons who are officers or employees of the Trustee,
     including the Mr. W.J. Newbury, Chairman and Director, and Mr. N. Hill,
     Senior Trust Officer, have shared voting control over the shares, but there
     are two categories of natural people who may sign on behalf of the Trust,
     one of which must come from a list of people called "Category A" and one of
     which must come from a similar list called "Category B."

4)   Includes 530,000 shares issuable upon exercise of warrants and 25,000
     issuable upon exercise of employee stock options. 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 430,000 shares issuable upon exercise of warrants, 25,000 issuable
     upon exercise of employee stock options, 45,000 shares held by her minor
     children, and 2,715,677 shares held by Pegasus Settlement Trust.

6)   Includes 243,750 shares issuable upon exercise of employee stock options.

7)   Includes 90,000 shares issuable upon exercise of warrants.

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

9)   Includes 140,000 shares issuable upon exercise of employee stock options.


                                       32

<PAGE>

10)  Includes 25,000 shares issuable upon exercise of warrants, and 120,833
     shares issuable upon exercise of employee stock options.

11)  Includes 27,292 shares issuable upon exercise of employee stock options.
     Mr. Miller was our Sr. Vice President of Sales from December 2001 to May
     31, 2002.

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

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

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

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

16)  Includes the shares described in footnotes 4 through 11.


             Item 12. Certain Relationships and Related Transactions

     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.
At the time of this placement, Gerard Hallaren was a director of the Company and
a Managing Director of Stifel.

     Also in the August 24, 2000 offering, Paragon Ranch and Leslie Melzer
purchased 500,000 and 50,000 shares of our common stock, respectively, and
warrants to purchase 125,000 and 12,500 shares of our common stock,
respectively, at an exercise price of $2.625 per share on or before August 24,
2005. These shares and warrants were issued at the same price as that paid by
other investors in the offering. Leslie Melzer is Vice President of Paragon
Ranch and shares voting power over Paragon Shares.

     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.

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

                                       33

<PAGE>

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

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

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

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

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

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

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

     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)

                                       34

<PAGE>

3.5/(3)/       Certificate of Amendment, filed on March 7, 1997 with the
               Secretary of State of Delaware (Exhibit 3.5)
3.6/(1)/       Bylaws of Preferred/telecom, Inc. (Exhibit 3.4)
10.1/(4)/      Form of Warrant Certificate and Schedule of Warrant Certificates
               (Exhibit 10.1)
10.2/(5)/      Volume License Agreement between Philips Speech Processing North
               America, a division of Philips Electronics North America
               Corporation and Preferred Voice, Inc. (Exhibit 10.31)
10.3/(6)/      Form of Subscription Agreement between Preferred Voice, Inc. and
               certain purchasers of Preferred Voice, Inc. common stock
               (Exhibit 10.1)
10.4/(6)/      Form of Warrant Certificate (Exhibit 10.2)
10.5/(6)/      Warrant No. 122 issued to Stifel, Nicolaus & Company, Inc.
               (Exhibit 10.3)
10.6/(5)/      Second Amendment to Lease between Dallas Office Portfolio, L.P.,
               as successor in interest to Greenville Avenue Properties, Ltd.
               and Preferred Voice, Inc. (Exhibit 10.3)
10.7/(1)/      Preferred/telecom, Inc. 1994 Stock Plan for Incentive and
               Non-Qualified Stock Options (Exhibit 10.5)
10.8/(7)/      2000 Stock Plan for Incentive Stock Options and Other Equity
               Participation (Exhibit 10.1)
10.9/(8)/      Form of Subscription Agreement by and between Preferred Voice,
               Inc. and certain signatories thereto (Exhibit 10.1)
10.10/(8)/     Form of Warrant Certificate, issued by Preferred Voice, Inc.
               pursuant to the Subscription Agreement filed as Exhibit 10.9
               hereto (Exhibit 10.2)
10.11/(9)/     Patent License Agreement by and between Preferred Voice, Inc. and
               KoninKlijkePhilips Electronics N.V.*(Exhibit 10.2)
10.12/(10)/    Form of Subscription Agreement, by and between Preferred Voice,
               Inc. and certain signatories thereto (Exhibit 10.1)
23/+/          Consent of Philip Vogel & Co. PC

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

+    Filed herewith.

(1)  Incorporated by reference to the exhibit shown in parenthesis to our
     Registration Statement on Form S-1, filed with the Securities and Exchange
     Commission on June 15, 1995.
(2)  Incorporated by reference to the exhibit shown in parenthesis to Amendment
     No. 1 to our Registration Statement, filed with the Securities and Exchange
     Commission on August 7, 1995.
(3)  Incorporated by reference to the exhibit shown in parenthesis to our Annual
     Report on Form 10-KSB for the period ended March 31, 1999, filed by us with
     the Securities and Exchange Commission.
(4)  Incorporated by reference to the exhibit shown in parenthesis to our
     Registration Statement on Form SB-2, filed with the Securities Exchange
     Commission on March 8, 2001
(5)  Incorporated by reference to the exhibit shown in parenthesis to Amendment
     No. 1 to Form 10-KSB for the period ended March 31, 2000, filed by us with
     the Securities and Exchange Commission.
(6)  Incorporated by reference to the exhibit shown in parenthesis to our
     Current Report on Form 8-K, filed with the Securities and Exchange
     Commission on September 15, 2000.
(7)  Incorporated by reference to the exhibit shown in parenthesis to our
     Quarterly Report on Form 10-QSB for the quarter ended December 31, 2000,
     filed by us with the Securities and Exchange Commission.
(8)  Incorporated by reference to the exhibit shown in parenthesis to our
     Current Report on Form 8-K, filed with the Securities and Exchange
     Commission on May 7, 2001.
(9)  Incorporated by reference to the exhibit shown in parenthesis to our
     Quarterly Report on Form 10-QSB for the quarter ended September 30, 2001,
     filed by us with the Securities and Exchange Commission.
(10) Incorporated by reference to the exhibit shown in parenthesis to our
     Current Report on Form 8-K, filed with the Securities and Exchange
     Commission on November 21, 2001.


