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 June 30, 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
  incorporation or organization)                       Identification No.)

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 - 15,744,571 shares as of August 10, 2001.

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-June 30, 2001, June 30, 2000 and March 31, 2001.                                   1

         Statements of Operations-Three Months Ended June 30, 2001 and 2000
         and for the Year Ended March 31, 2001.                                                            3

         Statements of Cash Flows-Three Months Ended June 30, 2001 and 2000
         and for the Year Ended March 31, 2001.                                                            4

         Notes to Financial Statements - June 30, 2001.                                                    6

Item 2.  Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                                                    18

Part II. Other Information                                                                                 21

Item 1.  Legal Proceedings                                                                                 21

Item 2.  Changes in Securities                                                                             21

Item 3.  Defaults upon Senior Securities                                                                   22

Item 4.  Submission of Matters to a Vote of Security Holders                                               22

Item 5.  Other Information                                                                                 22

Item 6.  Exhibits and Reports on Form 8-K                                                                  23

Signatures                                                                                                 24


</TABLE>



<PAGE>


                              PREFERRED VOICE, INC.
                                 BALANCE SHEETS
                             JUNE 30, 2001 AND 2000
                                 MARCH 31, 2001

<TABLE>
<CAPTION>


                                                                     June 30,              June 30,               March 31,
                                                                       2001                  2000                    2001
                                                                    (Unaudited)           (Unaudited)             (Audited)
                                                                  ----------------     ------------------      -----------------
<S>                                                                  <C>                    <C>                   <C>
Assets

    Current Assets:
        Cash and cash equivalents                                    $  1,283,070           $    644,739          $   1,735,752
        Accounts receivable, net of allowance
           for doubtful accounts of $ -0-, $-0-
           and $-0- respectively                                           65,204                  7,020                 39,141
        Employee advances                                                   3,144                      0                    922
        Inventory                                                          49,085                 86,314                 49,085
        Prepaid expenses                                                      203                      0                    493
                                                                  ----------------     ------------------      -----------------

    Total current assets                                             $  1,400,706           $    738,073          $   1,825,393
                                                                  ----------------     ------------------      -----------------

    Property and equipment:
       Computer equipment                                            $    933,428           $    472,927          $     882,960
       Furniture and fixtures                                              42,691                 40,791                 42,691
       Office equipment                                                    61,889                 18,198                 61,889
                                                                  ----------------     ------------------      -----------------

                                                                     $  1,038,008           $    531,916          $     987,540
    Less accumulated depreciation                                       (247,176)              (110,982)              (187,807)
                                                                  ----------------     ------------------      -----------------

    Net property and equipment                                       $    790,832           $    420,934          $     799,733
                                                                  ----------------     ------------------      -----------------

    Other assets:
       Capitalized software development costs,
       net of accumulated amortization of
       $387,421, $194,484 and $343,388, respectively                 $    403,436           $    306,471          $     380,173
       Deposits                                                            15,687                 85,114                 14,093
       Prepaid expenses                                                         0                761,018                      0
       Trademarks                                                          51,091                 11,452                 48,533
       Deferred stock issuance costs                                            0                 32,470                      0
                                                                  ----------------     ------------------      -----------------

    Total other assets                                               $    470,214          $   1,196,525          $     442,799
                                                                  ----------------     ------------------      -----------------

Total assets                                                         $  2,661,752          $   2,355,532          $   3,067,925
                                                                  ================     ==================      =================

</TABLE>



                                       1
<PAGE>

                              PREFERRED VOICE, INC.
                                 BALANCE SHEETS
                             JUNE 30, 2001 AND 2000
                                 MARCH 31, 2001

<TABLE>
<CAPTION>

                                                                   June 30,            June 30,              March 31,
                                                                     2001                2000                   2001
                                                                 (Unaudited)          (Unaudited)            (Audited)
                                                              -------------------   ----------------      -----------------

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

      Current liabilities:
          Accounts payable                                          $    150,671         $  228,285            $   338,270
          Accrued operating expenses                                      36,059             11,999                 39,379
          Accrued vacation                                                31,356             20,203                 22,194
          Accrued payroll and payroll taxes                               41,720              5,631                  3,589
          Accrued interest payable                                        38,815             41,001                 44,451
          Customer deposits                                              342,118            390,992                342,118
          Current maturities of long-term debt                            20,000             30,000                 30,000
          Note payable                                                    50,866             50,868                 50,866
                                                              -------------------   ----------------      -----------------

                 Total current liabilities                          $    711,605         $  778,979            $   870,867
                                                              -------------------   ----------------      -----------------



      Commitments (Note J)




      Stockholders' equity:
         Common stock, $0.001 par  value
            20,000,000 shares authorized; shares
            issued 15,744,571, 13,626,492 and
            15,672,586 respectively                                  $    15,745         $   13,626            $    15,674
         Additional paid-in capital                                   14,652,779          9,310,570             13,856,051
         Accumulated deficit                                        (12,716,872)        (7,745,775)           (11,672,799)
         Treasury stock - 22,500, 385,224 and

