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 Period Ended December 31, 2004.


or


o
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 AvenueSuite 570Dallas, TX

75206(Address of Principal Executive Offices)

(Zip Code)





(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 o




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 - 29,607,493 shares as of February 10, 2005.





Transitional Small Business Format   Yes o   No x










INDEX




**Preferred Voice, Inc.**




Part I.
Financial InformationItem 1.
Financial StatementsBalance Sheets-December 31, 2004 and March 31, 2004.
1Statements of Operations-Three Months Ended December 31, 2004 and 2003 and Nine Months Ended December 31, 2004 and 2003.
2Statements of Cash Flows- Nine Months Ended December 31, 2004 and 2003.
3Notes to Financial Statements - December 31, 2004.
4Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
10Item 3.
Controls and Procedures
13Part II.
Other Information
13Item 1.
Legal Proceedings
13Item 2.
Changes in Securities
13Item 3.
Defaults upon Senior Securities
14Item 4.
Submission of Matters to a Vote of Security Holders
14Item 5.
Other Information
14Item 6.
Exhibits and Reports on Form 8-K
14Signatures

15











**PREFERRED VOICE, INC.**


****


**CONDENSED BALANCE SHEETS**


**DECEMBER 31, 2004 AND MARCH 31, 2004**





**December 31,**

**March 31,****2004**

**2004****(unaudited)**

**(audited)****Assets**Current assets:Cash and cash equivalents

$
255,153

$
64,674Accounts receivable, net of allowance for doubtfulaccounts of $5,325 and $6,325, respectively


127,984


133,542Prepaid expense


4,138


2,851Total current assets

$
387,275

$
201,067Property and equipment:Computer equipment

$
1,624,250

$
1,575,228Furniture and fixtures


32,046


32,046Office equipment


61,044


61,044$
1,717,340

$
1,668,318Less accumulated depreciation


1,071,344


847,415Net property and equipment

$
645,996

$
820,903Other assets:Capitalized software development costs, net ofaccumulated amortization of $928,260 and $872,672, respectively

$
247,183

$
121,528Deposits


4,485


4,485Trademarks and patents, net of accumulatedamortization of $8,677 and $1,819, respectively


87,027


78,532Total other assets

$
338,695

$
204,545Total assets

$
1,371,966

$
1,226,515




**Liabilities and stockholders' equity**Current liabilities:Accounts payable

$
76,976

$
202,079Accrued operating expenses


8,338


239Accrued vacation


7,577


8,565Accrued payroll and payroll taxes


7,829


30,241Current portion - notes payable


13,120


49,041Accrued lawsuit settlement


--


132,293Total current liabilities

$
113,840

$
422,458Long-term liabilities:Notes payable

$
17,551

$
27,459Commitments and contingencies (Note F)Stockholders' equity:Common stock, $.001 par value; 50,000,000 shares authorized; 29,607,493 and 18,607,493 shares issued, respectively

$
29,607

$
18,607Additional paid-in capital


18,938,663


17,846,301Accumulated deficit


(17,726,189
)

(17,086,804
)Treasury stock- 22,500 shares at cost


(1,506
)

(1,506
)Total stockholders' equity

$
1,240,575

$
776,598Total liabilities and stockholders' equity

$
1,371,966

$
1,226,515


**
 *See independent accountants review report.*
 *The accompanying notes are an integral part of these financial statements.*





1


**PREFERRED VOICE, INC.**


****


**CONDENSED STATEMENTS OF OPERATIONS**


**FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003**


****


**Three months**

**Nine months**

**Three months**

**Nine months****ended**

**ended**

**ended**

**ended****December 31,**

**December 31,**

**December 31,**

**December 31,****2004**

**2004**

**2003**

**2003****(unaudited)**

**(unaudited)**

**(unaudited)**

**(unaudited)**Net sales

$
204,249

$
747,297

$
373,724

$
1,292,230Cost of sales


122,926


367,311


128,186


459,048Gross profit

$
81,323

$
379,986

$
245,538

$
833,182General and administrative expenses


398,089


1,078,336


336,951


1,292,599Loss from operations

$
(316,766
)
$
(698,350
)
$
(91,413
)
$
(459,417
)Other income (expense):Interest income