(b)  Reports on Form 8-K

     None

                                       35

<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 __, 2002                       By:   /s/ William J. Schereck
                                              ----------------------------------
                                              William J. Schereck, President

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

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

/s/ G. Ray Miller            Chairman of the Board of Directors          June ___, 2002
-------------------------
G. Ray Miller

/s/ William J. Schereck      President (Principal Executive Officer)     June ___, 2002
-------------------------
William J. Schereck

/s/ Mary G. Merritt          Secretary, Treasurer and Vice President     June ___, 2002
-------------------------    of Finance and Director (Principal
Mary G. Merritt              Accounting Officer)

/s/ Scott V. Ogilvie         Director
-------------------------
Scott V. Ogilvie                                                         June ___, 2002

/s/ Leslie Melzer            Director
-------------------------
Leslie Melzer                                                            June ___, 2002

</TABLE>

                                       36

<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, 2002 and 2001, and the related statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years then ended. 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, 2002 and 2001, and the results of its operations and its cash flows
for the three years then ended, in conformity with accounting principles
generally accepted in the United States of America.

                                                  PHILIP VOGEL & CO. PC

                                                  Certified Public Accountants

Dallas, Texas

May 10, 2002

The accompanying notes are an integral part of these statements

                                      F-1


<PAGE>

                              PREFERRED VOICE, INC.
                                 BALANCE SHEETS
                             MARCH 31, 2002 AND 2001


<TABLE>
<CAPTION>
                                                                             2002            2001
                                                                          ----------      ----------
<S>                                                                       <C>             <C>

          Assets

Current assets:
  Cash and cash equivalents                                               $1,302,754      $1,735,752
  Accounts receivable, net of allowance
    for doubtful accounts of $36,070 and
    and $-0-, respectively                                                   162,940          39,141
  Employee advances                                                            2,638             922
  Inventory                                                                        0          49,085
  Prepaid expenses                                                            28,411             493
                                                                          ----------      ----------

        Total current assets                                              $1,496,743      $1,825,393
                                                                          ----------      ----------

Property and equipment:
  Computer equipment                                                      $1,678,172      $  882,960
  Furniture and fixtures                                                      42,691          42,691
  Office equipment                                                            62,997          61,889
                                                                          ----------      ----------

                                                                          $1,783,860      $  987,540

  Less accumulated depreciation                                              408,104         187,807
                                                                          ----------      ----------

        Net property and equipment                                        $1,375,756      $  799,733
                                                                          ----------      ----------

Other assets:
  Capitalized software development costs,
    net of accumulated amortization of $588,814
    and $324,747, respectively                                            $  316,474      $  380,173
  Deposits                                                                    23,019          14,093
  Trademarks and patents                                                      53,535          48,533
                                                                          ----------      ----------

        Total other assets                                                $  393,028      $  442,799
                                                                          ----------      ----------

        Total assets                                                      $3,265,527      $3,067,925
                                                                          ==========      ==========
</TABLE>


The accompanying notes are an integral part of these statements

                                      F-2



<PAGE>

<TABLE>
<CAPTION>
                                                                        2002                  2001
                                                                    ------------          ------------
<S>                                                                 <C>                   <C>

          Liabilities and stockholders' equity

Current liabilities:
    Accounts payable                                                $    333,636          $    338,270
    Accrued operating expenses                                            98,420                39,379
    Accrued vacation                                                      23,715                22,194
    Accrued payroll and payroll taxes                                      4,501                 3,589
    Accrued interest payable                                              33,319                44,451
    Deferred revenue                                                     344,618               342,118
    Current maturities of long-term debt                                       0                30,000
    Note payable                                                          50,866                50,866
                                                                    ------------          ------------

          Total current liabilities                                 $    889,075          $    870,867
                                                                    ------------          ------------


Long-term debt                                                      $     50,000          $          0
                                                                    ------------          ------------


Commitments (Notes J and M)

Stockholders' equity:
    Common stock, $0.001 par  value
      50,000,000 shares authorized; shares
      issued 18,407,493 and
      15,672,586, respectively                                      $     18,407          $     15,674
    Additional paid-in capital                                        17,817,465            13,856,051
    Accumulated deficit                                              (15,507,914)          (11,672,799)
    Treasury stock -  22,500 and
      385,224 shares at cost, respectively                                (1,506)               (1,868)
                                                                    ------------          ------------

          Total stockholders' equity                                $  2,326,452          $  2,197,058
                                                                    ------------          ------------

          Total liabilities and stockholders' equity                $  3,265,527          $  3,067,925
                                                                    ============          ============
</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, 2002, 2001 AND 2000

<TABLE>
<CAPTION>
                                                             2002                 2001                2000
                                                         ------------         ------------        ------------
<S>                                                      <C>                  <C>                 <C>

Sales                                                    $ 1,474,465          $   138,097         $   885,134

Cost of sales                                                462,311              101,188             215,293
                                                         ------------         ------------        ------------

          Gross profit                                   $ 1,012,154          $    36,909         $   669,841
                                                         ------------         ------------        ------------

Costs and expenses:
  General and administrative                             $ 4,854,006          $ 4,011,608         $ 1,675,971
  Interest expense                                             5,255                4,600              28,556
                                                         ------------         ------------        ------------

          Total costs and expenses                       $ 4,859,261          $ 4,016,208         $ 1,704,527
                                                         ------------         ------------        ------------

Loss from operations                                     $(3,847,107)         $(3,979,299)        $(1,034,686)
                                                         ------------         ------------        ------------

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

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

Loss from operations before income taxes
   and extraordinary item                                $(3,847,107)         $(4,816,419)        $(1,053,042)

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

Loss from operations before
   extraordinary item                                    $(3,847,107)         $(4,816,419)        $(1,053,042)

Extraordinary item:
   Gain from extinguishment of debt (net of
     applicable income taxes of $-0-)(Note L)                 11,992               74,375              59,976
                                                         ------------         ------------        ------------

Net loss                                                 $(3,835,115)         $(4,742,044)        $  (993,066)
                                                         ============         ============        ============

Per share amounts:
   Loss from operations                                  $     (0.23)         $     (0.35)        $     (0.10)
                                                         ============         ============        ============

   Gain from extinguishment of debt                      $      0.00          $      0.01         $      0.01
                                                         ============         ============        ============

   Net loss per share                                    $     (0.23)         $     (0.34)        $     (0.09)
                                                         ============         ============        ============
</TABLE>


The accompanying notes are an integral part of these statements.

