United States
                       Securities and Exchange Commission
                             Washington, D. C. 20549

                                   Form 10-QSB

{X}  Quarterly  Report  Pursuant  to  Section  13 or 15 (d)  of  the  Securities
     Exchange Act of 1934 for the Quarterly Period Ended December 31, 2001.

                                       or

{ }  Transition  Report  Pursuant  to  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.

         Delaware                                      75-2440201
-----------------------------------         ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
  incorporation or organization)

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

                                 (214) 265-9580
--------------------------------------------------------------------------------
              (Registrant's Telephone Number, including area code.)

                                 Not Applicable
--------------------------------------------------------------------------------
              (Former name, Former Address and Former Fiscal year,
                         if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such shorter  periods that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.
             Yes      X                No
                 ---------------          ----------------

                      Applicable Only to Corporate Issuers

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
Common Stock, as of the latest practical date.

Common Stock, $ 0.001 Par Value - 18,407,493 shares as of January 31, 2002.

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




<PAGE>

<TABLE>
<CAPTION>


                                      INDEX


                              Preferred Voice, Inc.

<S>      <C>                                                                                    <C>

Part I.  Financial Information                                                                   1

Item 1.  Financial Statements                                                                    1

         Balance Sheets-December 31, 2001, December 31, 2000 and March 31, 2001.                 1

         Statements of Operations-Three Months Ended December 31, 2001 and
         2000, and Nine Months Ended December 31, 2001 and 2000, and for the
         Year Ended March 31, 2001.                                                              3

         Statements of Cash Flows-Nine Months Ended December 31, 2001 and 2000
         and for the Year Ended March 31, 2001.                                                  4

         Notes to Financial Statements - December 31, 2001.                                      6

Item 2.  Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                                         24

Part II. Other Information                                                                      29

Item 1.  Legal Proceedings                                                                      29

Item 2.  Changes in Securities                                                                  29

Item 3.  Defaults upon Senior Securities                                                        29

Item 4.  Submission of Matters to a Vote of Security Holders                                    29

Item 5.  Other Information                                                                      30

Item 6.  Exhibits and Reports on Form 8-K                                                       30

Signatures                                                                                      31


</TABLE>

<PAGE>

Part I.  FINANCIAL INFORMATION

Item 1.  Financial Statements
<TABLE>
<CAPTION>

                                                     Preferred Voice, Inc.

                                                        Balance Sheets
                                         December 31, 2001 and 2000 and March 31, 2001

                                                         December 31,             December 31,             March 31,
                                                             2001                     2000                   2001
                                                         (unaudited)              (unaudited)              (audited)
                                                      -------------------      -------------------     ------------------

          Assets
<S>                                                        <C>                      <C>                    <C>

Current assets:
    Cash and cash equivalents                              $   2,347,418            $   1,018,319          $   1,735,752
    Accounts receivable, net of allowance
       for doubtful accounts of $ -0-, $-0-
       and $-0-, respectively                                    203,274                    7,527                 39,141
    Employee advances                                              1,174                    1,573                    922
    Inventory                                                          0                   47,785                 49,085
    Prepaid expenses                                                 180                  761,306                    493
                                                      -------------------      -------------------     ------------------

          Total current assets                           $     2,552,046            $   1,836,510          $   1,825,393
                                                      -------------------      -------------------     ------------------

Property and equipment:
   Computer equipment                                    $     1,478,479            $     752,128          $     882,960
   Furniture and fixtures                                         42,691                   42,691                 42,691
   Office equipment                                               62,997                   59,774                 61,889
                                                      -------------------      -------------------     ------------------

                                                         $     1,584,167            $     854,593          $     987,540
   Less accumulated depreciation                                 342,224                  158,027                187,807
                                                      -------------------      -------------------     ------------------

          Net property and equipment                     $     1,241,943            $     696,566          $     799,733
                                                      -------------------      -------------------     ------------------

Other assets:
   Capitalized software development costs,
      net of accumulated amortization of
      $520,798, $-0- and $324,747, respectively          $       381,609            $     395,294          $     380,173
   Deposits                                                       23,019                   90,195                 14,093
   Trademarks                                                     53,314                   47,313                 48,533
                                                      -------------------      -------------------     ------------------

          Total other assets                             $       457,942            $     532,802          $     442,799
                                                      -------------------      -------------------     ------------------

          Total assets                                   $     4,251,931            $   3,065,878          $   3,067,925
                                                      ===================      ===================     ==================

</TABLE>

                                       1
<PAGE>

<TABLE>
<CAPTION>


                                                     December 31,             December 31,               March 31,
                                                         2001                     2000                     2001
                                                      (unaudited)             (unaudited)                (audited)
                                                  --------------------     -------------------       ------------------

          Liabilities and stockholders' equity
<S>                                                      <C>                 <C>                          <C>

Current liabilities:
    Accounts payable                                     $    277,837        $    177,965                 $    338,270

    Accrued operating expenses                                133,901              22,224                       39,379
    Accrued vacation                                           20,540              26,969                       22,194
    Accrued payroll and payroll taxes                           1,518               1,606                        3,589
    Accrued interest payable                                   41,465              43,301                       44,451
    Deferred revenue                                          554,618             342,118                      342,118
    Current maturities of long-term debt                       20,000              30,000                       30,000
    Note payable                                               50,866              50,866                       50,866
                                                  --------------------     -------------------       ------------------

          Total current liabilities                      $  1,100,745        $    695,049                 $    870,867
                                                  --------------------     -------------------       ------------------


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

Commitments (Note J)


Stockholders' equity:
   Common stock, $0.001 par  value
      50,000,000 shares authorized; shares
      issued 18,389,689, 14,780,086 and
      15,672,586, respectively                           $     18,390        $     14,780                 $     15,674
   Additional paid-in capital                              17,708,809          12,126,947                   13,856,051
   Accumulated deficit                                   (14,624,508)         (9,769,030)                 (11,672,799)
   Treasury stock - 22,500, 385,224 and
      385,244 shares at cost, respectively                    (1,505)             (1,868)                      (1,868)
                                                  --------------------     -------------------       ------------------

    Total stockholders' equity                           $  3,101,186        $  2,370,829                 $  2,197,058
                                                  --------------------     -------------------       ------------------

     Total liabilities and stockholders'
       equity                                            $  4,251,931        $  3,065,878                 $  3,067,925
                                                  ====================     ===================       ==================


</TABLE>


                                       2

<PAGE>



                              Preferred Voice, Inc.