$
--

$
--

$
--

$
247Interest expense


(914
)

(5,608
)

(5,406
)

(10,984
)Negotiated settlement


--


64,573


--


8,413Forgiveness of debt


--


--


--


30,819Gain on sale of assets


--


--


12,409


84,048Other expense


--


--


(1
)

(2,544
)Total other income (expense)

$
(914
)
$
58,965

$
7,002

$
109,999Loss from operations before income taxes

$
(317,680
)
$
(639,385
)
$
(84,411
)
$
(349,418
)Provision for income taxes


--


--


--


--Net loss

$
(317,680
)
$
(639,385
)
$
(84,411
)
$
(349,418
)Per share amounts:Loss from operations

$
(0.01
)
$
(0.02
)
$
(0.01
)
$
(0.02
)Net loss

$
(0.01
)
$
(0.02
)
$
(0.01
)
$
(0.02
)





*See independent accountants review report.*
 *The accompanying notes are an integral part of these financial statements.*







2


PREFERRED VOICE, INC.


**CONDENSED STATEMENTS OF CASH FLOWS**
 **FOR THE NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003**


**2004**

**2003****(unaudited)**

**(unaudited)**Cash flows from operating activities:Cash received from customers

$
817,428

$
1,378,599Cash paid to suppliers and employees


(1,429,169
)

(1,425,974
)Interest received


--


247Interest paid


(5,608
)

(44,303
)Net cash used by operating activities

$
(617,349
)
$
(91,431
)Cash flows from investing activities:Capital expenditures

$
(246,343
)
$
(41,903
)Proceeds from sale of assets


--


125,824Employee advances


--


675Net cash provided (used) by investing activities

$
(246,343
)
$
84,596Cash flows from financing activities:Proceeds from stock issuance

$
1,100,000

$
--Repayment of note payable


(45,829
)

(5,000
)Net cash provided by financing activities

$
1,054,171

$
(5,000
)Net increase (decrease) in cash and cash equivalents

$
190,479

$
(11,835
)Cash and cash equivalents:Beginning of period


64,674


55,760End of period

$
255,153

$
43,925
   Reconciliation of net loss to netcash used by operating activities:Net loss

$
(639,385
)
$
(349,418
)Adjustments to reconcile net loss to net cashused by operating activities:Depreciation and amortization

$
287,100

$
335,332Gain on sale of assets


--


(87,196
)Allowance for doubtful accounts


--


--Impairment of intangibles


--


2,543Fair value of stock warrants issued in exchangefor services


3,362


--Changes in operating assets and liabilities:(Increase) decrease in accounts receivable


5,558


77,956(Increase) decrease in prepaid expenses


(1,287
)

434(Increase) decrease in deposits


--


7,832Increase (decrease) in patents and trademarks


--


(778
)Increase (decrease) in accounts payable


(125,103
)

(39,170
)Increase (decrease) in accrued expenses


(147,594
)

(38,966
)Total adjustments

$
22,036

$
257,987Net cash used by operating activities

$
(617,349
)
$
(91,431
)


**
 *See independent accountants review report.*
 *The accompanying notes are an integral part of these financial statements.*







3


PREFERRED VOICE, INC. NOTES TO FINANCIAL STATEMENTS


**Note A - General organization** :





Preferred Voice, Inc. (the "Company") is a Delaware corporation incorporated in 1992. On February 25, 1997, the Companys stockholders approved changing the name of the Company to better reflect the nature of the Companys business. The Company commenced business on May 13, 1994, and was in the development stage until August 1, 1995. The Company provides 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 accounting policies followed by Preferred Voice, Inc. are set forth in the Companys financial statements that are a part of its March 31, 2004, Form 10KSB and should be read in conjunction with the financial statements for the three and nine months  ended December 31, 2004 , contained herein.