                                      F-4

<PAGE>

                              PREFERRED VOICE, INC.
                       STATEMENTS OF STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED MARCH 31, 2002, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                               Shares of common stock
                                                         --------------------------------------------------------------------
                                                            Authorized         Issued        Outstanding      In treasury
                                                         --------------------------------------------------------------------

<S>                                                      <C>               <C>              <C>              <C>
Balance - March 31, 1999                                    20,000,000        9,695,681        9,310,457          385,224

   Conversion of prime plus 2% debentures                            0          121,261          121,261                0
   Conversion of 7% debentures                                       0           47,254           47,254                0
   Conversion of 8% debentures                                       0          200,000          200,000                0
   Conversion of 9% debentures                                       0          466,667          466,667                0
   Conversion of 10% debentures                                      0          386,000          386,000                0
   Conversion of 12% debentures                                      0           26,381           26,381                0
   Exercise of employee stock option                                 0            1,250            1,250                0
   Exercised warrants                                                0          412,297          412,297                0
   Issuance of common stock                                          0        1,920,005        1,920,005                0

   Net loss for the year ended March 31, 2000                        0                0                0                0
                                                         --------------------------------------------------------------------

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

   Exercise of employee stock options                                0            9,500            9,500                0
   Exercised warrants                                                0          420,932          420,932                0
   Issuance of common stock net of stock
     issuance costs of $138,637                                      0        1,965,358        1,965,358                0
   Issuance of stock warrants to non-employee
     for services                                                    0                0                0                0

   Net loss for the year ended March 31, 2001                        0                0                0                0
                                                         --------------------------------------------------------------------

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

   Conversion of note payable to stock                               0           17,804           17,804                0
   Exercised warrants                                                0          275,118          275,118                0
   Warrants issued to non-employees                                  0                0                0                0
   Issuance of common stock net of stock
     issuance costs of $232,986                                      0        2,804,709        2,804,709                0
   Increase in authorized shares                            30,000,000                0                0                0
   Cancellation of treasury stock                                    0         (362,724)               0         (362,724)

   Net loss for the year ended March 31, 2002                        0                0                0                0
                                                         --------------------------------------------------------------------

Balance - March 31, 2002                                    50,000,000       18,407,493       18,384,993           22,500
                                                         ====================================================================
</TABLE>


The accompanying notes are an integral part of these statements

                                      F-5



<PAGE>

<TABLE>
<CAPTION>
                                 Amounts
----------------------------------------------------------------------------
  Common Stock          Treasury          Additional          Accumulated       Total stockholders'
$0.001 par value         stock          paid-in capital          deficit              equity
----------------    ----------------    ----------------    ----------------    ------------------
<S>                 <C>                 <C>                 <C>                 <C>
$         9,695     $        (1,868)    $     5,192,033     $    (5,937,689)    $        (737,829)

            121                   0              90,826                   0                90,947
             47                   0              42,009                   0                42,056
            200                   0             149,800                   0               150,000
            467                   0             349,533                   0               350,000
            386                   0             192,614                   0               193,000
             27                   0              26,354                   0                26,381
              2                   0                 649                   0                   651
            412                   0             300,890                   0               301,302
          1,920                   0           2,608,080                   0             2,610,000

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

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

             10                   0               9,491                   0                 9,501
            420                   0             429,775                   0               430,195

          1,967                   0           4,332,835                   0             4,334,802

              0                   0             131,162                   0               131,162

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

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

             18                   0              17,470                   0                17,488
            275                   0             300,051                   0               300,326
              0                   0              91,187                   0                91,187

          2,803                   0           3,552,706                   0             3,555,509
              0                   0                   0                   0                     0
           (363)                362                   0                   0                    (1)

              0                   0                   0          (3,835,115)           (3,835,115)
----------------    ----------------    ----------------    ----------------    ------------------

$        18,407     $        (1,506)    $    17,817,465     $   (15,507,914)    $       2,326,452
================    ================    ================    ================    ==================
</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, 2002, 2001 AND 2000

<TABLE>
<CAPTION>
                                                              2002                2001             2000
                                                        ----------------   -----------------  ---------------
<S>                                                     <C>                <C>                <C>

Cash flows from operating activities:
   Cash received from customers                         $     1,365,158    $         54,006   $    1,273,062
    Cash paid to suppliers and employees                     (4,707,443)         (3,643,002)      (2,096,249)
    Interest paid                                                     0                   0         (224,235)
                                                        ----------------   -----------------  ---------------

         Net cash used by operating activities          $    (3,342,285)   $     (3,588,996)  $   (1,047,422)
                                                        ----------------   -----------------  ---------------

Cash flows from investing activities:
   Capital expenditures                                 $      (978,046)   $       (948,089)  $     (389,436)
   Proceeds from sale of assets                                       0                   0            1,750
   Employee advances (repayments)
                                                                 (1,716)               (922)           2,500
                                                        ----------------   -----------------  ---------------

         Net cash used by investing activities          $      (979,762)   $       (949,011)  $     (385,186)
                                                        ----------------   -----------------  ---------------

Cash flows from financing activities:
   Proceeds from issuance of stock                      $     4,072,035    $      4,913,135   $    2,583,952
   Proceeds from notes payable                                   50,000                   0          200,000
   Stock issuance costs                                        (232,986)            (12,667)         (19,803)
                                                        ----------------   -----------------  ---------------

          Net cash provided by financing activities     $     3,889,049    $      4,900,468   $    2,764,149
                                                        ----------------   -----------------  ---------------

Net increase (decrease) in cash and
   cash equivalents                                     $      (432,998)   $        362,461   $    1,331,541

Cash and cash equivalents:
   Beginning of year                                          1,735,752           1,373,291           41,750
                                                        ----------------   -----------------  ---------------

   End of year                                          $     1,302,754    $      1,735,752   $    1,373,291
                                                        ================   =================  ===============
</TABLE>



The accompanying notes are an integral part of these statements.