            385,224 shares at cost, respectively                         (1,505)            (1,868)                (1,868)
                                                              -------------------   ----------------      -----------------

                  Total stockholders' equity                       $   1,950,147        $ 1,576,553           $  2,197,058
                                                              -------------------   ----------------      -----------------

Total liabilities and stockholders' equity                         $   2,661,752        $ 2,355,532           $  3,067,925
                                                              ===================   ================      =================



</TABLE>

                                       2


<PAGE>


                              PREFERRED VOICE, INC.
                            STATEMENTS OF OPERATIONS
                FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000
                      AND FOR THE YEAR ENDED MARCH 31, 2001

<TABLE>
<CAPTION>

                                                               June 30,             June 30,               March 31,
                                                                 2001                 2000                    2001
                                                              (Unaudited)          (Unaudited)             (Audited)
                                                            ----------------     ----------------       -----------------

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

Sales                                                         $      84,272          $     6,608            $    138,097

Cost of sales                                                        19,211                8,949                 101,188
                                                            ----------------     ----------------       -----------------

          Gross profit (loss)                                 $      65,061          $   (2,341)            $     36,909
                                                            ----------------     ----------------       -----------------

Costs and expenses:
  General and administrative                                  $   1,107,984          $   811,529            $  4,011,608
   Interest expense                                                   1,150                1,150                   4,600
                                                            ----------------     ----------------       -----------------

          Total costs and expenses                            $   1,109,134          $   812,679            $  4,016,208
                                                            ----------------     ----------------       -----------------

Loss from operations                                          $ (1,044,073)          $ (815,020)            $ (3,979,299)
                                                            ----------------     ----------------       -----------------

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

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

Loss from operations before income taxes and
   extraordinary item                                         $  (1,044,073)         $  (815,020)           $  (4,816,419)

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

Loss from operations before extraordinary item                $  (1,044,073)         $  (815,020)           $  (4,816,419)

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

Net loss                                                      $  (1,044,073)         $  (815,020)           $  (4,742,044)
                                                            ================     ================       =================

Per share amounts:

Loss from operations                                          $      (0.07)          $    (0.06)            $      (0.35)
                                                            ================     ================       =================

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

Net loss per share                                            $      (0.07)          $    (0.06)            $      (0.34)
                                                            ================     ================       =================


</TABLE>

                                       3
<PAGE>


                              PREFERRED VOICE, INC.
                            STATEMENTS OF CASH FLOWS
                FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000
                      AND FOR THE YEAR ENDED MARCH 31, 2001

<TABLE>
<CAPTION>

                                                                June 30,                June 30,                March 31,
                                                                  2001                    2000                     2001
                                                               (Unaudited)            (Unaudited)               (Audited)
                                                           --------------------    -------------------     ---------------------

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

Cash Flows from Operating Activities:
   Cash received from customers                                 $       58,209          $      3,512             $      54,006
   Cash paid to suppliers and employees                            (1,174,571)              (792,473)               (3,643,002)
                                                           --------------------    -------------------     ---------------------

         Net cash used by operating activities                  $  (1,116,362)          $   (788,961)            $  (3,588,996)
                                                           --------------------    -------------------     ---------------------

Cash flows from investing activities:
   Capital expenditures                                         $    (117,765)          $   (269,859)            $    (948,089)
   Employee advances                                                   (2,222)                      0                     (922)
                                                           --------------------    -------------------     ---------------------

         Net cash used by investing activities                  $    (119,987)          $   (269,859)            $    (949,011)
                                                           --------------------    -------------------     ---------------------

Cash flows from financing activities:
   Proceeds from issuance of stock                              $      783,667          $     342,935            $    4,913,135
   Stock issuance costs                                                      0               (12,667)                  (12,667)
                                                           --------------------    -------------------     ---------------------

        Net cash provided by financing activities               $      783,667          $     330,268            $    4,900,468
                                                           --------------------    -------------------     ---------------------

Net increase (decrease) in cash and cash                        $    (452,682)          $   (728,552)            $      362,461
equivalents

Cash and cash equivalents:
   Beginning of period                                               1,735,752              1,373,291                 1,373,291
                                                           --------------------    -------------------     ---------------------
   End of period                                                $    1,283,070          $     644,739            $    1,735,752
                                                           ====================    ===================     =====================

Supplemental schedule of non-cash investing
  and financing activities:

   Issuance of common stock in exchange for debt                   $    16,786            $    15,197                $        0
                                                           ====================    ===================     =====================

</TABLE>


                                       4
<PAGE>


                              PREFERRED VOICE, INC.
                            STATEMENTS OF CASH FLOWS
                FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000
                      AND FOR THE YEAR ENDED MARCH 31, 2001

<TABLE>
<CAPTION>


                                                                   June 30,                 June 30,                March 31,
                                                                     2001                     2000                     2001
                                                                  (Unaudited)              (Unaudited)              (Audited)
                                                               ------------------        ----------------        -----------------
      <S>                                                         <C>                       <C>                    <C>