The financial information included herein as of December 31, 2004 , and for the three and nine month periods ended December 31, 2004 and 2003 , has been presented without an audit, pursuant to accounting principles for the interim financial information generally accepted in the United States of America and the rules
of the Securities and Exchange Commission. The Company believes that the disclosures are adequate to make the information presented not misleading. The information presented reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of results for the period.





**Cash and cash equivalents**





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





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





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





**Receivables and credit policies**





Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Unpaid accounts receivable with invoice dates over 30 days old bear no interest.





Accounts receivable are stated at the amount billed to the customer. Customer account balances with invoices dated over 90 days are considered delinquent.





Payments of accounts receivable are allocated to the specific invoices identified on the customers remittance advice or, if unspecified, are applied to the earliest unpaid invoice.





The carrying amount of accounts receivable is reduced by a valuation allowance that reflects managements best estimate of amounts that will not be collected. Management individually reviews all accounts receivable balances that exceed 90 days from invoice date and, based on an assessment of current creditworthiness, estimates that portion, if any, of the balance that will not be collected. Accounts receivable past 90 days due are $17,109 and $13,024 as of December 31, 2004 and March 31, 2004, respectively.








4
 PREFERRED VOICE, INC.
 NOTES TO FINANCIAL STATEMENTS





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





**Capitalized software development**





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





**Depreciation**





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





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





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





Computer equipment


5 yearsFurniture and fixtures


5 yearsOffice 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**





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





**Loss per share**





The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, *Earnings per Share* . SFAS No. 128 reporting requirements replace primary and fully-diluted earnings per share (EPS) with basic and diluted EPS. Basic EPS is calculated by dividing net income or loss (available to common stockholders) by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Since the Company incurred a loss from operations for the periods ended December 31, 2004 and 2003 , no computation of diluted EPS has been performed.





5
 PREFERRED VOICE, INC.
 NOTES TO FINANCIAL STATEMENTS





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





**Income taxes**





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





**Trademarks and patents**





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





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





The Company adopted the provisions of SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets,* effective for periods beginning January 1, 2002 and thereafter. SFAS 144 replaces SFAS 121, *Accounting for the Impairment of Long-Lived Assets for Long-Lived Assets to Be Disposed Of* , and, among other matters, addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 retains the basic provisions of
SFAS 121, but broadens its scope and establishes a single model for long-lived assets to be disposed of by sale.





**Use of estimates**





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





**Reclassification**





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





**Reporting comprehensive income and operating segments**





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





**Stock-based compensation**





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





6
 PREFERRED VOICE, INC.
 NOTES TO FINANCIAL STATEMENTS





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





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





**Gain from extinguishment of debt**





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


****


**Note C - Notes payable:**





Notes payable consist  of the following:


**December 31 2004,**

**March 31, 2004**Note payable, 10% interest rate. Principal and accrued interest was payable on September 30, 2003. Convertible into shares of the Companys common stock at a conversion rate of $2.00 of indebtedness per share of common stock.

$
--

$
36,500Note payable, due in monthly installments of $1,217 including interest at 6% through March 1, 2007. Note is unsecured.


30,671


40,000$
30,671

$
76,500Less current portion


13,120


49,041$
17,551

$
27,459




Interest expense charged to operations related to notes payable was $914 and $5,406 for the three months ended December 31, 2004 and 2003 , respectively.




**Note D - Common stock:**





**Private equity offering**





On May 18, 2004, the Company completed the sale of 11,000,000 shares of common stock and warrants to purchase 5,550,000 shares of common stock of the Company. The warrants are exercisable for 5 years at an exercise price of $0.12 per share of common stock. The sale was a private equity offering that raised $1,100,000 in gross proceeds from existing institutional and individual investors.