                                      F-7


<PAGE>

<TABLE>
<CAPTION>
                                                           2002               2001               2000
                                                      --------------     --------------     --------------
<S>                                                   <C>                <C>                <C>

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

   Net loss                                           $  (3,835,115)     $  (4,742,044)     $    (993,066)
                                                      --------------     --------------     --------------

   Adjustments to reconcile net loss to
       net cash used by operating activities:
      Depreciation                                    $     465,723      $     278,052      $     140,948
      Gain on sale of fixed assets                                0                  0             18,356
      Impairment loss                                             0            837,120                  0
      Fair value of stock warrants issued in
        exchange for services                                91,186            131,162                  0
      Forgiveness of debt                                   (11,992)           (74,375)           (59,976)

      Changes in assets and liabilities:
         Increase in accounts receivable                   (123,799)           (35,217)            (3,064)
         (Increase) decrease in inventory                    49,085             35,639            (84,724)
         (Increase) decrease in deposits                     (8,926)            71,021             (3,579)
         Increase in prepaid expenses                       (27,918)            (2,220)                 0
         Increase in patents and trademarks                  (5,002)           (41,061)            (7,472)
         Increase (decrease) in accounts payable             (4,634)           (40,715)           (91,016)
         Increase (decrease) in accrued expenses             66,607             42,516           (354,821)
         Increase (decrease) in customer deposits             2,500            (48,874)           390,992
                                                      --------------     --------------     --------------

             Total adjustments                        $     492,830      $   1,153,048      $     (54,356)
                                                      --------------     --------------     --------------

Net cash used by operating activities                 $  (3,342,285)     $  (3,588,996)     $  (1,047,422)
                                                      ==============     ==============     ==============

Supplemental schedule of non-cash
    investing and financing activities:
   Issuance of common stock in
     exchange for debt                                $      34,247      $           0      $     952,383
                                                      ==============     ==============     ==============
</TABLE>


The accompanying notes are an integral part of these statements

                                      F-8



<PAGE>

                                PREFERRED VOICE

                         NOTES TO FINANCIAL STATEMENTS

Note A - General organization:

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

Note B - Summary of significant accounting policies:

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

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

   Concentration of business, market and credit risks
   --------------------------------------------------

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

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

      At March 31, 2002, the Company had cash balances of approximately
   $1,130,000 in banking institutions in excess of federally insured amounts.
   These balances are before considering outstanding items.

      During the years ended March 31, 2002, 2001 and 2000, approximately
   $410,000 (27.8%), $103,000 (74.6%) and $853,000 (96.4%), respectively, of the
   Company's total sales were derived from one, two and one customers,
   respectively. At March 31, 2002, 2001 and 2000, no single customer accounted
   for a material portion of accounts receivable.

   Inventory
   ---------

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


                                      F-9

<PAGE>

                                PREFERRED VOICE

                         NOTES TO FINANCIAL STATEMENTS

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

   Capitalized software development
   --------------------------------

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

      During the years ended March 31, 2002, 2001 and 2000, software development
   costs capitalized were $181,728, $338,875 and $194,623, respectively. The
   amortization of capitalized software development costs for the years ended
   March 31, 2002, 2001 and 2000 was $264,067, $165,847 and $92,935,
   respectively.

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

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

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

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

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

      Depreciation expense for the years ended March 31, 2002, 2001 and 2000 was
   $465,723, $278,052 and $140,948, respectively.

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

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


                                      F-10

<PAGE>

                                PREFERRED VOICE

                         NOTES TO FINANCIAL STATEMENTS

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

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

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

      During the year ended March 31, 2002, the majority of the Company's
   revenue consisted of revenue sharing receipts. Revenue sharing income is
   recognized when the voice dialing services are provided, generally monthly.
   Revenue sharing income for the years ended March 31, 2002, 2001 and 2000 was
   $1,044,380, $74,779 and $-0-, respectively.

      During the years ended March 31, 2001 and 2000, the majority of the
   Company's revenue consisted of nonrefundable fees for the exclusive rights
   for customers to use the Company's application software in certain geographic
   market and installation of equipment in multiple sites. The Company recorded
   the nonrefundable fees when the contract was executed as the earnings process
   had been completed and fee income had been collected. Income generated from
   the installation of equipment was recognized upon the completion of each
   individual site. Deferred revenue associated with uncompleted installations
   at March 31, 2001 and 2000 was $344,618 and $342,118, respectively.

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

      The Company expenses advertising costs when the advertisement occurs.
   Total advertising expense amounted to $17,350, $74,158 and $39,613 for the
   years ended March 31, 2002, 2001 and 2000, respectively.

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

      The Company adopted the provisions of Statement of Financial Accounting
   Standards (SFAS) No. 128, Earnings per Share, during the year ended March 31,
   1998. SFAS No. 128 reporting requirements replace primary and fully-diluted
   earnings per share (EPS) with basic and diluted EPS. Basic EPS is calculated
   by dividing net income or loss (available to common stockholders) by the
   weighted average number of common shares outstanding for the period. Diluted
   EPS reflects the potential dilution that could occur if securities or other
   contracts to issue common stock were exercised or converted into common
   stock. Since the Company incurred a loss from operations for the years ended
   March 31, 2002, 2001 and 2000, no computation of diluted EPS has been
   performed.