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

      Net loss                                                    $  (1,044,073)            $  (815,020)           $  (4,742,044)
                                                               ------------------        ----------------        -----------------


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

         Depreciation                                             $      103,403            $     52,323           $      278,052
         Gain 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 in accounts receivable                             (26,063)                 (3,096)                 (35,217)
            (Increase) decrease in inventory                                   0                 (1,590)                   35,639
            Increase in deposits                                         (1,594)                       0                  (5,081)
            (Increase) decrease in prepaid expenses                          290                       0                    (493)
            Increase in patents and trademarks                           (2,558)                 (3,980)                 (41,061)
            Increase in accounts payable                               (187,599)                       0                 (40,715)
            Increase (decrease) in accrued expenses                       45,123                (29,336)                   42,516
            Increase (decrease) in customer deposits                           0                  11,738                 (48,874)
                                                               ------------------        ----------------        -----------------

                   Total adjustments                              $     (72,289)            $     26,059           $  (1,153,048)
                                                               ------------------        ----------------        -----------------

      Net cash used by operating activities                       $  (1,116,362)            $  (788,961)           $  (3,588,996)


</TABLE>


                                       5
<PAGE>



                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS

Note A - General organization:

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


Note B - Summary of significant accounting policies:

   Cash and cash equivalents

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

   Accounts receivable

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

   Inventory

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

   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 periods ended June 30, 2001 and 2000 and March 31, 2001, software
    development   costs   capitalized  were  $67,296,   $116,269  and  $338,815,
    respectively. The amortization of capitalized software development costs for
    the periods  ended June 30,  2001 and 2000 and March 31,  2001 was  $44,033,
    $35,584 and $184,488, respectively.

   Depreciation

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

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


                                       6
<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS


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

   Income taxes

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

   Fair value of financial instruments

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

   Revenue recognition

      The Company is engaged as a provider  of  telecommunication  products  and
   services.  Generally, the Company recognizes revenue under the accrual method
   when its services and  products are  provided.  During the three months ended
   June 30, 2001,  the majority of the  Company's  revenue  consisted of revenue
   sharing receipts. During the three months ended June 30 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 three  months  ended June 2001 and 2000 was
   $84,272 and $0, 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 $2,275 and $2,950 for the three months
   ended June 30,  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  15,589,892  and  13,091,105  at  June  30,  2001  and  2000,
   respectively and 13,884,662 for the year ended March 31, 2001.

                                       7

<PAGE>


                              PREFERRED VOICE, INC.

                          NOTES TO FINANCIAL STATEMENTS


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

   Amortization

      The cost of trademarks  are 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.


Note C - Note payable:

   Note payable consists of the following:

<TABLE>
<CAPTION>

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

              Note payable, Brite Voice Systems,  Inc., dated January 31,  1997.
                  Note is  unsecured  and  payable  in monthly  installments  of
                  $8,112,  including  interest at the rate of prime + 2 (8.5% at
                  March 31, 1999) through maturity on January 1, 1998.                  $50,866        $50,868         $50,866
                                                                                     ===========    ===========     ===========

</TABLE>

      The note to Brite Voice Systems,  Inc. (Brite) is currently in dispute and
   effective  April  1997;  the  Company  discontinued  the  accrual of interest
   expense. Interest expense charged to operations related to the Brite note was
   $-0- for the three months ended June 30, 2001 and 2000 and for the year ended
   March 31, 2001.


                                       8
<PAGE>


Note D - Long-term debt:

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

                                                                                        June            June             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 converted into 1,612,421 shares of common
                  stock on various dates through June 30, 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
                                                                                     ------------    ------------     ------------

                                                                                         $20,000         $30,000          $30,000
              Less current portion                                                        20,000          30,000           30,000
                                                                                     ------------    ------------     ------------

              Total                                                                        $   0           $   0            $   0
                                                                                     ============    ============     ============
</TABLE>


   Interest  expense  charged to operations  related to the  long-term  debt was
$1,150 for the three months ended June 30, 2001 and 2000 and $4,600 for the year
ended March 31, 2001.


Note E - Common stock:

   Common stock authorized

      On  September  29,  2000,  the  Company's  Board of  Directors  adopted  a
    resolution to increase the number of authorized  shares of common stock from
    20,000,000 to 50,000,000. The increase in authorized shares has not yet been
    approved by the Company's stockholders.

   Stock purchase warrants

     At June  30,  2001,  the  Company  had  outstanding  warrants  to  purchase
   2,851,203  shares of the  Company's  common stock at prices which ranged from
   $0.50 per share to $3.53 per share.  The warrants are exercisable at any time
   and expire on dates ranging from September 8, 2001 to April 19, 2006. At June
   30, 2001, 2,851,203 shares of common stock were reserved for that purpose.