****


****


7
 PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS


****


**Note D - Common stock (continued):**





**Stock purchase warrants**





At December 31, 2004 , the Company had outstanding warrants to purchase 13,610,500 shares of the Company's common stock at prices which ranged from $0.10 per share to $3.53 per share. The warrants are exercisable at any time and expire through May 18, 2009. At December 31, 2004 , 13,610,500 shares of common stock were reserved for that purpose.





**Common stock reserved**





At December 31, 2004 , shares of common stock were reserved for the following purposes:




Exercise of stock warrants


13,610,500Exercise of future grants of stock options and stock appreciation rights under the 1994 stock option plan


337,132Exercise of future grants of stock options and stock appreciation rights under the 2000 stock option plan


2,000,00015,947,632




****


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





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




**2004**

**2003**Expected dividend yield


0.00
%

0.00
%Risk-free interest rate


1.00% - 3.79
%

2.28% - 4.13
%Expected life


2.5 - 5 years


2.5 yearsExpected volatility


90% - 197
%

165% - 191
%


8
 PREFERRED VOICE, INC.
 NOTES TO FINANCIAL STATEMENTS




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





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




**Three months****ended**



**Nine months ended****December 31,**



**December 31,****2004**

**2003**

**2004**

**2003**Net loss, as reported

$
(317,680
)
$
(84,411
)
$
(639,385
)
$
(349,418
)Less total compensation expense determined under fair value based method for all awards, net of tax effects


(44,086
)

(6,796
)

(178,296
)

(77,897
)Proforma net loss

$
(361,766
)
$
(91,207
)
$
(817,681
)
$
(427,315
)Loss per common share:As reported

$
(0.01
)
$
(0.01
)
$
(0.02
)
$
(0.02
)Proforma

$
(0.01
)
$
(0.01
)
$
(0.03
)
$
(0.02
)


**Note F - Commitments:**





The Company leases its office facilities and various office equipment under operating leases expiring through December 2005. Following is a schedule of future minimum lease payments required under the above operating leases as of March 31, 2004:




**Year ending****March 31,**

**Amount**2005

$
62,0962006


53,8202007


53,8202008


53,8202009


40,365$
263,921


Total rent expense charged to operations was $17,124, $33,901, $ 45,746 and $51,975 for the three and nine months ended December 31, 2004 and 2003, respectively.













9




**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, including those set forth herein under Managements Discussion and Analysis of Financial Condition and Results of Operations" and those set forth in the Managements Discussion and Analysis of Financial Condition and Results of Operations section of the Form 10-KSB for the fiscal year ended March 31, 2004. Notwithstanding the foregoing, the Company is
not entitled to rely on the safe harbor for forward looking statements under 27A of the Securities Act or 21E of the Exchange Act as long as the Companys stock is classified as a penny stock within the meaning of Rule 3a51-1 of the Exchange Act. A penny stock is generally defined to be any equity security that has a market price (as defined in Rule 3a51-1) of less than $5.00 per share, subject to certain exceptions.





*Overview*





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





We currently generate revenue from two distribution channels master distributors and telecommunications carriers. We believe the distributors will be a source of direct subscriber addition. To date we have service deployment in Miami, Florida, and Chicago, Illinois. Our telecommunications distribution channel is directly with Incumbent Local Exchange Carriers, or local telephone companies, Wireless Communication Carriers, or cell phone companies, and Competitive Local Exchange Carriers, or competitive local telephone companies. This avenue of distribution is extremely attractive because these companies already have the subscriber bases and the infrastructure to service large numbers of subscribers.





Our contracts in most instances are revenue sharing contracts whereby we in most cases 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 sales force focuses on marketing our revenue sharing agreements and, to date, we are providing service to seventeen (17) wireless carriers nationwide. As of December 31, 2004, these seventeen contracts were generating revenues of approximately $68,000 per month from our primary product voice dial. The revenue sharing agreement is the primary method by which we intend to contract with customers to generate revenue going forward but with some services will require a licensing fee to initiate the service.