      Loss per share is based on the weighted average number of shares
   outstanding of 16,581,164, 13,884,662 and 11,283,538 for the years ended
   March 31, 2002, 2001 and 2000, respectively.

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

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


                                      F-11

<PAGE>

                                PREFERRED VOICE

                         NOTES TO FINANCIAL STATEMENTS

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

   Trademarks and patents
   ----------------------

      Certain costs incurred for the registration of trademarks and patents are
   capitalized and amortized. The amortization is calculated using the
   straight-line method, beginning when it is approved and continuing over its
   estimated useful or legal life, generally between 5 and 15 years.

      At March 31, 2002 and 2001, approval of patents and trademarks was still
   pending; therefore, no amortization expense for trademarks and patents has
   been recorded for the years ended March 31, 2002, 2001 and 2000.

   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).

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

   Use of estimates
   ----------------

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

   Reclassification
   ----------------

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

   Reporting comprehensive income and operating segments
   -----------------------------------------------------

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

                                      F-12

<PAGE>

                                PREFERRED VOICE

                         NOTES TO FINANCIAL STATEMENTS


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

   Stock based compensation
   ------------------------

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

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

   Gain from extinguishment of debt
   --------------------------------

      In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
   No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
   Corrections effective for period beginning May 15, 2002 and thereafter. The
   Company plans to adopt the provision of SFAS No. 145 for the fiscal year
   ending March 31, 2003. SFAS No. 145, among other matters, addresses financial
   accounting and reporting for the extinguishment of debt, concluding that debt
   extinguishments are often routine, recurring transactions and concluded that
   classifying the associated gains and losses as extraordinary items in all
   cases would be inconsistent with the criteria of ABP Opinion 30. Management
   has not fully assessed the effect of FASB No. 145, however, it believes that
   the adoption will result in a reclassification of extraordinary gains into
   ordinary income, with no effect on net income.

Note C - Note payable:

   Note payable consists of the following:

<TABLE>
<CAPTION>
                                                                        2002             2001
                                                                     -----------      -----------
<S>                                                                  <C>              <C>
      Note payable, Brite Voice Systems, Inc., dated January 31,
          1997.  Note is unsecured.                                   $  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, 2002, 2001 and 2000, respectively.


                                      F-13

<PAGE>

                                PREFERRED VOICE

                         NOTES TO FINANCIAL STATEMENTS


Note D - Long-term debt:

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                        2002           2001
                                                                                     -----------    -----------
<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. These
       notes were partially converted into 1,612,421 shares of common stock on
       various dates through December 31, 2001.                                      $        0     $   20,000

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

      Note payable, 10% interest rate. Principal and accrued interest payable on
       September 30, 2003. Convertible into shares of the Company's common stock
       at a conversion rate of $2.00 of indebtedness per share of common
       stock.                                                                            50,000              0
                                                                                     -----------    -----------

                                                                                     $   50,000     $   30,000
      Less current portion                                                                    0         30,000
                                                                                     -----------    -----------

      Total                                                                          $   50,000     $        0
                                                                                     ===========    ===========
</TABLE>

     Interest expense charged to operations related to the long-term debt was
$5,255, $4,600 and $28,557 for the years ended March 31, 2002, 2001 and 2000,
respectively.

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 was approved by
   the Company's stockholders on September 21, 2001.

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

      At March 31, 2002 the Company had outstanding warrants to purchase
   4,318,703 shares of the Company's common stock at prices which ranged from
   $0.50 per share to $3.53 per share. The warrants are exercisable at any time
   and expire through November 20, 2006. At March 31, 2002, 4,318,703 shares of
   common stock were reserved for that purpose.


                                      F-14

<PAGE>

                                PREFERRED VOICE

                         NOTES TO FINANCIAL STATEMENTS



Note E - Common stock (continued):

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

      At March 31, 2002, shares of common stock were reserved for the following
purposes:

           Exercise of stock warrants                                 4,318,703
           Exercise of future grants of stock options
              and stock appreciation rights under the
              1994 stock option plan                                    337,132
           Exercise of future grants of stock options
              and stock appreciation rights under the
              2000 stock option plan                                  2,000,000
                                                                  --------------

                                                                      6,655,835
                                                                  ==============

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 as of March 31, consists of:

<TABLE>
<CAPTION>
                                                    2002                  2001                2000
                                                 ----------            ----------          ----------
<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-15

<PAGE>

                                PREFERRED VOICE

                         NOTES TO FINANCIAL STATEMENTS



Note F - Income taxes (continued):

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

<TABLE>
<CAPTION>
                                                                    2002             2001            2000
                                                               --------------   --------------   -------------
<S>                                                            <C>              <C>              <C>
              Accumulated depreciation                         $      (3,500)   $     (59,000)   $    (38,000)
                                                               --------------   --------------   -------------

              Gross deferred tax liabilities                   $      (3,500)   $     (59,000)   $    (38,000)
                                                               --------------   --------------   -------------

              Stock warrant compensation                       $      31,000    $      70,000    $          0
              Accrued liabilities                                      8,000            8,000           6,000
              Net operating loss carryforward                      5,121,000        3,881,000       2,324,000
                                                               --------------   --------------   -------------

              Gross deferred tax assets                        $   5,160,000    $   3,959,000    $  2,330,000
              Valuation allowance                                 (5,156,500)      (3,900,000)     (2,292,000)
                                                               --------------   --------------   -------------

                                                               $       3,500    $      59,000    $     38,000
                                                               --------------   --------------   -------------

              Net deferred tax assets                          $           0    $           0    $          0
                                                               ==============   ==============   =============

              The change in the deferred tax valuation
                 allowance is as follows:                      $   1,256,500    $   1,608,000    $    303,000
                                                               ==============   ==============   =============
</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, 2002, a net operating loss
carryforward of approximately $15,060,000, which can be used to offset future
taxable income through the year 2022. Utilization of net operating loss
carryforwards in the future may be limited if changes in the Company's stock
ownership create a change of control as provided in Section 382 of the Internal
Revenue Code.