                                       9
<PAGE>


Note E - Common stock (continued):

   Common stock reserved

      At June 30, 2001,  shares of common stock were  reserved for the following
   purposes:

      Exercise of stock warrants                                      2,851,203
      Exercise of future grants of stock options
        and stock appreciation rights under the
        1994 stock option plan                                          412,250
      Exercise of future grants of stock options
        and stock appreciation rights under the
        2000 stock option plan                                          750,000
                                                                  --------------
                                                                      4,013,453
                                                                  ==============


Note F - Income taxes:

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

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

   The provision for income taxes consists of:

                                        June             June           March
                                        2001             2000           2001
                                  -------------    --------------    -----------

   Current income taxes             $    0            $    0           $    0

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

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


                                       10

<PAGE>


Note F - Income taxes (continued):

   Deferred tax (liabilities) assets consist of the following:

<TABLE>
<CAPTION>

                                                                            June 30,          June 30,          March 31,
                                                                              2001              2000              2001
                                                                         ----------------  ---------------  ------------------

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

                        Accumulated depreciation                             $  (59,000)      $  (39,000)        $     59,000
                                                                         ----------------  ---------------  ------------------

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

                        Stock warrant compensation                           $    70,000      $         0        $     70,000
                        Accrued liabilities                                       11,000            7,000               8,000
                        Start-up expenditures                                          0            1,000                   0
                        Net operating loss carryforward                        4,231,000        2,598,000           3,881,000
                                                                         ----------------  ---------------  ------------------

                        Gross deferred tax assets                            $ 4,312,000      $ 2,606,000        $  3,959,000
                        Valuation allowance                                  (4,253,000)      (2,567,000)         (3,900,000)
                                                                         ----------------  ---------------  ------------------

                        Net deferred tax assets                              $    59,000      $    39,000        $     59,000
                                                                         ----------------  ---------------  ------------------

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


                        The increase in the deferred tax valuation
                           allowance is as follows:                          $   353,000      $    275,000       $   1,608,000
                                                                         ================  ===============  ==================

</TABLE>


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

   The Company has available at June 30, 2001, a net operating loss carryforward
of approximately $12,443,000,  which can be used to offset future taxable income
through the year 2022.  Utilization of net operating loss  carryforwards  in the
future  may be limited if changes  in the  Company's  stock  ownership  create a
change of control as provided in Section 382 of the Internal Revenue Code.


Note G - 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 June 30, 2001,
options to  purchase  412,000  shares at  exercise  prices of $0.69 to $2.50 per
share were outstanding.  No stock  appreciation  rights had been granted at June
30, 2001.
                                       11
<PAGE>


Note G- Stock option plan (continued):

   On September  29,  2000,  the Company  adopted an incentive  stock option and
other equity  participation  plan which  permits the issuance of stock  purchase
agreements,  stock awards, incentive stock options,  non-qualified stock options
and stock appreciation rights to selected employees and independent  contractors
of the Company.  The plan reserves  750,000 shares of common stock for grant and
provides that the term of each award be determined by the committee of the Board
of  Directors  (Committee)  charged  with  administering  the plan.  These stock
options vest over a period of two years.

    Under the terms of the plan,  options granted may be either  nonqualified or
incentive stock options,  and the exercise  price,  determined by the Committee,
may not be less than the fair market  value of a share on the date of 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 June 30, 2001,
options to  purchase  572,000  shares at  exercise  prices of $1.40 to $1.94 per
share were outstanding.  No stock  appreciation  rights had been granted at June
30, 2001.

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


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

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

<TABLE>
<CAPTION>

                                                         June 30, 2001          June 30, 2000           March 31, 2001
                                                        -----------------    --------------------    ---------------------
                        <S>                              <C>                  <C>                      <C>

                        Expected dividend yield              0.00%                  0.00%                   0.00%

                        Risk-free interest rate          4.13% - 4.14%          5.69% - 6.02%           4.14% - 6.35%

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

                        Expected volatility                   169%                  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>

                                                                         June 30, 2001      June 30, 2000     March 31, 2001
                                                                        ----------------   ----------------   -----------------
                        <S>                                               <C>                  <C>               <C>

                        Net loss:
                          As reported                                     $ (1,044,073)        $  (815,020)      $ (4,742,044)
                                                                        ================   ================   =================

                          Proforma                                        $ (1,054,417)        $  (824,849)      $ (5,384,131)
                                                                        ================   ================   =================

                        Loss per common share:
                          As reported                                     $      (0.07)        $     (0.06)      $      (0.34)
                                                                        ================   ================   =================

                          Proforma                                        $      (0.07)        $     (0.07)      $      (0.39)
                                                                        ================   ================   =================

</TABLE>

                                       12

<PAGE>

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

   Proforma loss reflects only options  granted to during the periods ended June
30, 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.