We have concentrated our efforts in searching for services that our current carrier customers and potential carrier customers would like to provide their customers. We determined that there was a growing trend in mobile entertainment. We therefore contracted with a leading content provider to distribute their library of downloadable wireless games, picture messages, graphics and ring-tones. Our first content project was launched on June 18, 2004 with a full turnkey solution for the carrier that includes secure customer login from the carrier website, viewing of content, download of content, and creation of a billing record for the carriers billing system. This initial introduction to mobile entertainment led us to research the viability of additional personalized entertainment services that could be delivered
through our network. On October 22, 2004 we announced the first commercial launch of a ringback service in the United States with the launch of our Rockin Ringback service. Our personalized ringback service provides a network-based personalized service that enables users to choose an audio file that callers will listen to while the phone is ringing. We believe that since we already have a relationship with the carrier and are integrated with most of these carriers customer service department and billing department that we have an opportunity to introduce new products with minimal integration effort. We will continue to research and either develop or acquire additional services that can be deployed through our platform.





10





We have focused the last twelve months on converting our systems structure to a robust data base system which will allow for scalability and addition of new services to the platform in shorter development cycles than were possible under our previous structure. On September 15, 2004 we announced the release of My Phone Services Suite, which incorporates our network address book, network voice dialing, Push2Connect, and Rockin Ringback services into one user-centric service that allows the subscriber to personalize the look and feel of their communications service especially for their personality. Revenue from these new products is expected to be slow with no guarantees of market and/or customer acceptance. We also believe that we will continue to see increased competition that along with many
other factors may have an impact on the company and its products.





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





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


·
establish and maintain relationships with phone companies;


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


·
achieve user acceptance for our services;


·
generate reasonable margins on our services;


·
continue to deploy and install VIP systems on a timely and acceptable schedule;


·
respond to competitive market developments;


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


·
continually update our product offerings to meet the needs of consumers.





Failure to achieve these objectives could adversely affect our business, operating results and financial condition. Increased competition from other voice activated providers and the impact of voice activated dialing features available in cell phones can and have impacted our business.




*Results of Operations*





We recorded a net loss of $639,385 or $0.02 per share, for the nine-month period ended December 31, 2004, compared to a net loss of $349,418 or $0.02 per share, for the nine-month period ended December 31, 2003. For the three-month period ended December 31, 2004, we recorded a net loss of $317,680, or $.01 per share compared to a net loss of $84,411 or $.01 per share for the three-month period ended December 31, 2003.





*Total Sales*




Total revenue for the nine-month period ended December 31, 2004, was $747,297 compared to $1,292,230 for the nine-month period ended December 31, 2003. Total revenue for the three-month period ended December 31, 2004, was $204,249 compared to $373,724 for the three-month period ended December 31, 2003. Revenues in both the nine-month and three-month periods for both years consisted of revenue sharing receipts from our customer phone companies and billing our direct end-users for individual services. The decrease of revenues reflects loss of subscribers in the companys all bill program.





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We anticipate that revenues from the sale of our services will grow very gradually throughout fiscal year 2005 and into fiscal year 2006 as we remarket our new suite of services in the service areas for the local telephone companies and cell phone companies which have already signed revenue sharing agreements.





*Cost of Sales*





Cost of sales for the nine-month period ended December 31, 2004 was $367,311 compared to $459,048 for the nine-month period ended December 31, 2003. Cost of sales for the three-month period ended December 31, 2004 was $122,926 compared to $128,186 for the three-month period ended December 31, 2003. Cost of sales consisted entirely of costs for network infrastructure such as collocations, connectivity, system access and long distance to end-users during both periods.