                            Statements of Operations
              For The Three Months Ended December 31, 2001 and 2000
            And For the Nine Months Ended December 31, 2001 and 2000
                      And For the Year Ended March 31, 2001
<TABLE>
<CAPTION>


                                               Three Months Ended                    Nine Months Ended
                                         December 31,       December 31,      December 31,      December 31,          March 31,
                                           2001                 2000              2001              2000                 2001
                                       (Unaudited)          (Unaudited)        (Unaudited)       (Unaudited)          (Audited)
                                     -----------------    -----------------  ----------------  ----------------    -----------------
<S>                                       <C>                 <C>               <C>               <C>                  <C>

Sales                                     $   565,402         $      8,588      $    860,582      $     66,646         $    138,097

  Cost of Sales                               194,002               19,770           267,547            80,284              101,188
                                     -----------------    -----------------  ----------------  ----------------    -----------------

  Gross Profit (loss)                     $   371,400         $   (11,182)      $    593,035      $   (13,638)         $     36,909
                                     -----------------    -----------------  ----------------  ----------------    -----------------

Costs and Expenses:
  General & Administrative                $ 1,150,502         $  1,019,492      $  3,540,944      $  2,821,188         $  4,011,608
  Interest Expense                              1,950                1,150             3,800             3,450                4,600
                                     -----------------    -----------------  ----------------  ----------------    -----------------

  Total Costs and Expenses                $ 1,152,452         $  1,020,642      $  3,544,744      $  2,824,638         $  4,016,208
                                     -----------------    -----------------  ----------------  ----------------    -----------------

Gain/(Loss) Before Income Tax             $ (781,052)         $(1,031,824)      $(2,951,709)      $(2,838,276)         $(3,979,299)

Other Income (Expense):
  Loss From Impairment  of Assets                 -0-                  -0-               -0-               -0-            (837,120)
                                     -----------------    -----------------  ----------------  ----------------    -----------------

Gain/(Loss) From Operations Before
  Income Taxes/Extraordinary Items        $  (781,052)        $(1,031,824)      $(2,951,709)      $(2,838,276)        $ (4,816,419)

Provision for Income Tax                          -0-                  -0-               -0-               -0-                  -0-
                                     -----------------    -----------------  ----------------  ----------------    -----------------

Loss Before Extraordinary Item            $  (781,052)        $ (1,031,824)     $ (2,951,709)     $ (2,838,276)       $ (4,816,419)
                                     =================    =================  ================  ================    =================

Extraordinary Item:
 Gain from Extinguishment of Debt                 -0-                  -0-               -0-               -0-                  -0-
 (less applicable income taxes
   of -0-)

Net Loss                                  $ (781,052)         $ (1,031,824)     $ (2,951,709)     $ (2,838,276)       $ (4,816,419)
                                     =================    =================  ================  ================    =================


Per Share Amounts:

 Gain/(Loss) from Operations              $    (0.05)         $      (0.07)     $      (0.18)     $      (0.21)       $      (0.35)

 Gain from Extinguishment of Debt         $        -          $          -      $          -      $          -        $        0.01

Net Gain/Loss (Per Share)                 $    (0.05)         $      (0.07)     $      (0.18)     $      (0.21)       $      (0.34)

</TABLE>

                                       3
<PAGE>


<TABLE>
<CAPTION>
                                                   Preferred Voice, Inc.

                                                  Statement of Cash Flows

                                   For the Nine Months Ended December 31, 2001 and 2000
                                           And For the Year Ended March 31, 2001


                                                                     December 31,       December 31,          March 31,
                                                                         2001               2000                2001
                                                                      (Unaudited)        (Unaudited)          (Audited)
                                                                    ----------------  ------------------  ------------------
      <S>                                                              <C>               <C>                 <C>

      Cash Flows from Operating Activities:
        Cash Received from customers                                   $    908,949      $       12,596      $       54,006
        Cash Paid to suppliers and employees                            (3,413,900)         (2,773,083)         (3,643,002)
                                                                    ----------------  ------------------  ------------------

               Net Cash used by Operating Activities                   $(2,504,951)      $  (2,760,487)      $  (3,588,996)
                                                                    ----------------  ------------------  ------------------

      Cash Flows from Investing Activities:
         Capital Expenditures                                          $  (775,473)      $    (773,181)      $    (948,089)
         Employee Advances                                                    (252)             (1,573)               (922)
                                                                    ----------------  ------------------  ------------------

               Net Cash used by Investing Activities                   $  (775,725)      $    (774,754)      $    (949,011)
                                                                    ----------------  ------------------  ------------------

      Cash Flows from Financing Activities:
         Proceeds from Notes Payable                                   $     50,000      $      -0-          $       -0-
         Proceeds from Sale of Stock                                      4,075,328           3,192,936           4,913,135
         Stock Issuance Costs                                             (232,986)            (12,667)            (12,667)
                                                                    ----------------  ------------------  ------------------

               Net Cash provided by Financing Activities               $  3,892,342      $    3,180,269      $    4,900,468
                                                                    ----------------  ------------------  ------------------

      Net Increase (Decrease) in Cash and
          Cash Equivalents                                             $    611,666      $    (354,972)      $      362,461

      Cash and Cash Equivalents:
         Beginning of Period                                              1,735,752           1,373,291           1,373,291
                                                                    ----------------  ------------------  ------------------

         End of Period                                                 $  2,347,418      $    1,018,319      $    1,735,752
                                                                    ================  ==================  ==================

      Supplemental Schedule of non-cash
      investing and financing activities:

           Issuance of Common Stock in
            Exchange for Debt                                          $     16,786      $       15,196      $       -0-


</TABLE>

                                       4
<PAGE>



<TABLE>
<CAPTION>


                                                                 December 31,         December 31,          March 31,
                                                                     2001                 2000                 2001
                                                                 (Unaudited)          (Unaudited)           (Audited)
                                                              -------------------  -------------------  -------------------
      <S>                                                          <C>                 <C>                  <C>


      Reconciliation of Net Gain/(Loss) to Net
           Cash used by Operating Activities:

      Net Gain/(Loss)                                              $ (2,951,709)        $ (2,838,276)       $  (4,742,044)
                                                              -------------------  -------------------  -------------------

       Adjustments to Reconcile Net Loss to Net Cash
           used by Operating Activities:

         Depreciation                                              $     331,827        $    191,190        $      278,052
         (Gain) Loss on Sale of Fixed Assets                             (3,291)                  -0-                  -0-
         Impairment Loss                                                     -0-                  -0-              837,120
         Fair Value of Stock Warrants Issued
              In Exchange for Services                                       -0-                  -0-              131,162