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


                                              June 2001                   June 2000                   March 2001
                                        ------------------------- --------------------------- ----------------------------
                                              2000 plan                   2000 plan                    2000 plan
                                        ------------------------- --------------------------- ----------------------------
                                        Number       Weighted      Number       Weighted        Number       Weighted
                                          of         average         of          average          of          average
                                        shares    exercise price   shares    exercise price     shares    exercise price
                                        ------    --------------   ------    --------------     ------    ---------------
   <S>                                   <C>           <C>          <C>            <C>           <C>            <C>


   Outstanding at beginning of period    576,000       $    1.45          0        $    0.00           0        $    0.00

   Granted                                     0            0.00          0             0.00     576,000             1.45
   Exercised                                   0            0.00          0             0.00           0             0.00
   Expired                                     0            0.00          0             0.00           0             0.00
   Forfeited                             (4,000)          (1.45)          0             0.00           0             0.00
                                         -------- --------------- ---------- ---------------- ----------- ----------------

   Outstanding at end of period          572,000       $    1.45          0        $    0.00     576,000        $    1.45
                                         ======== =============== ========== ================ =========== ================

   Options exercisable at end of         190,666       $    1.45          0        N/A           190,666        $    1.45
   period

   Weighted average fair value of
     options granted at end of period          0       N/A                0        N/A           576,000        $    1.21


                                              June 2001                   June 2000                    March 2001
                                       -------------------------- --------------------------- -----------------------------
                                              1994 plan                   1994 plan                    1994 plan
                                       -------------------------- --------------------------- -----------------------------
                                       Number        Weighted      Number       Weighted        Number        Weighted
                                         of          average         of         average           of          Average
                                       shares     exercise price   shares    exercise price     shares     exercise price
                                       ------     --------------   ------    --------------     ------     --------------

   Outstanding at beginning of period    412,000       $    0.96    406,500       $     0.96      406,500       $     0.96

   Granted                                     0            0.00     15,000             2.50       15,000             2.50
   Exercised                                   0            0.00    (9,500)           (1.00)      (9,500)           (1.00)
   Expired                                     0            0.00          0             0.00            0             0.00
   Forfeited                                   0            0.00          0             0.00            0             0.00
                                       ---------- --------------- ---------  ---------------- -----------   ---------------

   Outstanding at end of period          412,000       $    0.96    406,500        $    0.96      412,000       $     0.96
                                       ========== =============== =========  ================ ===========   ===============

   Options exercisable at end of         392,000       $    0.96    295,083       $     0.94      392,000       $     0.96
   period

   Weighted average fair value of
     options granted at end of period          0       N/A           15,000       $     2.09       15,000       $     2.09

</TABLE>

                                       13
<PAGE>

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

<TABLE>
<CAPTION>

                                              June 2001                   June 2000                    March 2001
                                       -------------------------- --------------------------- -----------------------------
                                               Warrants                    Warrants                     Warrants
                                       -------------------------- --------------------------- -----------------------------
                                        Number      Weighted       Number       Weighted        Number        Weighted
                                          of         average         of          average          of           average
                                        shares   exercise price    shares    exercise price     shares     exercise price
                                       --------- ---------------- ---------- ---------------- ------------ ----------------
   <S>                                   <C>          <C>           <C>            <C>            <C>            <C>

   Outstanding at beginning of period    905,000      $     1.10    800,000        $    0.90      800,000        $    0.90

   Granted                                     0            0.00          0             0.00      105,000             2.66
   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          905,000      $     1.10    800,000        $    0.90      905,000        $    1.10
                                       ========= ================ ========== ================ ============ ================

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

   Weighted average fair value of
     warrants granted at end of period         0       N/A                0        N/A            105,000        $    1.96

</TABLE>


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 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 June
30, 2001 and 2000 with respect to warrants issued to non-employees.

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

                                                           June 2001             June 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>


                                       14
<PAGE>

Note I - Stock warrants (continued):

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


                                              June 2001                   June 2000                    March 2001
                                     ---------------------------- --------------------------- -----------------------------
                                       Number       Weighted       Number       Weighted        Number        Weighted
                                         of          Average         of         average           of           average
                                       shares    exercise price    shares    exercise price     shares     exercise price
                                     ----------- ---------------- ---------  ---------------- ------------ ----------------
  <S>                                    <C>          <C>           <C>           <C>             <C>            <C>

  Outstanding at beginning of period     621,035      $     1.76    470,000       $     1.36      470,000        $    1.36

  Granted                                      0            0.00          0             0.00      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           621,035      $     1.76    470,000       $     1.36      621,035        $    1.76
                                     =========== ================ =========  ================ ============ ================

  Warrants exercisable at end of         621,035      $     1.76    470,000       $     1.36      621,035        $    1.76
  period

  Weighted average fair value of
    warrants granted at end of period          0       N/A                0       N/A             151,035        $    1.67

</TABLE>

   Following is an overall summary of the stock warrant activity:
<TABLE>
<CAPTION>

                                           June 2001                     June 2000                    March 2001
                                   ---------------------------------------------------------- ----------------------------
                                     Number        Weighted       Number        Weighted        Number       Weighted
                                       of          average          of           average          of          Average
                                     shares     exercise price    shares     Exercise price     shares    exercise price
                                   ------------ ---------------   ------     --------------   ----------- ----------------
  <S>                                <C>             <C>          <C>              <C>         <C>              <C>