*Selling, General and Administrative*




Selling, general and administrative expenses for the nine-month period ended December 31, 2004 were $1,078,336 compared to $1,292,599 for the nine-month period ended December 31, 2003. Selling, general and administrative expenses for the three-month period ended December 31, 2004 were $398,089 compared to $336,951 for the three-month period ended December 31, 2003. The decrease from 2003 to 2004, are due to decreases in staffing. We expect that selling, general and administrative expenses will remain steady through fiscal year 2005, such expenses to include costs related to the number of employees, office space requirements 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 development costs include direct costs incurred subsequent to establishment of technological feasibility for significant product enhancements. During the nine-month periods ended December 31, 2004 and 2003, software development costs capitalized were $ 195,517 and $ 14,123 respectively. The amortization of capitalized software development costs for the nine-month periods ended December 31, 2004 and 2003 was $ 62,958 and $ 107,676 respectively.





*Other Income and Expense*





During the nine month period ended December 31, 2003, the Company made a sale of equipment to two customers that generated one-time net revenue of $84,048. The company was also able to negotiate settlement of outstanding accounts payable for the periods ended December 31, 2004 and 2003 of $64,573 and $39,232 respectively.





*Income Taxes*





As of December 31, 2004, we had cumulative federal net operating losses of approximately $17 million, which can be used to offset future income subject to federal income tax through the fiscal year 2024. Net operating loss limitations may be imposed if changes in our stock ownership create a change of control as provided in Section 382 of the Internal Revenue Code of 1986.





*Liquidity and Capital Resources*





Our cash and cash equivalents at December 31, 2004 were approximately $255,153 an increase of $190,479 from $64,674 at March 31, 2004. We have relied primarily on the issuance of stock and warrants to fund our operations since January of 1997 when we sold our long-distance resale operation.





12





On May 18, 2004, pursuant to Section 4(2) of the Securities Act and Regulation D thereunder, we closed an offering of 220 units consisting of Fifty Thousand (50,000) shares of the common stock of the Company and a warrant to purchase Twenty-Five Thousand shares of common stock at a purchase price of $5,000 per unit for an aggregate of $1,100,000.





Our revenues are approximately $68,000 per month and we expect these to continue to rise slowly as we continue to deploy new customers and our current customers continue to provide services to their customers.





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.





*Future Obligations*





We project our working capital needs to be $750,000 over the next six months for corporate overhead and equipment purchases to continue to deploy our services to carrier customers. Management does not believe that current cash and cash equivalents and cash that may be generated from operations will be sufficient to meet these anticipated capital requirements and to finance steady growth for the next six months. Such projections have been based on revenue trends from current customers and customers which are already under contract utilizing the revenue rates that we have experienced over the past six months with our currently installed customers and projected cash requirements to support installation, sales and marketing, and general overhead. We may be forced to raise additional capital through the issuance of
new shares, the exercise of outstanding warrants, or reduce our current overhead. However, any projections of future cash needs and cash flows are subject to substantial uncertainty.




**Item 3. Controls and Procedures**




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





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





**PART II.**  **OTHER INFORMATION**





Item 1.
Legal Proceedings.





We are not a party to any material legal proceedings.





Item 2.
Changes in Securities and Use of Proceeds.





(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*


**


*None*





13


Item 3.  Defaults upon Senior Securities.
 
 None.
 
 Item 4.  Submission of Matters to a Vote of Security Holders.
 
 None
 
 Item 5.  Other Information.
 
 None
 
 Item 6. Exhibits and Reports on Form 8-K
 
 (a)  *Exhibits*
 
 Exhibit
 Number Exhibit Description
 
 31.1
Certification of Chief Executive Officer 
 31.2
Certification of Chief Financial Officer 
 32.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 
 32.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 
 
 *(a)*
*Reports on Form 8-K* 
 None
 
   14    **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, 2005
By:
/s/ Latif M. NathaniDate
Latif M. NathaniChairman and Chief Executive Officer
(Principal Executive Officer)
 
 
 15