         Changes in Assets and Liabilities:
            (Increase) Decrease in Accounts Receivable                 (164,133)              (3,603)             (35,217)
            Increase (Decrease) in Inventory                              49,085               36,939               35,639
            Increase (Decrease) in Customer Deposits                     (8,926)              (5,081)              (5,081)
            (Increase) Decrease in Prepaid Expenses                          313                (288)                (493)
            (Increase) Decrease in Patents                               (4,781)             (39,841)             (41,061)
            Increase (Decrease) in Accounts Payable                     (60,433)             (79,657)             (40,715)
            Increase (Decrease) in Accrued Expense                        94,597               27,004               42,516
            (Increase) Decrease in Deposits                              212,500             (48,874)             (48,874)
                                                              -------------------  -------------------  -------------------



                   Total Adjustments                               $     446,758       $       77,789       $    1,153,048
                                                              -------------------  -------------------  -------------------

      Net Cash used by Operating Activities                        $ (2,504,951)       $  (2,760,487)       $  (3,588,996)
                                                              ===================  ===================  ===================


</TABLE>


                                       5
<PAGE>


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:

   Basis of presentation

       The  financial  statements  of the  Company  contained  herein  have been
    prepared  by the  Company  pursuant  to the  rules  and  regulations  of the
    Securities  and Exchange  Commission  (the "SEC").  The quarterly  financial
    information  included  herein  is  unaudited;  however,  in the  opinion  of
    management,  all  adjustments  necessary  for a  fair  presentation  of  the
    financial statements have been made. All such adjustments, in the opinion of
    management,  are of a normal recurring nature. The results of operations for
    the periods  presented are not  necessarily  indicative of the results to be
    expected for the full fiscal year.

        Certain  information  and  footnote  disclosures  normally  included  in
    financial  statements  prepared in  accordance  with  accounting  principles
    generally  accepted have been  condensed or omitted  pursuant to the interim
    reporting rules of the SEC. The interim financial  statements should be read
    in conjunction with the audited financial statements and related notes as of
    March 31, 2001,  included in the  Company's  Form 10-KSB,  as amended by the
    Company's Form 10-KSB/A.

   Cash and cash equivalents

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

   Accounts receivable

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

   Inventory

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

   Capitalized software development

      The  capitalization of software  development costs begins when a product's
    technological  feasibility has been established and ends when the product is
    available for general release 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 three and nine months  ended  December 31, 2001 and 2000 and year
    ended March 31, 2001,  software  development costs capitalized were $23,090,
    $178,845, $40,267, $296,914 and $338,815,  respectively. The amortization of
    capitalized  software  development costs for the three and nine months ended
    December  31, 2001 and 2000 and the year ended  March 31, 2001 was  $67,355,
    $196,051, $45,480, $127,406 and $184,488, respectively.

                                       6
<PAGE>

   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.















                                       7
<PAGE>


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

      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

   Fair value of financial instruments

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

   Revenue recognition

      The Company is engaged as a provider  of  telecommunication  products  and
   services.  Generally, the Company recognizes revenue under the accrual method
   when its services and products are provided. Payments received from customers
   in advance are deferred and  recognized as revenue when services and products
   are provided. During the nine months ended December 31, 2001, the majority of
   the Company's revenue consisted of revenue sharing receipts.  During the nine
   months  ended  December  31  2000,  the  majority  of the  Company's  revenue
   consisted  of billing  end-users  for  services.  Revenue  sharing  income is
   recognized  when the voice  dialing  services are provided.  Revenue  sharing
   income for the nine months ended  December 31, 2001 and 2000 was $648,742 and
   $7,593, respectively, and $74,779 for the year ended March 31, 2001.

   Advertising expense

      The Company  expenses  advertising  costs when the  advertisement  occurs.
   Total advertising expense amounted to $(2,395),  $6,600,  $38,808 and $62,658
   for the three and nine months ended December 31, 2001 and 2000, respectively,
   and $74,158 for the year ended March 31, 2001.

   Loss per share

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

      Loss  per  share  is  based  on the  weighted  average  number  of  shares
   outstanding  of  16,736,507,  16,015,566,  14,394,862  and 13,746,448 for the
   three and nine months  ended  December 31, 2001 and 2000,  respectively,  and
   13,884,662 for the year ended March 31, 2001.

   Income taxes

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


                                       8
<PAGE>


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

   Amortization

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

   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).

   New accounting pronouncements

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

   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 periods. 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.

Note C - Note payable:

   Note payable consists of the following:
<TABLE>
<CAPTION>

                                                                         December           December           March
                                                                           2001               2000              2001
                                                                       --------------     --------------     -----------
       <S>                                                                <C>               <C>               <C>

       Note payable,  Brite Voice Systems, Inc., dated
           January 31, 1997.  Note is unsecured.                          $ 50,866          $  50,866         $50,866
                                                                       ==============     ==============     ===========


</TABLE>


                                       9
<PAGE>

Note C - Note payable (continued):

      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 the three and nine months  ended  December 31, 2001 and 2000 and for
   the year ended March 31, 2001.


Note D - Long-term debt:

Long-term debt consists of the following:
<TABLE>
<CAPTION>

                                                                                      December            December          March
                                                                                       2001                2000             2001
                                                                                  --------------      --------------    -----------
         <S>                                                                         <C>                 <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.                                                      $ 10,000            $ 20,000        $20,000

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

         Notepayable,  10% interest rate. Principal and accrued interest payable
             commencing September 30, 2002 until maturity 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              0
                                                                                  --------------      --------------    -----------
                                                                                     $70,000             $ 30,000        $30,000
         Less current portion                                                         20,000               30,000         30,000
                                                                                  --------------      --------------    -----------

         Total                                                                       $50,000             $      0        $     0
                                                                                  ==============      ==============    ===========

</TABLE>

   Interest  expense  charged to operations  related to the  long-term  debt was
$1,950,  $3,800,  $1,150 and $3,450 for the three and nine months ended December
31, 2001 and 2000, respectively, and $4,600 for the year ended March 31, 2001.


                                       10
<PAGE>


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 December  31,  2001,  the Company had  outstanding  warrants to purchase
   4,278,703  shares of the  Company's  common stock at prices which ranged from
   $0.50 per share to $2.93 per share.  The warrants are exercisable at any time
   and expire through April 19, 2006. At December 31, 2001,  4,278,703 shares of
   common stock were reserved for that purpose.