Note G - Employee stock option plans:

   1994 Plan
   ---------

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

      Under the terms of the 1994 Plan, options granted may be either
   nonqualified or incentive stock options, and the exercise price, determined
   by the Committee, may not be less than the fair market value of a share on
   the date of grant. Stock appreciation rights granted in tandem with an option
   shall be exercisable only to the extent the underlying option is exercisable
   and the grant price shall be equal to the exercise price of the underlying
   option. At March 31, 2002, options to purchase 297,000 shares at exercise
   prices of $0.69 to $2.50 per share were outstanding. No stock appreciation
   rights had been granted at March 31, 2002.

                                      F-16

<PAGE>

                                PREFERRED VOICE

                         NOTES TO FINANCIAL STATEMENTS



Note G - Employee stock option plans (continued):

      As of March 31, 2002, 112,868 of these options have been exercised, 39,882
   have been forfeited, 297,000 remain outstanding, and 272,000 were vested and
   exercisable. At March 31, 2002, the remaining weighted average contractual
   life was 5.8 years.

   2000 Plan
   ---------

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

      Under the terms of the 2000 Plan, options granted may be either
   nonqualified or incentive stock options, and the exercise price, determined
   by the Committee, may not be less than the fair market value of a share on
   the date of the grant. Stock appreciation rights granted in tandem with an
   option shall be exercisable only to the extent the underlying option is
   exercisable and the grant price shall be equal to the exercise price of the
   underlying option. At March 31, 2002, options to purchase 1,051,825 shares at
   exercise prices of $1.25 to $3.00 per share were outstanding. No stock
   appreciation rights had been granted at March 31, 2002.

      As of March 31, 2002, none of these options have been exercised, 132,000
   have been forfeited, 1,051,825 remain outstanding, and 222,000 were vested
   and exercisable. At March 31, 2002, the remaining weighted average
   contractual life was 9.1 years.

   Employee warrants
   -----------------

      As of March 31, 2002, none of the employee warrants have been exercised or
   forfeited, 985,000 remain outstanding, and 985,000 were vested and
   exercisable. At March 31, 2002, the remaining weighted average contractual
   life was approximately 1.5 years.

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

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

<TABLE>
<CAPTION>
                                                       2002                   2001                   2000
                                                --------------------   --------------------    -----------------

<S>                                             <C>                    <C>                     <C>
               Expected dividend yield                 0.00%                  0.00%                 0.00%

               Risk-free interest rate             2.28% - 5.06%          4.14% - 6.35%         6.31% - 6.35%

               Expected life                      2.5 - 3.5 years        1.5 - 3.5 years       2.5 - 3.5 years

               Expected volatility                  165% - 189%               172%                   177%
</TABLE>



                                      F-17

<PAGE>

                                PREFERRED VOICE

                         NOTES TO FINANCIAL STATEMENTS



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

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

<TABLE>
<CAPTION>
                                              2002            2001               2000
                                         -------------   -------------      -------------
<S>                                      <C>             <C>                <C>
      Net loss:
        As reported                      $ (3,835,114)   $ (4,742,044)      $   (993,066)
                                         =============   =============      =============

        Proforma                         $ (4,409,704)   $ (5,384,131)      $ (1,111,018)
                                         =============   =============      =============
      Loss per common share:
        As reported                      $      (0.23)   $      (0.34)      $      (0.09)
                                         =============   =============      =============

        Proforma                         $      (0.26)   $      (0.39)      $      (0.10)
                                         =============   =============      =============
</TABLE>

   Proforma loss reflects only options granted during the years ended March 31,
2002, 2001 and 2000. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the proforma net loss
amounts presented above because compensation cost is reflected over the option's
vesting period.

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

<TABLE>
<CAPTION>
                                                     2000 stock award and incentive plan (2000 Plan)
                                  ---------------------------------------------------------------------------------------
                                              2002                         2001                         2000
                                  ----------------------------  ----------------------------  -----------------------------
                                                    Weighted                     Weighted                     Weighted
                                      Number        average        Number        average         Number       average
                                        of          exercise         of          exercise          of         exercise
                                      shares         price         shares         price          shares        price
                                  -------------  -------------  ------------  --------------  ------------  ---------------
<S>                               <C>            <C>            <C>           <C>             <C>           <C>
Outstanding at beginning
   of year                            576,000       $   1.45      576,000        $   1.45           0         $   0.00
Granted                               607,825           1.81            0            0.00           0             0.00
Exercised                                   0           0.00            0            0.00           0             0.00
Forfeited                            (132,000)          1.60            0            0.00           0             0.00
Expired                                     0           0.00            0            0.00           0             0.00
                                  -------------  -------------  ------------  --------------  ------------  ---------------

Outstanding at end of year          1,051,825       $   1.63      576,000        $   1.45           0         $   0.00
                                  =============  =============  ============  ==============  ============  ===============

Options exercisable at
   end of year                        222,000       $   1.40      190,666        $   1.45           0         $   0.00
Weighted average fair
   value of options
   granted end of year                607,825       $   1.07      576,000        $   1.21           0         $   0.00
</TABLE>


                                      F-18

<PAGE>

                                PREFERRED VOICE

                         NOTES TO FINANCIAL STATEMENTS



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

<TABLE>
<CAPTION>
                                                      1994 stock award and incentive plan (1994 Plan)
                                  -----------------------------------------------------------------------------------------
                                              2002                         2001                          2000
                                  ---------------------------   ---------------------------   -----------------------------
                                                    Weighted                     Weighted                      Weighted
                                      Number        average        Number         average         Number        average
                                        of          exercise         of          exercise           of         exercise
                                      shares         price         shares          price          shares         price
                                  ------------   ------------   -----------    ------------   -----------    -------------
<S>                               <C>            <C>            <C>            <C>            <C>            <C>
Outstanding at beginning
   of year                            412,000      $   0.96       406,500       $   0.96         382,750       $   0.92
Granted                                     0          0.00        15,000       $   2.50          30,000       $   1.50
Exercised                             (75,118)         0.94        (9,500)      $   1.00          (1,250)      $   0.53
Forfeited                             (39,882)         1.16             0           0.00               0       $   0.00
Expired                                     0          0.00             0           0.00          (5,000)      $   1.03
                                  ------------   ------------   -----------    ------------   -----------    --------------