  Outstanding at beginning of        2,778,703       $    1.75    2,303,203        $    1.14   2,303,203        $    1.14
  period

     Issued                            197,500            2.00       65,000             2.50     973,000             2.39
     Exercised                        (50,000)          (1.00)    (335,196)           (1.09)   (420,196)           (1.02)
     Expired                          (75,000)          (3.12)     (24,804)           (3.00)    (77,304)           (2.01)
                                   ------------ --------------  ------------  --------------- ----------- ----------------

  Outstanding at end of period       2,851,203       $    1.66    2,659,965        $    1.32   2,778,703        $    1.75
                                   ============ ==============  ============  =============== =========== ================

</TABLE>

                                       15

<PAGE>


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
June 30, 2001:

                               Year ending
                                June 30,                     Amount
                             ----------------           ------------------

                                  2002                          $ 196,638
                                  2003                            193,066
                                  2004                            187,918
                                  2005                            189,662
                                  2006                             94,831

                                                        ------------------
                                                                $ 862,115
                                                        ==================

   Total rent expense charged to operations was $ 47,061,  $28,977 for the three
months  ended June 30, 2001 and 2000 and  $153,515  for the year ended March 31,
2001.


Note K - Barter transaction:

   On June 3, 1996, the Company entered into a media purchase  agreement for the
promotion of its products and services with Proxhill Marketing, Ltd. (Proxhill).
Under the terms of the agreement,  the Company committed to purchase  $1,200,000
of media  advertising  time in exchange for 200,000  shares of common stock at a
value of $4.00 per share, and $400,000 in cash. The agreement is for a period of
five  years.  For each  purchase of media  advertising  time,  the Company  will
receive  a barter  credit  equal to  66.67% of the  transaction  value  with the
remaining  balance  payable in cash.  A prepaid  barter  credit in the amount of
$761,018 and prepaid media  commissions in the amount of $76,102 are included in
other assets in the  accompanying  balance sheet at June 30, 2000. In connection
with this agreement,  the Company issued to Proxhill 50,000 warrants to purchase
the Company's  common stock at a price of $4.00 per share.  The options  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.


                                       16

<PAGE>


Note M - Going concern:

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

   On June 3, 1999, the Company entered into a software  license  agreement with
KMC Telecom Holdings, Inc. (KMC). Under the terms of the agreement, KMC paid the
Company initial license fees of $570,000 for the rights to utilize the Company's
software  applications in certain  geographical  markets. The agreement is for a
period of ten years and  provides of 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 June 30,  2001,  the  Company  had
completed one installation.

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

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

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

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

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


Note N - Concentrations:

   Concentrations of credit risk

      At June 30, 2001,  the Company had cash  balances of  $1,344,466  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 months ended June 30, 2001,  approximately $83,000 of the
   Company's  revenue was derived  from three  customers.  During the year ended
   March 31, 2001,  approximately  $118,000 of the Company's revenue was derived
   from four customers.

                                       17

<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,  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/A
for the fiscal year ended March 31, 2001.  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 December of 1998, we realized that we would need  extensive  amounts
of  working  capital  to sell and market our  services  directly  to  individual
consumers.  Therefore,  we began  researching  venues which already had inherent
customer or subscriber  bases. The first  distribution  channel that we explored
was the use of master  distributors  in various  cities  and  states  around the
country.  We  believe  the  distributors  will be a source of direct  subscriber
addition once we include the master distributor marketing area in the network of
a VIP  system,  which  we  expect  to  occur  by the  end of  2001.  The  second
distribution  channel is directly with  Incumbent  Local Exchange  Carriers,  or
local  telephone  companies,  Wireless  Communication  Carriers,  or cell  phone
companies,  and  Competitive  Local  Exchange  Carriers,  or  competitive  local
telephone companies. This avenue of distribution is extremely attractive because
these  companies  already have the subscriber  bases and the  infrastructure  to
service large numbers of subscribers.

         We first  attempted to sell our  hardware  and license our  application
software  but after only one such  agreement  with KMC  Telecom  Holdings,  Inc.
("KMC") we decided to pursue  revenue  sharing  whereby we provide all hardware,
software applications and support in exchange for a portion of revenue generated
from the service provided by our customer to their subscribers. Our entire sales
force focuses on marketing our revenue sharing  agreements and, as of August 10,
2001,  we had signed  thirty-six  (36) local  telephone  company  and cell phone
company  multi-year  contracts.  Also,  as of  August  10,  2001,  seven  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 July
31, 2001, these seven locations  generated  revenues of  approximately  $60,000.
Each of these companies has signed a revenue sharing agreement with us and these
types of revenue sharing arrangements are the standard manner 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.  Three other contracting phone companies are
in the system  acceptance and early  marketing  stages,  and we should  generate
revenues  from these  contracts by the second  quarter of the fiscal year ending
March 31,  2002.  Six  additional  contracting  phone  companies  will start the
installation and implementation phase early in the third fiscal quarter.