   Common stock reserved

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

           Exercise of stock warrants                               4,278,703
           Exercise of future grants of stock options
             and stock appreciation rights under the
             1994 stock option plan                                   297,250
           Exercise of future grants of stock options
             and stock appreciation rights under the
             2000 stock option plan                                 2,000,000
                                                               --------------

                                                                    6,575,953
                                                               ==============


Note F - Income taxes:

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

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


                                       11
<PAGE>


Note F - Income taxes (continued):

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

                                   Three months         Nine months        Three months         Nine months
                                  ended December      ended December      ended December       ended December        March
                                       2001                2001                2000                 2000              2001
                                 ----------------    ----------------     --------------       --------------    --------------
  <S>                                    <C>                  <C>                <C>                <C>              <C>

  Current income taxes                   $      0             $     0            $     0            $       0        $        0

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

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

</TABLE>

   Deferred tax (liabilities) assets consist of the following:
<TABLE>
<CAPTION>

                                                               December 31,      December 31,         March 31,
                                                                   2001              2000                2001
                                                             ----------------- -----------------   -----------------
              <S>                                                <C>               <C>                 <C>


              Accumulated depreciation                           $   (79,000)      $   (28,000)        $   (59,000)
                                                             ----------------- -----------------   -----------------

              Gross deferred tax liabilities                     $   (79,000)      $   (28,000)        $   (59,000)
                                                             ----------------- -----------------   -----------------

              Stock warrant compensation                         $     70,000      $          0        $     70,000
              Accrued liabilities                                       7,000             9,000               8,000
              Start-up expenditures                                         0             1,000                   0
              Net operating loss carryforward                       4,899,000         3,295,000           3,881,000
                                                             ----------------- -----------------   -----------------

              Gross deferred tax assets                          $  4,897,000      $  3,305,000        $  3,959,000
              Valuation allowance                                 (4,818,000)       (3,277,000)         (3,900,000)
                                                             ----------------- -----------------   -----------------

                                                                 $     79,000      $     28,000        $     59,000
                                                             ----------------- -----------------   -----------------
              Net deferred tax assets                            $          0      $          0        $          0
                                                             ================= =================   =================


              The change in the deferred tax valuation
                 allowance is as follows:                        $    918,000      $    985,000        $  1,608,000
                                                             ================= =================   =================

</TABLE>


                                       12
<PAGE>


Note F - Income taxes (continued):

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

   The  Company has  available  at  December  31,  2001,  a net  operating  loss
carryforward of  approximately  $14,408,000,  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 of 1986, as amended.


Note G - Stock option plan:

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

   Under the terms of the plan,  options  granted may be either  nonqualified or
incentive stock options,  and the exercise  price,  determined by the Committee,
may not be less  than the  fair  market  value of a share on the date of  grant.
Stock appreciation  rights granted in tandem with an option shall be exercisable
only to the extent the  underlying  option is  exercisable  and the grant  price
shall be equal to the exercise price of the underlying  option.  At December 31,
2001,  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
December 31, 2001.

   On September  29,  2000,  the Company  adopted an incentive  stock option and
other equity  participation  plan which  permits the issuance of stock  purchase
agreements,  stock awards, incentive stock options,  non-qualified stock options
and stock appreciation rights to selected employees and independent  contractors
of the Company. The plan reserves 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 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 December 31,
2001,  options to purchase 1,011,825 shares at exercise prices of $1.40 to $3.00
per share were  outstanding.  No stock  appreciation  rights had been granted at
December 31, 2001.

    During the year ended March 31, 2001, the Company issued 105,000 warrants to
certain  officers or directors at exercise  prices  ranging from $2.50 to $2.93.
The warrants can be  exercised at any time and expire on various  dates  through
March 31, 2004.


                                       13

<PAGE>


Note H - Proforma information related to 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>

                                                 December 31, 2001      December 31, 2000       March 31, 2001
                                                --------------------   --------------------    -----------------
               <S>                                      <C>                    <C>                   <C>

               Expected dividend yield                 0.00%                  0.00%                 0.00%

               Risk-free interest rate                 2.28%              4.99% - 6.02%         4.14% - 6.35%

               Expected life                     1.5 years to 3.5        2.5 years to 6          1.5 years to
                                                       years                  years               3.5 years

               Expected volatility                     165%                134% - 139%               172%
</TABLE>

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

                              Three months       Nine months        Three months         Nine months        March 31,
                             ended December     ended December     ended December      ended December          2001
                                31, 2001           31, 2001           31, 2000            31, 2000
                            -----------------  -----------------  ------------------  ------------------ ----------------
   <S>                        <C>               <C>               <C>                    <C>               <C>

   Net loss:
     As reported              $    (781,052)    $   (2,951,709)   $     (1,031,824)      $  (2,838,276)    $  (4,742,044)
                            =================  =================  ==================  ================== ================

     Proforma                 $  (1,076,889)    $    3,270,656)   $     (1,074,041)      $  (2,944,761)    $  (5,384,131)
                            =================  =================  ==================  ================== ================

   Loss per common share:
     As reported              $       (0.05)    $        (0.18)   $          (0.07)      $       (0.21)    $       (0.34)
                            =================  =================  ==================  ================== ================

     Proforma                 $       (0.06)    $        (0.20)   $          (0.07)      $       (0.21)    $       (0.39)
                            =================  =================  ==================  ================== ================

</TABLE>

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




                                       14
<PAGE>


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

   Following is a summary of the stock award and incentive plans and warrants:
<TABLE>
<CAPTION>

                                                               2000 stock award and incentive plan
                                       ------------------------------------------------------------------------------------
                                           Three months ended            Nine months ended
                                              December 2001                December 2001                March 2001
                                       ------------------------------------------------------------------------------------
                                                        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 period        968,000     $  1.65          576,000         $1.45              0       $ 1.45

Granted                                    47,825        1.50          567,825          1.85        576,000         1.88
Exercised                                       0        0.00                0          0.00              0         0.00
Expired                                         0        0.00                0          0.00              0         0.00
Forfeited                                 (4,000)        1.40        (132,000)          1.60              0       (1.61)
                                       ------------------------------------------------------------------------------------

Outstanding at end of period            1,011,825     $  1.65        1,011,825         $1.65        576,000       $ 1.66
                                       ====================================================================================

Options exercisable at end of period      222,000     $  1.40          222,000         $1.40        190,666       $ 1.45

Weighted average fair value of
   options granted during the period       47,825     $  1.22          567,825         $0.84        576,000       $ 1.21


</TABLE>

<TABLE>
<CAPTION>

                                                   2000 stock award and incentive plan
                                       ----------------------------------------------------------
                                           Three months ended            Nine months ended
                                              December 2000                December 2000
                                       ----------------------------------------------------------
                                                        Weighted                     Weighted
                                           Number        average       Number         average
                                             of         exercise         of          exercise
                                           shares         price        shares          price
                                       ----------------------------------------------------------
<S>                                    <C>               <C>        <C>               <C>