Outstanding at end of year            297,000      $   1.02       412,000       $   0.96         406,500       $   0.96
                                  ============   ============   ===========    ============   ===========    ==============

Options exercisable at
   end of year                        272,000      $   0.95       392,002       $   0.96         304,583       $   0.94
Weighted average fair
   value of options
   granted end of year                      0      $   0.00        15,000       $   2.09          30,000       $   1.28
</TABLE>

   Following is a summary of warrants issued to employees:

<TABLE>
<CAPTION>
                                                                    Employee warrants
                                  --------------------------------------------------------------------------------------
                                              2002                        2001                         2000
                                  --------------------------   --------------------------   ----------------------------
                                                   Weighted                     Weighted                    Weighted
                                     Number        average        Number        average        Number        average
                                       of          exercise         of          exercise         of         exercise
                                     shares         price         shares         price         shares         price
                                  -----------   ------------   -----------   ------------   -----------   --------------
<S>                               <C>            <C>           <C>            <C>           <C>           <C>

Outstanding at beginning
   of year                           825,000       $   1.10       576,000       $   0.90       800,000      $   0.90
Granted                              160,000           1.50        25,000           2.50             0          0.00
Exercised                                  0           0.00             0           0.00             0          0.00
Forfeited                                  0           0.00             0           0.00             0          0.00
Expired                                    0           0.00             0           0.00             0          0.00
                                  -----------   ------------   -----------   ------------   -----------   --------------

Outstanding at end of year           985,000       $   1.04       825,000       $   0.96       800,000      $   0.90
                                  ===========   ============   ===========   ============   ===========   ==============

Options exercisable at
   End of year                       985,000       $   1.04       825,000       $   1.10       800,000      $   0.90
Weighted average fair
   value of options
   granted end of year               160,000       $   1.36        25,000       $   2.50             0      $   0.00
</TABLE>

                                      F-19

<PAGE>

                                PREFERRED VOICE

                         NOTES TO FINANCIAL STATEMENTS


Note I - Stock warrants:

   During the years ended March 31, 2002, 2001 and 2000, the Company issued
180,000, 151,035 and 130,000 warrants to certain service providers and business
partners at exercise prices ranging from $0.84 to $4.00. The warrants can be
exercised at any time and expire at various dates through November 20, 2006.

   In accordance with SFAS No. 123, the Company accounts for warrants issued to
non-employees at fair value of the warrants at the grant date. For the years
ended March 31, 2002 and 2001, the Company recognized $91,186 and $131,162,
respectively, as compensation expense and $-0- and $120,320, respectively, as
stock issuance cost during the years ended March 31, 2002 and 2001 related to
warrants issued to non-employees. The Company recognized no compensation expense
or assets for the year ended March 31, 2000, with respect to warrants issued to
non-employees, as these amounts were not significant.

   For the years ended March 31, 2002 and 2001, the Company issued 1,575,000 and
716,965 warrants, respectively, in connection with stock offerings. No warrants
were issued for the year ended March 31, 2000 in connection with stock
offerings. These warrants were not issued in exchange for goods and services;
therefore, no compensation expense was recognized by the Company during the
years ended March 31, 2002, 2001 and 2000.

   As of March 31, 2002, 1,022,493 of these warrants have been exercised; none
have been forfeited; and 4,318,703 remain outstanding, of which 4,318,703 were
vested and exercisable. At March 31, 2002, the remaining weighted average
contractual life was approximately 4.7 years.

   The per share weighted-average fair value of warrants granted to
non-employees in exchange for goods and services was determined using the Black
Scholes Option-Pricing Model. The following weighted-average assumptions were
used in the pricing model:
<TABLE>
<CAPTION>
                                           2002                  2001                 2000
                                     ------------------    ------------------   -----------------
         <S>                         <C>                   <C>                  <C>
         Expected dividend yield           0.00%                 0.00%                0.00%
         Risk-free interest rate           4.39%                 5.69%                6.31%
         Expected life                   1.5 years          0.5 - 3.5 years      2.5 - 3.5 years
         Expected volatility            86% - 131%               172%                 177%
</TABLE>

   Following is a summary of warrants issued to non-employees in exchange for
goods and services:
<TABLE>
<CAPTION>
                                              2002                          2001                           2000
                                  ----------------------------- ------------------------------ -----------------------------
                                                   Weighted                       Weighted                      Weighted
                                     Number        average          Number        average          Number        average
                                       of          exercise           of          exercise           of         exercise
                                     shares         price           shares         price           shares         price
                                  ------------- --------------- -------------- --------------- --------------- -------------
<S>                               <C>           <C>             <C>            <C>             <C>             <C>
Outstanding at beginning
  Of year                            621,035      $   1.76          470,000       $   1.36         340,000       $   1.30
Granted                              180,000          1.94          151,035           3.01         130,000           1.52
Exercised                                  0          0.00                0           0.00               0           0.00
Forfeited                                  0          0.00                0           0.00               0           0.00
Expired                                    0          0.00                0           0.00               0           0.00
                                  ------------- --------------- -------------- --------------- --------------- -------------
Outstanding at end of year           801,035      $   1.76          621,035       $   1.76         470,000       $   1.36
                                  ============= =============== ============== =============== =============== =============
Options exercisable at
  End of year                        801,035      $   1.76          621,035       $   1.76         470,000       $   1.36
Weighted average fair
   value of options
   granted end of year               180,000      $   1.97          151,035       $   1.67         130,000       $   1.08
</TABLE>