         We are still at an early stage of implementing our business plan. It is
subject to risks inherent in the establishment and deployment of technology with
which  consumers have limited  experience.  We believe our services are services
that any consumer who uses a phone can utilize. For example, any cell phone user
who  wants


                                       18
<PAGE>

to speak a name or use our dial number feature without  punching  buttons on his
cell phone would be a user, or a company who wants their  employees  accessed by
the caller  saying an employee  name instead of asking the caller to punch in an
extension or spell a name on the key pad. Our services are generic to cell phone
users as well as land line  users,  children  as well as the  elderly.  As voice
recognition  becomes  more  prevalent  in  everyday  life,  such as in  computer
programs,  reservation systems and  telecommunications  information  systems, we
believe  the  public  will be  more  apt to  accept  and  utilize  voice-related
features. In order for us to succeed, we must:

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

         o    establish and maintain relationships with phone companies;

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

         o    establish a lead time for delivery of hardware;

         o    achieve user acceptance for our services;

         o    generate reasonable margins on our services;

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

         o    respond to competitive developments;

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

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

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

Results of Operations

         We  recorded  a net loss of  $1,044,073,  or $0.07 per  share,  for the
period  ended June 30,  2001,  compared  to a net loss of  $815,020 or $0.06 per
share, for the period ended June 30, 2000.

         Total Sales

         Total revenue for the period ended June 30, 2001, was $84,272  compared
to $6,608 for the period ended June 30, 2000. During the three months ended June
30, 2001, our revenue  consisted  entirely of revenue sharing  receipts from our
customer phone  companies.  For the three months ended June 30, 2000, all of our
revenues were from billing our direct  end-users for  individual  services.  The
increase of revenues reflects our commercial  deployment of our services through
our revenue sharing agreement with our customers.

         We  anticipate  that  revenues  from the sale of our services will grow
gradually  in the second  half of our fiscal year 2002 as we continue to install
VIP  systems 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 period  ended June 30, 2001 was $19,211  compared
to $8,949 for the period ended June 30, 2000. 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.

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<PAGE>


         Selling, General and Administrative

         Selling,  general and administrative expenses for the period ended June
30, 2001 were  $1,107,984  compared to  $811,529  for the period  ended June 30,
2000.  The  increases  from  2000 to  2001  are due to  increased  staffing  and
additional  marketing  efforts by our marketing staff of our VIP system services
to potential  parties  interested in our revenue sharing  agreements.  We expect
that  selling,  general and  administrative  expenses  will continue to increase
through  fiscal year 2002,  such expenses to include costs related to the number
of  employees,  office space  requirements  and general  overhead.  However,  we
believe that such expenses will not increase  proportionately  with revenue from
sales.

         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
periods ended June 30, 2001 and 2000,  software  development  costs  capitalized
were  $67,296,  and  $116,269  respectively.  The  amortization  of  capitalized
software  development  costs for the  periods  ended June 30,  2001 and 2000 was
$44,033, and $35,584 respectively.

         Income Taxes

         As of June 30, 2001, we had cumulative  federal net operating losses of
approximately  $12.4 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 as provided in Section 382 of the Internal Revenue Code of 1986.

Liquidity and Capital Resources

         Our cash and cash  equivalents  at June 30,  2001  were  $1,283,070,  a
decrease of $452,682 from $1,735,752 at March 31, 2001. 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.

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

         To date we have installed one system.  On September 25, 2000, KMC wrote
us and asserted that since it had not accepted the initial  installation  within
90 days,  it was  refusing  to accept  the system  and  exercising  its right to
terminate  the  agreement  with  cause  under  the  terms of the  contract.  KMC
requested  a refund of most monies  paid  relating  to the initial  market and a
refund of all monies paid for other markets.  We responded by informing KMC that
under  the  terms  of the  agreement,  KMC  had  already  accepted  the  initial
installation and, therefore,  had no right to terminate the agreement with cause
pursuant to the terms of the agreement.  If the judge were to determine that KMC
had properly  terminated  the contract for cause,  then KMC would be entitled to
the refund of money paid under the agreement.

         On November 16, 2000,  we filed a breach of contract  suit against KMC.
We continue to carry approximately $342,000 in deferred revenue related to sales
of  hardware  to KMC and we will  continue  to carry such  amounts  as  deferred
revenue  until the  conclusion  of and  final  judgment  on the case.  If we are
required to refund such monies in the period that the refund is ascertained,  it
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


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<PAGE>


contract, neither party would be entitled to receive any money back. However, we
will  continue  to carry the  $342,000  related to sales of  hardware  to KMC as
deferred revenue until final judgment is entered on this case.