Outstanding at beginning of period           0           $0.00            0           $0.00

Granted                                448,000            1.40      448,000            1.40
Exercised                                    0            0.00            0            0.00
Expired                                      0            0.00            0            0.00
Forfeited                                    0            0.00            0            0.00
                                       ----------------------------------------------------------

Outstanding at end of period           448,000           $1.40      448,000           $1.40
                                       ==========================================================


Options exercisable at end of period         0             N/A            0             N/A

Weighted average fair value of
   options granted during the period         0             N/A            0             N/A


</TABLE>


                                       15
<PAGE>


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

                                                               1994 stock award and incentive plan
                                       ------------------------------------------------------------------------------------
                                           Three months ended           Nine months ended
                                              December 2001                December 2001                March 2001
                                       ------------------------------------------------------------------------------------
                                                        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 period        385,334        $ 1.02       412,000        $  1.02       406,500         $ 0.96

Granted                                         0          0.00             0           0.00        15,000           2.50
Exercised                                (88,334)        (0.94)      (88,334)         (0.94)       (9,500)         (1.00)
Expired                                         0          0.00             0           0.00             0           0.00
Forfeited                                       0        (1.50)      (26,666)         (1.16)             0           0.00
                                       ------------------------------------------------------------------------------------

Outstanding at end of period              297,000        $ 1.02       297,000        $  1.02       412,000         $ 0.96
                                       ====================================================================================

Options exercisable at end of period      263,667        $ 0.94       263,667        $  0.94       392,000         $ 0.96

Weighted average fair value of
   options granted during the period            0           N/A             0           N/A         15,000           2.09

</TABLE>

<TABLE>
<CAPTION>

                                                  1994 stock award and incentive plan
                                       ----------------------------------------------------------
                                           Three months ended            Nine months ended
                                              December 2000                December 2000
                                       ----------------------------------------------------------
                                                        Weighted                     Weighted
                                           Number       average        Number         average
                                             of         exercise         of          exercise
                                           shares        price         shares         price
                                       ----------------------------------------------------------
<S>                                       <C>            <C>        <C>               <C>

Outstanding at beginning of period        412,000        $0.92      412,000           $0.92


Granted                                      0            0.00            0            0.00
Exercised                                    0            0.00            0            0.00
Expired                                      0            0.00            0            0.00
Forfeited                                    0            0.00            0            0.00
                                       ----------------------------------------------------------

Outstanding at end of period              412,000        $0.92      412,000           $0.92
                                       ==========================================================

Options exercisable at end of period      295,333        $0.92      295,333           $0.92

Weighted average fair value of
   options granted during the period            0         N/A        15,000           $2.13


</TABLE>

                                       16
<PAGE>


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

   Following is a summary of warrants issued to employees:
<TABLE>
<CAPTION>

                                                                            Warrants
                                       ------------------------------------------------------------------------------------
                                           Three months ended           Nine months ended
                                              December 2001               December 2001                 March 2001
                                       ------------------------------------------------------------------------------------
                                                        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 period        825,000     $1.00            825,000        $1.10         800,000       $  0.96

Granted                                   160,000      1.50            160,000         1.50          25,000          2.50
Exercised                                       0      0.00                  0         0.00               0        (1.00)
Expired                                         0      0.00                  0         0.00               0          0.00
                                       ------------------------------------------------------------------------------------

Outstanding at end of period              985,000     $1.04            985,000        $1.04         825,000       $  0.96
                                       ====================================================================================


Options exercisable at end of period      985,000     $1.04            985,000        $1.04         825,000       $  1.10

Weighted average fair value of
   options granted during the period      160,000     $1.50            160,000        $1.50          25,000       $  2.50

</TABLE>

<TABLE>
<CAPTION>

                                                               Warrants
                                       ---------------------------------------------------------
                                           Three months ended           Nine months ended
                                              December 2000               December 2000
                                       ---------------------------------------------------------
                                                        Weighted                    Weighted
                                           Number        average       Number        average
                                             of         exercise         of         exercise
                                           shares         price        shares         price
                                       ---------------------------------------------------------

<S>                                       <C>            <C>           <C>           <C>

Outstanding at beginning of period        905,000        $1.10         800,000       $0.96

Granted                                      0            0.00         105,000        2.50
Exercised                                    0            0.00            0           0.00
Expired                                      0            0.00            0           0.00
                                       ---------------------------------------------------------


Outstanding at end of period              905,000        $1.10         905,000       $1.10
                                       =========================================================

Options exercisable at end of period      905,000        $1.10         905,000       $1.10

Weighted average fair value of
   options granted during the period            0         N/A          105,000       $1.96

</TABLE>

                                       17
<PAGE>

Note I - Stock warrants:

   During the year ended March 31, 2001, the Company issued 151,035  warrants to
certain service  providers and business partners at exercise prices ranging from
$0.84 to $3.53.  The warrants can be exercised at any time and expire at various
dates through August 24, 2006.

   In accordance with SFAS No. 123, the Company  accounts for warrants issued to
non-employees  at fair value of the  warrants  at the grant  date.  The  Company
recognized $131,162 as compensation  expense and $120,320 as stock issuance cost
during  the  year  ended   March  31,  2001   related  to  warrants   issued  to
non-employees.   No  warrants  were  issued  and  no  compensation  expense  was
recognized by the Company  during the periods  ended  December 31, 2001 and 2000
with  respect to warrants  issued to  non-employees  in  exchange  for goods and
services.

   For the three and nine months ended  December 31,  2001,  the Company  issued
1,297,500  and  1,495,000  warrants,   respectively  in  connection  with  stock
offerings.  These  warrants  were not issued in exchange for goods and services;
therefore,  no  compensation  expense was  recognized by the Company  during the
three and nine months ended  December  31, 2001 with  respect to these  warrants
issued in connection with the stock offerings.