                                      F-20

<PAGE>

                                PREFERRED VOICE

                         NOTES TO FINANCIAL STATEMENTS

Note I - Stock warrants (continued):

   The following is a summary of warrants issued in connection with stock
offerings:
<TABLE>
<CAPTION>
                                              2002                            2001                           2000
                                  ------------------------------  ------------------------------ ------------------------------
                                                    Weighted                        Weighted                       Weighted
                                      Number        average           Number        average           Number        average
                                        of          exercise            of          exercise            of         exercise
                                      shares         price            shares         price            shares         price
                                  -------------- ---------------  -------------- --------------- --------------- --------------
<S>                               <C>            <C>              <C>            <C>             <C>             <C>
Outstanding at beginning
  of year                            1,252,668      $   1.75         1,033,203      $   1.14         1,465,500      $   1.07
Granted                              1,575,000          1.95           716,965          2.39                 0          0.71
Exercised                             (200,000)         1.15          (420,196)         1.02          (402,297)         1.07
Forfeited                                    0          0.00                 0          0.00                 0          0.00
Expired                                (95,000)         3.04           (77,304)         2.01           (30,000)         1.07
                                  -------------- ---------------  -------------- --------------- --------------- --------------
Outstanding at end of year           2,532,668      $   1.64         1,252,668      $   1.75         1,033,203      $   1.14
                                  ============== ===============  ============== =============== =============== ==============

Options exercisable at
  end of year                        2,532,668      $   1.64         1,252,668      $   1.75          1,033,203     $   1.14
Weighted average fair
   value of options
   granted end of year               1,575,000      $   1.95           716,965      $   2.39                  0     $   0.00
</TABLE>

   Following is an overall summary of the stock warrants activity, including
warrants issued to employees (see Note H):
<TABLE>
<CAPTION>
                                              2002                            2001                           2000
                                  ------------------------------  ------------------------------ ------------------------------
                                                    Weighted                        Weighted                       Weighted
                                      Number        average           Number        average           Number        average
                                        of          exercise            of          exercise            of         exercise
                                      shares         price            shares         price            shares         price
                                  -------------- ---------------  -------------- --------------- --------------- --------------
<S>                               <C>            <C>              <C>            <C>             <C>             <C>
Outstanding at beginning
  of year                            2,698,703      $   1.75         2,303,203      $   1.14          2,605,500     $   1.07
Granted                              1,915,000          1.59           973,000          2.39            130,000         1.52
Exercised                             (200,000)         1.15          (420,196)         1.02           (402,297)        0.71
Forfeited                                    0          0.00                 0          0.00                  0         0.00
Expired                                (95,000)         3.04           (77,304)         2.01            (30,000)        1.07
                                  -------------- ---------------  -------------- --------------- --------------- --------------
Outstanding at end of year           4,318,703      $   1.62         2,778,703      $   1.75          2,303,203     $   4.88
                                  ============== ===============  ============== =============== =============== ==============

Options exercisable at
  end of year                        4,318,703      $   1.66         2,698,703      $   1.75          2,303,203     $   4.88
Weighted average fair
  value of options
  granted end of year                1,915,000      $   1.62           893,000      $   2.39            130,000     $   1.52

</TABLE>
                                      F-21

<PAGE>

                                PREFERRED VOICE

                         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, 2002:

                 Year ending
                  March 31,                                         Amount
                ----------------                                 -------------

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

                                                                    $ 644,378
                                                                 =============


   Total rent expense charged to operations was $202,541, $153,515 and $76,317
for the years ended March 31, 2002, 2001 and 2000, 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. In connection with this agreement, the
Company issued to Proxhill 50,000 warrants to purchase the Company's common
stock at a price of $4.00 per share. The options expired June 3, 2001. 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 - Extinguishment of debt:

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

   During the year ended March 31, 2001, the Company negotiated settlements of
amounts owed to certain of its vendors and employees. The negotiated settlements
resulted in a reduction of the Company's accounts payable and accrued operating
expenses in the amount of $74,375, which has been reported as an extraordinary
item in the accompanying statements of operations.

                                      F-22

<PAGE>

                                PREFERRED VOICE

                         NOTES TO FINANCIAL STATEMENTS


Note M - Operation and management's intent:

   Operating losses
   ----------------

      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.

   Contingency
   -----------

      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 $570,000 for the rights to utilize the Company's software
   applications in certain geographical markets. 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, 2002, the Company had
   completed one installation, and $342,118 remains as deferred revenue.

      On September 25, 2000, KMC notified the Company that the initial
   installation would not be accepted and KMC intends to terminate the
   agreement. In addition, KMC requested the refund of the initial 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 revenue 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 (see Note N).

   Stock offerings
   ---------------

      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.

      On November 21, 2001, the Company closed an offering of 2,420,000 units
   consisting of shares of common stock and warrants to purchase shares of
   common stock at $1.25 per unit, providing net proceeds of $2,849,625 for
   working capital.

   Operations
   ----------

      As of March 31, 2002, the Company has entered into forty 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.

                                      F-23

<PAGE>

                                PREFERRED VOICE

                         NOTES TO FINANCIAL STATEMENTS


Note M - Operation and management's intent (continued):

   Management's intent
   -------------------

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

Note N - Legal matters:

   The Company has filed a suit against KMC Telecom Holdings, Inc. (KMC)
claiming breach of contract (see Note M, Contingency) and, subsequently, KMC
filed a counterclaim also claiming breach of contract. The case is set to begin
in October 2002; however, both parties have been engaged in settlement
discussions, with the current offer involving the payment of no money from
either party and the mutual dismissal of all claims. The Company views the
potential exposure to the counterclaim as minimal and believes that as the
lawsuit progresses, it will result in a positive recovery. Due to the
uncertainty of the outcome, as of March 31, 2002, no accrual for possible gain
from the lawsuit has been made.

                                      F-24