         We have raised a significant  amount of working capital through private
equity  financings  that we  believe  will  provide us with  sufficient  working
capital  for the  next  eight  months  at  which  time we hope to be  generating
revenues to cover our cash needs.  On August 24, 2000,  pursuant to Section 4(2)
of the Securities  Act and Regulation D thereunder,  we conducted an offering of
1,142,858  units  consisting  of shares of our  common  stock  and  warrants  to
purchase  shares of our common  stock at $2.625 per share  providing us with net
proceeds of  $2,787,531,  for working  capital.  On April 11, 2001,  pursuant to
Section 4(2) of the Securities Act and Regulation D thereunder,  we conducted an
offering  of  1,187,500  units  consisting  of  shares of our  common  stock and
warrants to purchase  shares of our common stock at $2.00 per share providing us
with net proceeds of $1,752,500,  before  commissions and expenses,  for working
capital.  We began  recording  revenues from our revenue  sharing  agreements in
November of 2000.  These  revenues  are  approximately  $60,000 per month but we
expect  these  to  continue  to  rise  to a  level  to  meet  our  monthly  cash
requirements by December of 2001.

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

Future Obligations

         We project our working capital needs to be $1,800,000 over the next six
months  for  corporate  overhead  and will  require  approximately  $600,000  of
equipment  financing  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 insufficient to meet these anticipated capital
requirements and to finance continued growth for the foreseeable  future. We may
be forced to raise  additional  capital through the issuance of new shares,  the
exercise of outstanding warrants,  or reduce our current overhead.  However, any
projections  of future  cash  needs and cash flows are  subject  to  substantial
uncertainty.

         We do not  make  any  assurance  that we will  be  able  to  raise  any
additional  capital or to raise capital on terms  satisfactory to us. If we need
to raise additional capital before October 11, 2001, we may be required to issue
additional  shares of our common stock to the  stockholders  who purchased their
stock in the April 11, 2001 offering  pursuant to the terms of the  subscription
agreement executed between us and such  stockholders.  Subject to our ability to
fund the cost,  we expect to hire or  contract  with  approximately  thirty (30)
additional persons during the twelve (12) months ending in July, 2002, primarily
to  support  our   expanding   marketing   activities,   software  and  hardware
development, and system installations. At August 10, 2001, we employed forty-one
(41) full time employees.

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings.

There have been no material  developments  in the  litigation  we have  reported
regarding KMC and Proxhill Marketing Limited in our Form 10-KSB/A for the fiscal
year ended March 31, 2001,  filed with the SEC on August 10, 2001 and we are not
involved in any other material legal proceedings.


                                       21
<PAGE>

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 June 8, 2001,  we issued  25,000  shares of our common stock to JMG
Capital  Partners,  L.P. at an exercise price of $1.00 per share pursuant to the
exercise of a warrant.

          Also on June 8, 2001,  we issued  25,000 shares of our common stock to
Triton  Capital  Investments,  Ltd.  at an  exercise  price of $1.00  per  share
pursuant to the exercise of a warrant.

          On June 22, 2001,  we issued 9,709 shares of our common stock to Jonas
Aircraft  and Arms  Company,  Inc.  pursuant to their  exchange of a  $10,000.00
promissory note and accrued interest totaling $13,395.36. The debt was converted
at $1.39 per share pursuant to the terms stated in the promissory note.

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

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

Item 3.   Defaults upon Senior Securities.

None.

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

None.

Item 5.   Other Information.

None.

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<PAGE>

Item 6.  Exhibits and Reports on Form 8-K

(a)      Exhibits

Exhibit
Number            Exhibit Description

10.1+    Form of Marketing Agreement. (Exhibit 10.1)
10.2+    Form of Amendment to Marketing Agreement. (Exhibit 10.2)
10.3++   Form of Subscription Agreement by and between Preferred Voice, Inc. and
         certain signatories thereto. (Exhibit 10.1)
10.4++   Form of Warrant  Certificate,  issued by Preferred Voice, Inc. pursuant
         to the Subscription Agreement filed therewith as Exhibit 10.1. (Exhibit
         10.2)

+        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 April 30, 2001.
++       Incorporated  by referenced to the Exhibit shown in  parenthesis to our
         Current  Report  on Form 8-K filed  with the  Securities  and  Exchange
         Commission on May 7, 2001.

(b)      Reports on Form 8-K

         We filed a Current  Report on Form 8-K with the Securities and Exchange
Commission on April 30, 2001,  reporting on amendments to contracts  that we had
signed  with  certain  of our  customers  to  implement  what we refer to as our
"opt-out" program as an Item 5, Other Event. No financial  statements were filed
with this report.

         We filed another  Current  Report on Form 8-K with the  Securities  and
Exchange  Commission  on May 7, 2001,  reporting on our offering  that closed on
April 11, 2001, in which we issued 1,187,500  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 this
report.


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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.


         August 14, 2001              /s/ G. Ray Miller
------------------------------        ---------------------------------------
         Date                         G. Ray Miller
                                      Chief Executive Officer and
                                      Chairman of the Board of Directors
                                      (Principal Executive Officer)






         August 14, 2001               /s/ Mary G. Merritt
------------------------------         ---------------------------------------
         Date                          Mary G. Merritt
                                       Secretary, Treasurer and
                                       Vice President of Finance
                                       (Principal Financial Officer)





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