   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>

                                            December 2001        December 2000            March 2001
                                         --------------------  -------------------  -----------------------
         <S>                                     <C>                  <C>           <C>

         Expected dividend yield                 N/A                  N/A                   0.00%
         Risk-free interest rate                 N/A                  N/A                   5.69%
         Expected life                           N/A                  N/A           0.5 years to 3.5 years
         Expected volatility                     N/A                  N/A                    172%

</TABLE>

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

                                           Three months ended           Nine months ended
                                             December 2001                December 2001                March 2001
                                       --------------------------- --------------------------------------------------------
                                                       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 period        621,035     $1.76        621,035        $1.76              470,000       $1.36

Granted                                   220,000      1.94        220,000         1.94              151,035        3.01
Exercised                                    0         0.00           0            0.00                 0           0.00
Expired                                      0         0.00           0            0.00                 0           0.00
                                       --------------------------- --------------------------------------------------------

Outstanding at end of period              841,035     $1.76        841,035        $1.76              621,035       $1.76
                                       =========================== ========================================================

Options exercisable at end of period      841,035     $1.76        841,035        $1.76              621,035       $1.76

Weighted average fair value of
   options granted during the period      220,000     $1.94        220,000        $1.94              151,035       $1.67

</TABLE>

                                       18
<PAGE>


Note I - Stock warrants (continued):
<TABLE>
<CAPTION>

                                           Three months ended           Nine months ended
                                             December 2000                 December 2000
                                       ---------------------------  ----------------------------
                                                       Weighted                     Weighted
                                          Number       average           Number      average
                                            of         exercise           of        exercise
                                          shares        price           shares        price
                                       ---------------------------  ----------------------------
<S>                                       <C>        <C>                <C>        <C>

Outstanding at beginning of period        470,000    $1.36              470,000    $1.36

Granted                                      0        0.00                 0        0.00
Exercised                                    0        0.00                 0        0.00
Expired                                      0        0.00                 0        0.00
                                       ---------------------------  ----------------------------

Outstanding at end of period              470,000    $1.36              470,000    $1.36
                                       ===========================  ============================


Options exercisable at end of period      470,000    $1.36              470,000    $1.36

Weighted average fair value of
   options granted during the period         0        N/A                  0        N/A

</TABLE>

   The  following  is a summary  of  warrants  issued in  connection  with stock
offerings:
<TABLE>
<CAPTION>

                                          Three months ended            Nine months ended
                                             December 2001                 December 2001                 March 2001
                                       ---------------------------  ----------------------------  -------------------------
                                                       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 period       1,305,168     $1.64            1,252,668     $1.66         1,033,203     $1.14

Granted                                  1,297,500      1.57            1,495,000      1.95           716,965      2.39
Exercised                                (150,000)    (1.00)            (200,000)    (1.15)         (420,196)    (1.02)
Expired                                      0          0.00             (95,000)    (3.04)          (77,304)    (2.01)
                                       ---------------------------  ----------------------------  -------------------------

Outstanding at end of period             2,452,668     $1.64            2,452,668     $1.64         1,252,668     $1.75
                                       ===========================  ============================  =========================

Options exercisable at end of period     2,452,668     $1.64            2,452,668     $1.64         1,252,668     $1.75

Weighted average fair value of
   options granted during the period     1,297,500     $1.57            1,495,000     $1.95           716,965     $2.39


</TABLE>

                                       19

<PAGE>


Note I - Stock warrants (continued):
<TABLE>
<CAPTION>

                                          Three months ended            Nine months ended
                                             December 2000                 December 2000
                                       ---------------------------  ----------------------------
                                                       Weighted                      Weighted
                                          Number        average         Number        average
                                            of         exercise           of         exercise
                                          shares        price           shares        price
                                       ---------------------------  ----------------------------

<S>                                      <C>           <C>             <C>          <C>

Outstanding at beginning of period       1,077,453     $1.14           1,033,203     $1.14

Granted                                      0          0.00             436,750      2.50
Exercised                                    0          0.00           (342,696)    (1.09)
Expired                                      0          0.00            (49,804)    (3.00)
                                       ---------------------------  ----------------------------
Outstanding at end of period             1,077,453     $1.14           1,077,453     $1.36
                                       ===========================  ============================

Options exercisable at end of period     1,077,453     $1.14           1,077,453     $1.36

Weighted average fair value of
   options granted during the period         0          N/A              436,750     $2.50

</TABLE>

<TABLE>
<CAPTION>

   Following is an overall summary of the stock warrant activity:

                                          Three months ended             Nine months ended
                                             December 2001                 December 2001                 March 2001
                                       ---------------------------  ----------------------------  -------------------------
                                                       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 period       2,831,203      $  1.65        2,698,703     $  1.75         2,303,203    $   1.14

Granted                                  1,597,500         1.59        1,875,000        1.59           893,000        2.39
Exercised                                (150,000)       (1.15)        (200,000)      (1.15)         (420,196)      (1.02)
Expired                                     0            (3.04)         (95,000)      (3.04)          (77,304)      (2.01)
                                       ---------------------------  ----------------------------  -------------------------

Outstanding at end of period             4,278,703      $  1.66        4,278,703     $  1.66         2,698,703        1.75
                                       ===========================  ============================  =========================

Options exercisable at end of period     4,278,703      $  1.66        4,278,703     $  1.66         2,695,703        1.75

Weighted average fair value of
   options granted during the period     1,597,500      $  1.59        1,875,000     $  1.59           893,000        2.39

</TABLE>


                                       20
<PAGE>


Note I - Stock warrants (continued):
<TABLE>
<CAPTION>

                                              Three months ended           Nine months ended
                                                 December 2000                December 2000
                                           --------------------------- -----------------------------
                                                           Weighted                     Weighted
                                              Number       average         Number        average
                                                of         exercise          of         exercise
                                              shares        price          shares         price
                                           --------------------------- -----------------------------

    <S>                                        <C>            <C>           <C>             <C>

    Outstanding at beginning of period         2,452,453      $  1.14       2,303,203       $  1.14


    Granted                                            0         0.00         541,750          2.50
    Exercised                                          0         0.00       (342,696)        (1.09)
    Expired                                            0         0.00        (49,804)        (3.00)
                                           --------------------------- -----------------------------

    Outstanding at end of period               2,452,453      $  1.14       2,452,453       $  1.32
                                           =========================== =============================


    Options exercisable at end of period       2,452,453      $  1.14       2,452,453       $  1.32

    Weighted average fair value of

       options granted during the period               0         N/A          541,750       $  2.50

</TABLE>

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
December 31, 2001:

                               Year ending
                               December 31,                    Amount
                             -----------------              -------------

                                   2002                      $ 196,070
                                   2003                        191,281
                                   2004                        188,620
                                   2005                        189,662
                                   2006                         47,415
                                                            -------------
                                                             $ 813,048
                                                            =============


   Total rent expense charged to operations was $52,510,  $150,633,  $48,605 and
$106,620  for the  three  and nine  months  ended  December  31,  2001 and 2000,
respectively, and $153,515 for the year ended March 31, 2001.



                                       21
<PAGE>


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, 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.

Note M - Operation and management's intent:

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

   On June 3, 1999, the Company entered into a software  license  agreement with
KMC Telecom Holdings, Inc. (KMC). Under the terms of the agreement, KMC paid the
Company initial license fees of $570,000 for the rights to utilize the Company's
software  applications in certain  geographical  markets. The agreement is for a
period of ten years and provides for a total of  thirty-nine  installations  and
grants KMC the ability to add up to 81 additional  installations.  The agreement
also calls for KMC to pay the Company a monthly  license fee ranging from $1,000
to $3,500 per month for each software and hardware installation beginning in the
25th month after each  installation.  As of December 31,  2001,  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  intended  to  terminate  the  software  license
agreement. In addition, KMC requested the refund of the initial license fees and
other amounts paid to the Company.  The Company  believes it has fully  complied
with the terms and conditions of the agreement and intends to vigorously  defend
its position.  Accordingly,  no provision for losses in connection  with the KMC
agreement has been charged to 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.

   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.

                                       22
<PAGE>

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

   As of December 31, 2001,  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.

   On October 11, 2001,  the Company  entered into a  professional  services and
development  contract in which a customer  agreed to pay an  aggregate  contract
amount  of  $500,000.  Sixty  percent  of this  amount  was paid on the date the
contract was executed,  and the remaining  amounts to be paid upon completion of
milestones related to the deliverables.

   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.

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


Note N - Concentrations:

   Concentrations of credit risk

   At December 31, 2001,  the Company had cash balances of  $2,444,926  with one
banking  institution,  which is in excess  of the  federally  insured  amount of
$100,000 per  institution.  These  balances are before  considering  outstanding
items.

    Concentration of business - major customers

   During the three and nine  months  ended  December  31,  2001,  approximately
$406,000 and $565,000 of the Company's  revenue was derived from four customers.
During the year ended March 31, 2001,  approximately  $118,000 of the  Company's
revenue was derived from four different customers.


                                       23

<PAGE>


                 Item 2. Management's Discussion and Analysis of
                  Financial Condition and Results of Operations


         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. 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.


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,  the first  deployment of which is scheduled to be tested in the Miami
area during the fourth quarter of fiscal 2002. The second  distribution  channel
is through contracting 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, as of January 31,
2002,  we had signed  forty-three  (43) local  telephone  company and cell phone
company multi-year contracts.  As of December 31, 2001, ten system locations had
been fully implemented so that the systems installed  pursuant to such contracts
are already  generating  revenues for us. In the month ended  December 31, 2001,
these ten locations generated revenues of approximately  $120,000. Each of these
companies has signed a revenue  sharing  agreement with us. 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 other contracting phone companies are
in the system  acceptance and early  marketing  stages,  and we should  generate
revenues  from these  contracts in the fourth  quarter of the fiscal year ending
March 31,  2002.  Five  other  contracting  phone  companies  have  started  the
installation and implementation phase.

         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

                                       24
<PAGE>

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 its  employees
accessed by the caller  saying an employee  name instead of asking the caller to
punch in an  extension  or spell a name on the key pad. Our services are generic
to cell phone users as well as land line users, children as well as the elderly.
As voice  recognition  becomes  more  prevalent  in  everyday  life,  such as in
computer  programs,   reservation  systems  and  telecommunications  information
systems,  we  believe  the  public  will  be  more  apt to  accept  and  utilize
voice-related features. In order for us to succeed, we must:

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

         o        establish and maintain relationships with phone companies;

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

         o        establish a lead time for delivery of hardware;

         o        achieve user acceptance for our services;

         o        generate reasonable margins on our services;

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

         o        respond to competitive developments;

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

         o        continually   update  our   software  to  meet  the  needs  of
                  consumers.

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

         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.


Results of Operations

         For the nine month  period ended  December 31, 2001,  we recorded a net
loss of $2,951,709,  or $.18 per share,  compared to a net loss of $2,838,276 or
$.21 per share, for the nine month period ended December 31, 2000. For the three
month period ended  December  31, 2001,  we recorded a net loss of $781,052,  or
$.05 per share, compared to a net loss of $1,031,824,  or $.07 per share for the
three month period ended December 31, 2000.

                                       25
<PAGE>

         Total Revenue

         Total revenue for the nine months period ended  December 31, 2001,  was
$860,582 compared to $66,646 for the nine months period ended December 31, 2000.
Of the revenue booked in the nine months period ended December 31, 2001, 74% was
generated from revenue sharing agreements,  24% from network service fees and 1%
from our "Emma the  Perfect  Receptionist"  and "Smart  Line"  services.  Of the
revenue  booked in the nine months  period  ended  December  31,  2000,  74% was
generated from sales of its VIP systems, 15% from service fees for our "Emma the
Perfect  Receptionist"  and "Smart Line" services,  and 11% from revenue sharing
agreements.  Total revenue for the three months  period ended  December 31, 2001
was $565,402  compared to $8,588 for the three months period ended  December 31,
2000. Of the revenue  booked in the three months period ended December 31, 2001,
63% was from revenue sharing agreements,  36% from network service fees and less
than 1% from  service  fees for our "Emma the Perfect  Receptionist"  and "Smart
Line" services.  Of the revenue booked in the three months period ended December
31, 2000, 88% was from revenue sharing  agreements and 12% from service fees for
our "Emma the Perfect Receptionist" and "Smart Line" services.

         We anticipate  that revenues from our revenue  sharing  agreements will
grow  gradually  in the final  quarter of our fiscal year 2002 as we continue to
install  VIP systems in the central  switch  offices of, or to network  into our
VOIP system,  local telephone  companies and cellular phone companies which have
already  signed  revenue  sharing  agreements.  We will  continue  to focus  our
marketing efforts on entering into revenue share agreements with local telephone
companies  and cellular  phone  companies and we do not  anticipate  substantial
revenue  going  forward  from  the sale of  master  distributorships  or  direct
licensing of the VIP systems such as was done in the KMC licensing agreement.


         Cost of Sales

         Cost of sales for the nine months  period  ended  December 31, 2001 was
$267,547 compared to $80,284 for the nine months period ended December 31, 2000.
For the nine months  period ended  December 31, 2001,  56% of the costs were for
network  infrastructure  such  as  collocations,  connectivity,  system  access,
depreciation,  and  long-distance and 44% of the costs were for market awareness
programs;  whereas,  in the comparable period of the previous fiscal year 68% of
the costs were for network  infrastructure  such as collocations,  connectivity,
system access, depreciation, and long-distance and 32% of the costs were for VIP
system  hardware  purchased by KMC.  Cost of sales for the three  months  period
ended  December 31, 2001 was  $194,002  compared to $19,770 for the three months
period ended December 31, 2000,  with the costs being  similarly  distributed as
the cost  distribution  for the nine months  period ended  December 31, 2001 and
2000, respectively.


         Selling, General and Administrative

         Selling, general and administrative expenses for the nine months period
ended  December  31, 2001 was  $3,540,944  compared to  $2,821,188  for the nine
months  period  ended  December 31, 2000.  Selling,  general and  administrative
expenses for the three  months  period  ended  December 31, 2001 was  $1,150,502
compared to $1,019,492  for the three months period ended December 31, 2000. The
difference  in the periods  ended  December 31, 2001 and the same period in 2000
was primarily due to increased  marketing efforts of our revenue sharing program
to wireline and wireless carriers.

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


         Core Technology Enhancements Software Applications and Hardware

         The  capitalization  of  software   development  costs  begins  when  a
product's  technological  feasibility  has been  established  and ends  when the
product is available  for general  release to  customers.  Capitalized  software

                                       26
<PAGE>

development  costs include direct costs incurred  subsequent to establishment of
technological feasibility for significant product enhancements.  During the nine
month periods ended December 31, 2001 and 2000, software development costs equal
to $178,845 and $296,914,  respectively,  were capitalized.  The amortization of
capitalized  software  development costs for the periods ended December 31, 2001
and 2000 was $196,051 and $127,406, respectively.


         Income Taxes

         As of December 31, 2001, we had cumulative federal net operating losses
of  approximately  $14.4  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 our stock ownership  create a change of
control of the company as provided in Section 382 of the  Internal  Revenue Code
of 1986, as amended.


Liquidity and Capital Resources

         Our cash and cash equivalents at December 31, 2001 were $2,347,418,  an
increase of $611,666 from $1,735,752 at March 31, 2001.

         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 a court 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  in 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 in this case.

         In the  quarter  ended  December  31,  2001,  we funded  our short term
working  capital needs from the proceeds of an offering of common stock in April
of 2001,  revenue  generated from our revenue sharing  agreements and a services
contract with VeriSign, Inc. On October 11, 2001, we entered into a Professional
Services and Development  Contract with VeriSign 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.  Sixty percent (60%) of this amount was paid on
the date the contract was  executed,  and the  remaining  amounts are to be paid
upon our  completion  of  milestones  related to the  deliverables.  The revenue
received from this contract  improved our liquidity in the fiscal  quarter ended
December 31, 2001.

                                       27
<PAGE>

         We began  recording  revenues  from our revenue  sharing  agreements in
November of 2000. These revenues are approximately  $100,000 per month, which is
not yet  sufficient to meet our monthly cash  requirements.  However,  we expect
these revenues to continue to rise to a level to meet such  requirements  by May
of 2002.

         Our short term working  capital  needs in the last month of the quarter
ended  December 31, 2001,  and since then have been funded by our sale of shares
of our common  stock and  warrants to purchase  shares of our common  stock.  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.  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 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 $2,200,000 over the next six
months for  corporate  overhead  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  management  projects a positive  cash flow.  Such
projections have been based on (1) continued growth in revenues from our current
customers and (2) new revenues from customers  which are already under contract,
but not yet generating revenues, which projected revenues are based upon

         o        the revenue rates that we have  experienced  over the past six
                  months with our currently installed customers, and

         o        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 if revenues
do not grow as projected. 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 for no additional  consideration to
the  stockholders  who  purchased  their stock in the November 21, 2001 offering
pursuant to the terms of the subscription agreement executed between us and such
stockholders.  Subject  to our  ability  to fund the cost,  we expect to hire or
contract  with  approximately  twenty five (25)  additional  persons  during the
twelve (12) months ending in December  2002,  primarily to support our expanding
marketing   activities,   software   and   hardware   development,   and  system
installations.  At February 12, 2002,  we employed  thirty-three  (33) full time
employees.

                                       28
<PAGE>


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings.

There have been no material  developments in the litigation  styled in the name,
Preferred Voice, Inc. v. KMC Telecom Holdings,  Inc., Cause No. 00-09351,  filed
in  Dallas  County,  Texas.  With  respect  to the  Proxhill  Marketing  Limited
litigation,  filed by Proxhill in Colorado  against us in May of 2001,  Proxhill
sought  injunctive  relief and  declaratory  judgment  claiming that our lawsuit
against them, which was filed in Dallas County, Texas, should have been filed in
the  District  Court of Arapaho  County in  Colorado.  In November  of 2001,  we
received a ruling in the Colorado state action that denied all injunctive relief
sought by  Proxhill  and also denied our motion to dismiss  the  Colorado  state
action.  The  declaratory  relief  that  Proxhill  requested  is still  pending,
therefore, the Colorado action is still pending. In order to preserve our rights
in that case,  we have filed a motion for leave to amend our pleadings to assert
as  counterclaims  the fraud claims we have made  against  Proxhill in the Texas
action. We are not involved in any other material legal proceedings.


Item 2.  Changes in Securities.

(a)      There have been no material changes in securities during the period.

(b)      There have been no material  changes in the class of  securities or the
         rights of the holders of the registered securities.

(c)      Recent Sales of Unregistered Securities

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.


Item 3.  Defaults upon Senior Securities

None.

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

None.

Item 5.   Other Information.

None.

                                       29
<PAGE>

Item 6.  Exhibits and Reports on Form 8-K

(a)      Exhibits

Exhibit
Number               Description of Exhibits

10.1(1)      Form of Subscription Agreement by and between Preferred Voice, Inc.
             and certain signatories thereto (Exhibit 10.1).


(1)      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

We filed a  Current  Report  on Form 8-K on  November  21,  2001 and an  amended
Current  Report  on Form  8-K/A on  December  5, 2001  with the  Securities  and
Exchange  Commission  reporting on our offering that closed on November 21, 2001
in which we issued 2,420,000 units,  consisting of one share of common stock and
one warrant to purchase  one-half (1/2) of a share of common stock as an Item 5,
Other Event. No financial statements were filed with these reports.






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<PAGE>


                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                          PREFERRED VOICE, INC.



      February 14, 2002                    /s/ G. Ray Miller
---------------------------------         --------------------------------------
            Date                          G. Ray Miller
                                          President, Chief Executive Officer and
                                          Chairman of the Board of Directors
                                          (Principal Executive Officer)




      February 14, 2002                   /s/ Mary G. Merritt
----------------------------------        --------------------------------------
                    Date                  Mary G. Merritt
                                          Secretary, Treasurer and Vice
                                          President of Finance
                                          (Principal Financial Officer)













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